Adjustable-Rate Mortgage (ARM): A mortgage with an interest rate that changes during the life of the loan according to movements in an index rate. Sometimes called AMLs (adjustable mortgage loans) or VRMs (variable-rate mortgages).
Adjusted Basis: The cost of a property plus the value of any capital expenditures for improvements to the property minus any depreciation taken.
Adjustment Date: The date that the interest rate changes on an adjustable-rate mortgage (ARM).
Adjustment Period: The period elapsing between adjustment dates for an adjustable-rate mortgage (ARM).
Affordability Analysis: An analysis of a buyers ability to afford the purchase of a home. Reviews income, liabilities, and available funds, and considers the type of mortgage you plan to use, the area where you want to purchase a home, and the closing costs that are likely.
Amortization: The gradual repayment of a mortgage loan, both principle and interest, by installments.
Amortization Term: The length of time required to amortize the mortgage loan expressed as a number of months. For example, 360 months is the amortization term for a 30-year fixed-rate mortgage.
Annual Percentage Rate (APR): The cost of credit, expressed as a yearly rate including interest, mortgage insurance, and loan origination fees. This allows the buyer to compare loans, however APR should not be confused with the actual note rate.
Appraisal: A written analysis prepared by a qualified appraiser and estimating the value of a property.
Appraised Value: An opinion of a property's fair market value, based on an appraiser's knowledge, experience, and analysis of the property.
Assignment: The transfer of a mortgage from one person to another.
Assumable Mortgage: A type of loan that can be transferred from the seller to the new buyer. Generally requires a credit review of the new borrower and lenders may charge a fee for the assumption. If a mortgage contains a due-on-sale clause, it may not be assumed by a new buyer.
Balance Sheet: A financial statement that shows assets, liabilities, and net worth as of a specific date.
Biweekly Payment Mortgage: A plan to reduce the debt every two weeks (instead of the standard monthly payment schedule). The 26 (or possibly 27) biweekly payments are each equal to one-half of the monthly payment required if the loan were a standard 30-year fixed-rate mortgage. The result for the borrower is a substantial savings in interest.
Cap: Limits how much the interest rate or the monthly payment can increase, either at each adjustment or during the life of the mortgage. Payment caps don't limit the amount of interest the lender is earning and may cause negative amortization.
Certificate of Eligibility: A document issued by the federal government certifying a veteran’s eligibility for a Department of Veterans Affairs (VA) mortgage.
Certificate of Reasonable Value (CRV): A document issued by the Department of Veterans Affairs (VA) that establishes the maximum value and loan amount for a VA mortgage.
Closing: A meeting held to finalize the sale of a property. The buyer signs the mortgage documents and pays closing costs. Also called "settlement."
Closing Costs: These are expenses — over and above the price of the property — that are incurred by buyers and sellers when transferring ownership of a property. Closing costs normally include an origination fee, property taxes, charges for title insurance and escrow costs, appraisal fees, etc. Closing costs will vary according to the area country and the lenders used.
Closing Disclosure: A Closing Disclosure is a five-page form that provides final details about the mortgage loan you have selected. It includes the loan terms, your projected monthly payments, and how much you will pay in fees and other costs to get your mortgage (closing costs). The lender is required to give you the Closing Disclosure at least three business days before you close on the mortgage loan. This three-day window allows you time to compare your final terms and costs to those estimated in the Loan Estimate that you previously received from the lender. The three days also gives you time to ask your lender any questions before you go to the closing table.
Compound Interest: Interest paid on the original principal balance and on the accrued and unpaid interest.
Consumer Reporting Agency (or Bureau): An organization that handles the preparation of reports used by lenders to determine a potential borrower's credit history. The agency gets data for these reports from a credit repository and from other sources.
Conventional Mortgage: A conventional loan is a mortgage that is not guaranteed or insured by any government agency, including the Federal Housing Administration (FHA), the Farmers Home Administration (FmHA) and the Department of Veterans Affairs (VA). It is typically fixed in its terms and rate.
Credit Report: A report detailing an individual's credit history that is prepared by a credit bureau and used by a lender to determine a loan applicant's creditworthiness.
