2/1 Buy Down
Mortgage
The 2/1 Buy Down Mortgage allows the borrower to qualify at below market
rates so they can borrow more. The initial starting interest rate
increases by 1% at the end of the first year and adjusts again by
another 1% at the end of the second year. It then remains at a fixed
interest rate for the remainder of the loan term.
Borrowers often refinance at the end of the second year to obtain the
best long term rates; however, even keeping the loan in place for three
full years or more will keep their average interest rate in line with
the original market conditions.
Acceleration
Clause
Provision in a mortgage that allows the lender to demand payment of the
entire principal balance if a monthly payment is missed or some other
default occurs.
Additional
Principal Payment
A way to reduce the remaining balance on the loan by paying more than
the scheduled principal amount due.
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 principal 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.
Asset
Anything owned of monetary value including real property, personal
property, and enforceable claims against others (including bank
accounts, stocks, mutual funds, etc.).
Assignment
The transfer of a mortgage from one person to another.
Assumability
An assumable mortgage 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.
Assumption
Fee
The fee paid to a lender (usually by the purchaser of real property)
when an assumption takes place.
Balance
Sheet
A financial statement that shows assets, liabilities, and net worth as
of a specific date.
Balloon
Mortgage
A mortgage with level monthly payments that amortizes over a stated term
but also requires that a lump sum payment be paid at the end of an
earlier specified term.
Balloon
Payment
The final lump sum paid at the maturity date of a balloon mortgage.
Before-tax
Income
Income before taxes are deducted.
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.
Bridge Loan
A second trust that is collateralized by the borrower's present home
allowing the proceeds to be used to close on a new house before the
present home is sold. Also known as "swing loan."
Broker
An individual or company that brings borrowers and lenders together for
the purpose of loan origination.
Buydown
When the seller,
builder or buyer pays an amount of money up front to the lender to
reduce monthly payments during the first few years of a
mortgage.Buydowns can occur in both fixed and adjustable rate mortgages.
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.
Change
Frequency
The frequency (in months) of payment and/or interest rate changes in an
adjustable-rate mortgage (ARM).
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.
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.
Conversion
Clause
A provision in an ARM allowing the loan to be converted to a fixed-rate
at some point during the term. Usually conversion is allowed at the end
of the first adjustment period. The conversion feature may cost extra.
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, Issac 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.
Deposit
This is a sum of money given to bind the sale of real estate, or a sum
of money given to ensure payment or an advance of funds in the
processing of a loan.
Discount
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.
Effective
Gross Income
A borrowers normal annual income, including overtime that is regular or
guaranteed.Salary is usually the principal source, but other income may
qualify if it is significant and stable.
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.
Escrow
Disbursements
The use of escrow funds to pay real estate taxes, hazard insurance,
mortgage insurance, and other property expenses as they become due.
Escrow
Payment
The part of a mortgagor’s monthly payment that is held by the servicer
to pay for taxes, hazard insurance, mortgage insurance, lease payments,
and other items as they become due.
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
Installment
The monthly payment due on a mortgage loan including payment of both
principal and interest.
Fixed-Rate Mortgage
(FRM)
A mortgage interest that are fixed throughout the entire term of the
loan.
Fully
Amortized ARM
An adjustable-rate mortgage (ARM) with a monthly payment that is
sufficient to amortize the remaining balance, at the interest accrual
rate, over the amortization term.
GNMA
A government-owned corporation that assumed responsibility for the
special assistance loan program formerly administered by Fannie Mae.
Popularly known as Ginnie Mae.
Growing-Equity
Mortgage (GEM)
A fixed-rate mortgage that provides scheduled payment increases over an
established period of time. The increased amount of the monthly payment
is applied directly toward reducing the remaining balance of the
mortgage.
Guarantee
Mortgage
A
mortgage that is guaranteed by a third party.
Housing
Expense Ratio
The percentage of gross monthly income budgeted to pay housing expenses.
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. A 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.
Interest
Rate Buydown Plan
An arrangement that allows the property seller to deposit money to an
account. That money is then released each month to reduce the
mortgagor's monthly payments during the early years of a mortgage.
Interest
Rate Ceiling
For an adjustable-rate mortgage (ARM), the maximum interest rate, as
specified in the mortgage note.
Interest
Rate Floor
For an
adjustable-rate mortgage (ARM), the minimum interest rate, as specified
in the mortgage note.
Late Charge
The penalty a borrower must pay when a payment is made a stated number
of days (usually 15) after the due date.
Lease-Purchase
Mortgage Loan
An alternative financing option that allows low- and moderate-income
home buyers to lease a home with an option to buy. Each month's rent
payment consists of principal, interest, taxes and insurance (PITI)
payments on the first mortgage plus an extra amount that accumulates in
a savings account for a downpayment.
Liabilities
A person's financial obligations. Liabilities include long-term and
short-term debt.
