Glossary

Adjustable Rate Mortgage (ARM)

A loan whose interest rate is periodically adjusted to more closely coincide with current interest rates. The adjustment amounts and times are agreed upon when the loan is created.

Annual Percentage Rate (APR)

The cost of a mortgage stated as a yearly rate; includes such items as interst, mortgage insurance and loan origination fee (points). Use of the APR permits a standard expression of credit costs, which faciliates easy comparison of lenders.

Assumable mortgage

A mortgage that can be transferred from a seller to a buyer; once the loan is assumed by the buyer the seller is no longer responsible for repaying it; there may be a fee and/or a credit package involved in the transfer of an assumable mortgage.

Balloon Mortgage

A mortgage that typically offers low rates for an initial period of time (usually 5, 7, or 10) years; after that time period elapses, the balance is due or is refinanced by the borrower

Biweekly Mortgage

A mortgage in which you make payments every two weeks instead of once a month. The basic result is that instead of making twelve monthly payments during the year, you make thirteen. The extra payment reduces the principal, substantially reducing the time it takes to pay off the mortgage.

Bridge Loan

A temporary loan which is used by those who have not yet sold their existing property, but must close on a purchase property transaciton.

Closing Costs

Customary costs above and beyond the sale price of the property that must be paid to cover the transfer of ownership at closing; these costs generally vary by geographic location and are typically detailed to the borrower after submission of a loan application.

Commission

An amount, usually a percentage of the property sales price, that is collected by a real estate professional as a fee for negotiating the transaction..

Conventional Loan

A private sector loan that is not guaranteed or insured by the U.S. government.

Conventional Mortgage

A mortgage loan not insured by HUD or guaranteed by the Veterans' Administration. It is subject to conditions established by the lending institution and State statutes.

Convertible ARM

An adjustable-rate mortgage that allows the borrower to change the ARM to a fixed-rate mortgage within a specific time.

Cost of Funds Index (COFI)

One of the indexes that is used to determine interest rate changes for certain adjustable-rate mortgages. It represents the weighted-average cost of savings, borrowings, and advances of the financial institutions such as banks and savings & loans, in the 11th District of the Federal Home Loan Bank.

Credit

An agreement in which a borrower receives something of value in exchange for a promise to repay the lender at a later date.

Credit Bureau Score

A number representing the possibility a borrower may default; it is based upon credit history and is used to determine ability to qualify for a mortgage loan.

Credit history

History of an individual's debt payment; lenders use this information to gauge a potential

Credit report

A record that lists all past and present debts and the timeliness of their repayment; it documents an individual's credit history.
borrower's ability to repay a loan.

Debt

An amount owed to another.

Deferred Interest

When the monthly payments do not cover all of the interest cost, the unpaid interest is deferred by adding it to the loan balance.

Down payment

The portion of a home's purchase price that the buyer pays in cash and is not part of the mortgage loan.

Equity

An owner's financial interest in a property. Equity is calculated by subtracting the amount still owed on the mortgage loan(s) from the fair market value of the property.

Fannie Mae

Federal National Mortgage Association (FNMA) - a federally-chartered enterprise owned by private stockholders that purchases residential mortgages and converts them into securities for sale to investors.

Federal Housing Administration (FHA)

An agency of the U.S. Department of Housing and Urban Development (HUD) which main activity is the insuring of residential mortgage loans made by private lenders. FHA assists first-time home buyers and others who might not be able to meet down payment requirements for conventional loans by providing mortgage insurance to private lenders. It also insures loans for home improvements and buying manufactured (mobile) homes. The FHA sets standards for construction and underwriting but does not lend money.

FHA

Federal Housing Administration; established in 1934 to advance homeownership opportunities for all Americans; assists homebuyers by providing mortgage insurance to lenders to cover most losses that may occur when a borrower defaults; this encourages lenders to make loans to borrowers who might not qualify for conventional mortgages.

FHA Loan

A loan insured by the Federal Housing Administration open to all qualified home purchasers. Interest rates on FHA loans are generally market rates, while down payment requirements are lower than for conventional loans. FHA loans cannot exceed the statutory limit.

First Mortgage

A mortgage that has priority as a lien over all other mortgages.

Fixed-Rate Mortgage

A mortgage in which the interest rate does not change during the entire term of the loan.

Foreclosure

A legal process in which mortgaged property is sold to pay the loan of the defaulting borrower.

Freddie Mac

Federal Home Loan Mortgage Corporation (FHLM) - a federally-chartered corporation that purchases residential mortgages, securitizes them, and sells them to investors.

Good Faith Estimate

An estimate of all closing fees including pre-paid and escrow items as well as lender charges; must be given to the borrower within three days after submission of a loan application.