Credit Risk Score: A credit score measures a consumer's credit risk relative to the rest of the U.S. population, based on the individual's credit usage history. The credit score most widely used by lenders is the FICO® score, developed by Fair, Isaac and Company. This 3-digit number, ranging from 300 to 850, is calculated by a mathematical equation that evaluates many types of information that are on your credit report. Higher FICO® scores represents lower credit risks, which typically equate to better loan terms. In general, credit scores are critical in the mortgage loan underwriting process.
Deed of Trust: The document used in some states instead of a mortgage. Title is conveyed to a trustee.
Default: Failure to make mortgage payments on a timely basis or to comply with other requirements of a mortgage.
Delinquency: Failure to make mortgage payments on time.
Discount Points: In an ARM with an initial rate discount, the lender gives up a number of percentage points in interest to reduce the rate and lower the payments for part of the mortgage term (usually for one year or less). After the discount period, the ARM rate usually increases according to its index rate.
Down Payment: Part of the purchase price of a property that is paid in cash and not financed with a mortgage.
Equity: The amount of financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on the mortgage.
Escrow: An item of value, money, or documents deposited with a third party to be delivered upon the fulfillment of a condition. For example, the deposit of funds or documents into an escrow account to be disbursed upon the closing of a sale of real estate.
Fannie Mae: A congressionally chartered, shareholder-owned company that is the nation's largest supplier of home mortgage funds.
FHA Mortgage: A mortgage that is insured by the Federal Housing Administration (FHA). Also known as a government mortgage.
FICO Score: FICO® scores are the most widely used credit score in U.S. mortgage loan underwriting. This 3-digit number, ranging from 300 to 850, is calculated by a mathematical equation that evaluates many types of information that are on your credit report. Higher FICO® scores represent lower credit risks, which typically equate to better loan terms.
First Mortgage: The primary lien against a property.
Fixed-Rate Mortgage (FRM): A mortgage interest that are fixed throughout the entire term of the loan.
GNMA: A government-owned corporation that assumed responsibility for the special assistance loan program formerly administered by Fannie Mae. Popularly known as Ginnie Mae.
Guarantee Mortgage: A mortgage that is guaranteed by a third party such as the U.S. Department of Veterans Affairs or the Federal Housing Administration.
HUD-1 Statement: A document that provides an itemized listing of the funds that are payable at closing. Items that appear on the statement include real estate commissions, loan fees, points, and initial escrow amounts. Each item on the statement is represented by a separate number within a standardized numbering system. The totals at the bottom of the HUD-1 statement define the seller's net proceeds and the buyer's net payment at closing.
Hybrid ARM (3/1 ARM, 5/1 ARM, 7/1 ARM): A combination fixed rate and adjustable rate loan — also called 3/1, 5/1, 7/1 — can offer the best of both worlds: lower interest rates (like ARMs) and a fixed payment for a longer period of time than most adjustable rate loans. For example, a "5/1 loan" has a fixed monthly payment and interest for the first five years and then turns into a traditional adjustable rate loan, based on then-current rates for the remaining 25 years. It's a good choice for people who expect to move or refinance, before or shortly after, the adjustment occurs.
Index: The index is the measure of interest rate changes a lender uses to decide the amount an interest rate on an ARM will change over time. The index is generally a published number or percentage, such as the average interest rate or yield on Treasury bills. Some index rates tend to be higher than others and some more volatile.
Initial Interest Rate: This refers to the original interest rate of the mortgage at the time of closing. This rate changes for an adjustable-rate mortgage (ARM). It's also known as "start rate" or "teaser."
Installment: The regular periodic payment that a borrower agrees to make to a lender.
Insured Mortgage: A mortgage that is protected by the Federal Housing Administration (FHA) or by private mortgage insurance (MI).
Interest: The fee charged for borrowing money.
Interest Accrual Rate: The percentage rate at which interest accrues on the mortgage. In most cases, it is also the rate used to calculate the monthly payments.
Liabilities: A person's financial obligations. Liabilities include long-term and short-term debt.
Line of Credit: An agreement by a commercial bank or other financial institution to extend credit up to a certain amount for a certain time.
Loan: A sum of borrowed money (principal) that is generally repaid with interest.