Lifetime
Payment Cap
For an
adjustable-rate mortgage (ARM), a limit on the amount that payments can
increase or decrease over the life of the mortgage.
Lifetime
Rate Cap
For an adjustable-rate mortgage (ARM), a limit on the amount that the
interest rate can increase or decrease over the life of the loan. See
cap.
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.
Liquid
Asset
A cash asset or an asset that is easily converted into cash.
Loan
A sum of borrowed money (principal) that is generally repaid with
interest.
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.
Lock-In Period
The guarantee of an interest rate for a specified period of time by a
lender, including loan term and points, if any, to be paid at closing.
Short term locks (under 21 days), are usually available after lender
loan approval only. However, many lenders may permit a borrower to lock
a loan for 30 days or more prior to submission of the loan application.
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.
Monthly
Fixed Installment
That portion of the total monthly payment that is applied toward
principal and interest. When a mortgage negatively amortizes, the
monthly fixed installment does not include any amount for principal
reduction and doesn't cover all of the interest. The loan balance
therefore increases instead of decreasing.
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
Broker
An individual or company that brings borrowers and lenders together for
the purpose of loan origination.
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.
Mortgage
Life Insurance
A type of term life insurance In the event that the borrower dies while
the policy is in force, the debt is automatically paid by insurance
proceeds.
Mortgagor
The borrower in a mortgage agreement.
Negative
Amortization
Amortization means that monthly payments are large enough to pay the
interest and reduce the principal on your mortgage. Negative
amortization occurs when the monthly payments do not cover all of the
interest cost. The interest cost that isn't covered is added to the
unpaid principal balance. This means that even after making many
payments, you could owe more than you did at the beginning of the loan.
Negative amortization can occur when an ARM has a payment cap that
results in monthly payments not high enough to cover the interest due.
Net Worth
The value of all of a person's assets, including cash.
Non
Liquid Asset
An asset that cannot easily be converted into cash.
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.
Payment
Change Date
The date when a new monthly payment amount takes effect on an
adjustable-rate mortgage (ARM) or a graduated-payment mortgage (GPM).
Generally, the payment change date occurs in the month immediately after
the adjustment date.
Periodic
Payment Cap
A limit on the amount that payments can increase or decrease during any
one adjustment period.
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.
Principal,
Interest, Taxes, and Insurance (PITI)
The four components of a monthly mortgage payment. Principal refers to
the part of the monthly payment that reduces the remaining balance of
the mortgage. Interest is the fee charged for borrowing money. Taxes and
insurance refer to the monthly cost of property taxes and homeowners
insurance, whether these amounts that are paid into an escrow account
each month or not.
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 MI 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.
Realtor®
A real estate broker or an associate who is an active member in a local
real estate board that is affiliated with the National Association of
Realtors.
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.
Revolving
Liability
A credit arrangement, such as a credit card, that allows a customer to
borrow against a preapproved line of credit when purchasing goods and
services.
Secondary
Mortgage Market
Where existing mortgages are bought and sold.
Security
The property that
will be pledged as collateral for a loan.
Seller
Carry-back
An agreement in which the owner of a property provides financing, often
in combination with an assumable mortgage. See owner financing.
Servicer
An organization that collects principal and interest payments from
borrowers and manages borrowers’ escrow accounts. The servicer often
services mortgages that have been purchased by an investor in the
secondary mortgage market.
Standard
Payment Calculation
The method used to determine the monthly payment required to repay the
remaining balance of a mortgage in substantially equal installments over
the remaining term of the mortgage at the current interest rate.
Step-Rate
Mortgage
A mortgage that allows for the interest rate to increase according to a
specified schedule (i.e., seven years), resulting in increased payments
as well. At the end of the specified period, the rate and payments will
remain constant for the remainder of the loan.
Third-party
Origination
When a lender uses another party to completely or partially originate,
process, underwrite, close, fund, or package the mortgages it plans to
deliver to the secondary mortgage market.
Total
Expense Ratio
Total obligations as a percentage of gross monthly income including
monthly housing expenses plus other monthly debts.
Treasury
Index
An index used
to determine interest rate changes for certain adjustable-rate mortgage
(ARM) plans. Based on the results of auctions that the U.S. Treasury
holds for its Treasury bills and securities or derived from the U.S.
Treasury's daily yield curve, which is based on the closing market bid
yields on actively traded Treasury securities in the over-the-counter
market.
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.
Two-step
Mortgage
An adjustable-rate mortgage (ARM) with one interest rate for the first
five or seven years of its mortgage term and a different interest rate
for the remainder of the amortization term.
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.
"Wrap
Around" Mortgage
A mortgage that includes the remaining balance on an existing first
mortgage plus an additional amount requested by the mortgagor. Full
payments on both mortgages are made to the "Wrap Around"
mortgagee, who then forwards the payments on the first mortgage to the
first mortgagee. These mortgages may not be allowed by the first
mortgage holder, and if discovered, could be subject to a demand for
full payment.