Graduated Payment Mortgage

A type of a mortgage that has lower payments initially and then payments increase each year until the loan is fully amortized.

Home Equity Line of Credit

A mortgage loan, usually in second position, that allows the borrower to obtain cash drawn against the equity of his home, up to a predetermined amount.

Home inspection

An examination of the structure and mechanical systems to determine a home's safety; makes the potential homebuyer aware of any repairs that may be needed.

Homeowner's insurance

An insurance policy that combines hazard insurance coverage for a dwelling and its contents with a personal liability coverage against claims of negligence or inappropriate action that result in someone's injury or property damage.

Homeowners' Association

A nonprofit association that manages the common areas of a planned unit development (PUD) or condominium project. In a condominium project, it has no ownership interest in the common elements. In a PUD project, it holds title to the common elements.

HUD

The U.S. Department of Housing and Urban Development; established in 1965, HUD works to create a decent home and suitable living environment for all Americans; it does this by addressing housing needs, improving and developing American communities, and enforcing fair housing laws.

Interest

A fee charged for borrowing money.

Jumbo Loan

A loan that exceeds Fannie Mae?s and Freddie Mac?s loan limits, currently at $417,000. Freddie Mac and Fannie Mae loans are referred to as conforming loans. Jumbo loans typically carry 0.25% to 0.50% higher interest rate as they are more expensive to insure against borrower nonpayment.

Loan

Money borrowed that is usually repaid with interest.

Loan-to-Value (LTV) Ratio

A percentage calculated by dividing the amount borrowed by the price or appraised value of the home to be purchased; the higher the LTV, the less cash a borrower is required to pay as down payment.

Lock-in

Since interest rates can change frequently, many lenders offer an interest rate lock-in that guarantees a specific interest rate if the loan is closed within a specific time.

Mortgage

A legal document that pledges a property to the lender as security for payment of a debt.

Mortgage Banker

A mortgage company that originates loans, then places those loans with a variety of other lending institutions with whom they usually have pre-established relationships.

Mortgage Broker

A person (not an employee of a lender) who brings a borrower and a lender together to obtain a federally-related mortgage loan. A mortgage broker has access to a variety of lenders and often offers the most choice in loan programs. Mortgage brokers are paid a fee by the borrower or the lender when a loan closes.

Mortgage Insurance

A policy that protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan; mortgage insurance is required primarily for borrowers with a down payment of less than 20% of the home's purchase price.

Mortgagee

The lender in a mortgage agreement.

Mortgagor

The borrower in a mortgage agreement.

Non-Conforming Loan

Loans that do not comply with Fannie Mae or Freddie Mac guidelines. These guidelines establish the maximum loan amount, down payment, borrower credit and income requirements, and suitable properties. Loans that does conform to these guidelines may be sold to Fannie Mae or Freddie Mac.

Origination

The process of preparing, submitting, and evaluating a loan application; generally includes a credit check, verification of employment, and a property appraisal.

Origination fee

The charge for originating a loan; is usually calculated in the form of points and paid at closing.

Periodic Rate Cap

For an adjustable-rate mortgage, 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.

Points

A point is 1 percent of the amount of the mortgage.

Pre-approval

When a lender commits to lend to a potential borrower; commitment remains as long as the borrower still meets the qualification requirements at the time of purchase.

Pre-qualify

When a lender informally determines the maximum amount an individual is eligible to borrow.

Prepayment

Payment of the mortgage loan before the scheduled due date; may be subject to a prepayment penalty.

Prepayment Penalty

A fee that may be charged to a borrower who pays off a loan before it is due.

Refinancing

The process of paying off one loan by securing another. Refinancing is typically done to secure better loan terms, such as lower interest rate, or to provide the borrower with extra cash (cash-out refinancing).

Reverse Mortgage

A special type of home loan that lets elderly homeowners convert the equity in their home into cash.

Second Home (or Vacation Home)

This home is not rented and is occupied occasionally by the owners.

Second Mortgage

A mortgage that has a lien position subordinate to the first mortgage

Secured Loan

A loan that is backed by collateral.

Teaser Rate

A low initial interest rate on a mortgage.

Two-Step Mortgage

With this type of loan homebuyers get a fixed rate loan at a slightly lower interest rate for a fixed period of time (most often for 5, 7, or 10 years) and then the interest rate is adjusted to fit market conditions at that time. After that adjustment, the mortgage maintains a fixed rate for the remaining years.

VA Loan

A mortgage for veterans and service persons guaranteed by the Department of Veterans Affairs (VA), requiring very low or no downpayments and with generous requirements for qualification.

Wraparound Mortgage

A loan arrangement whereby the existing loan is retained and a new loan is added to the property. Full payments on both mortgages are made to the wraparound mortgagee, who then forwards the payments on the first mortgage to the first mortgagee."