Loan Estimate: The Loan Estimate is a three-page form that you receive after applying for a mortgage. The form provides you with important information, including the estimated interest rate, monthly payment, and total closing costs for the loan. The Loan Estimate also gives you information about the estimated costs of taxes and insurance, and how the interest rate and payments may change in the future. In addition, the form indicates if the loan has special features that you will want to be aware of, like penalties for paying off the loan early (a prepayment penalty) or increases to the mortgage loan balance even if payments are made on time (negative amortization).
Loan-to-Value (LTV) Percentage: The relationship between the principal balance of the mortgage and the appraised value (or sales price if it is lower) of the property. For example, a $100,000 home with an $80,000 mortgage has an LTV of 80 percent.
Margin: The number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment.
Maturity: The date on which the principal balance of a loan becomes due and payable.
Mortgage: A legal document that pledges a property to the lender as security for payment of a debt.
Mortgage Banker: A company that originates mortgages exclusively for resale in the secondary mortgage market.
Mortgage Insurance: A contract that insures the lender against loss caused by a mortgagor's default on a government mortgage or conventional mortgage. Mortgage insurance can be issued by a private company or by a government agency.
Mortgage Insurance Premium (MIP): The amount paid by a mortgagor for mortgage insurance.
Note: A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.
Origination Fee: A fee paid to a lender for processing a loan application. The origination fee is stated in the form of points. One point is 1 percent of the mortgage amount.
Owner Financing: A property purchase transaction in which the party selling the property provides all or part of the financing.
Periodic Rate Cap: A limit on the amount that the interest rate can increase or decrease during any one adjustment period, regardless of how high or low the index might be.
PITI Reserves: A cash amount that a borrower must have on hand after making a down payment and paying all closing costs for the purchase of a home. The principal, interest, taxes, and insurance (PITI) reserves must equal the amount that the borrower would have to pay for PITI for a predefined number of months (usually three).
Points: A point is equal to one percent of the principal amount of your mortgage. For example, if you get a mortgage for $165,000 one point means $1,650 to the lender. Points usually are collected at closing and may be paid by the borrower or the home seller, or may be split between them.
Prepayment Penalty: A fee that may be charged to a borrower who pays off a loan before it is due.
Pre-Approval: The process of determining how much money you will be eligible to borrow before you apply for a loan.
Prime Rate: The interest rate that banks charge to their preferred customers. Changes in the prime rate influence changes in other rates, including mortgage interest rates.
Principal: The amount borrowed or remaining unpaid. The part of the monthly payment that reduces the remaining balance of a mortgage.
Principal Balance: The outstanding balance of principal on a mortgage not including interest or any other charges.
Private Mortgage Insurance (PMI): Mortgage insurance provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults. Most lenders generally require PMI for a loan with a loan-to-value (LTV) percentage in excess of 80 percent.
Qualifying Ratios: Calculations used to determine if a borrower can qualify for a mortgage. They consist of two separate calculations: a housing expense as a percent of income ratio and total debt obligations as a percent of income ratio.
Rate Lock: A commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified interest rate and lender costs for a specified period of time.
Real Estate Agent: A person licensed to negotiate and transact the sale of real estate on behalf of the property owner.
Real Estate Settlement Procedures Act (RESPA): A consumer protection law that requires lenders to give borrowers advance notice of closing costs.
Recording: The noting in the registrar’s office of the details of a properly executed legal document, such as a deed, a mortgage note, a satisfaction of mortgage, or an extension of mortgage, thereby making it a part of the public record.
Refinance: Paying off one loan with the proceeds from a new loan using the same property as security.
Secondary Mortgage Market: Where existing mortgages are bought and sold.
Security: The property that will be pledged as collateral for a loan.
Total Expense Ratio: Total obligations as a percentage of gross monthly income including monthly housing expenses plus other monthly debts.
Truth-in-Lending: A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the annual percentage rate (APR) and other charges.
Underwriting: The process of evaluating a loan application to determine the risk involved for the lender. Underwriting involves an analysis of the borrower's creditworthiness and the quality of the property itself.
VA Mortgage: A mortgage that is guaranteed by the Department of Veterans Affairs (VA). Also known as a government mortgage.