3/1, 5/1, 7/1 and 10/1 ARMs

Adjustable rate mortgages in which rate is fixed for three year, five year, seven year and 10-year periods, respectively, but may adjust annually after that.

Adjustable Rate Mortgage (ARM)

 A mortgage in which the interest rate is adjusted periodically based on a pre-selected index. Also sometimes known as a renegotiable rate mortgage, variable rate mortgage or Canadian rollover mortgage.

Amortization

Loan payment divided into equal periodic payments calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance.

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 measurement of the full cost of a loan including interest and loan fees expressed as a yearly percentage rate. Because all lenders apply the same rules in calculating the annual percentage rate, it provides consumers with a good basis for comparing the cost of different loans. 

Appraisal

An estimate of the value of property made by a qualified professional called an "appraiser.”

Appraised Value

An opinion of a property's fair market value, based on an appraiser's knowledge, experience, and analysis of the property.

Balloon Mortgage

A loan which is amortized for a longer period than the term of the loan. Usually this refers to a thirty year amortization and a five or seven year term. At the end of the term of the loan, the remaining outstanding principal on the loan is due. This final payment is known as a balloon payment.

Balloon Payment

The final lump sum paid at the maturity date of a balloon mortgage.

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.

Brrower (Mortgagor)

One who applies for and receives a loan in the form of a mortgage with the intention of repaying the loan in full.

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."

Caps (interest)

Consumer safeguards which limit the amount of change to the interest rate for an adjustable rate mortgage.

Caps (payment)

Consumer safeguards which limit the amount of change to the monthly payments for an adjustable rate mortgage.\

Closing

The meeting between the buyer, seller and lender or their agents where the property and funds legally change hands, also called settlement. Closing costs usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement. The cost of closing usually are about 3 percent to 6 percent of the mortgage amount.

Closing Costs

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.

Construction Loan

A short term interim loan to pay for the construction of buildings or homes. These are usually designed to provide periodic disbursements to the builder as he or she progresses.

Contract Sale or Deed:

A contract between purchaser and a seller of real estate to convey title after certain conditions have been met. It is a form of installment sale.

Conventional Loan

A mortgage not insured by FHA or guaranteed by VA.

Credit Report

A report documenting the credit history and current status of a borrower's credit standing.

Debt-to-Income Ratio

The ratio, expressed as a percentage, which results when a borrower's monthly payment obligation on long term debts is divided by his or her gross monthly income. See housing expenses-to-income ratio.

Deed of Trust

In many states, this document is used in place of a mortgage to secure the payment of a note.

Default

Failure to meet legal obligations in a contract, specifically, failure to make the monthly payments on a mortgage.

Deferred Interest

When a mortgage is written with a monthly payment that is less than required to satisfy the note rate, the unpaid interest is deferred by adding it to the loan balance. See negative amortization.

Delinquency

Failure to make payments on time. This can lead to foreclosure.

Down Payment

Money paid to make up the difference between the purchase price and the mortgage amount.

Earnest Money

Money given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment.

Equal Credit Opportunity Act (ECOA)

A federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status or receipt of income from public assistance programs.

Equity

The difference between the fair market value and current indebtedness, also referred to as the owner's interest. The value an owner has in real estate over and above the obligation against the property. 

Escrow

An account held by the lender into which the home buyer pays money for tax or insurance payments. Also earnest deposits held pending loan closing.

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

Federal National Mortgage Association mission is to help families achieve homeownership by providing products and servicesthat make it possible for low-, modrate- and middle-income families to buy homes of their own. To accomplish this mission, FNMA joins with lenders and community partners to create products and to reach out to underserved communities..

Federal Home Loan Mortgage Corporation(FHLMC) also called "Freddie Mac"

A government sponsored entity that purchases conventional mortgage from insured depository institutions and HUD-approved mortgage bankers.

Federal Housing Administration (FHA)

A division of the Department of Housing and Urban Development. Its main activity is the insuring of residential mortgage loans made by private lenders. FHA also sets standards for underwriting mortgages. 

FHA Loan

A loan insured by the Federal Housing Administration open to all qualified home purchasers. While there are limits to the size of FHA loans, they are generous enough to handle moderately priced homes almost anywhere in the country.

FHA Mortgage Insurance

Requires a fee (up to 2.25 percent of the loan amount) paid at closing to insure the loan with FHA. In addition, FHA mortgage insurance requires an annual fee of up to 0.5 percent of the current loan amount, paid in monthly installments. The lower the down payment, the more years the fee must be paid.

FHLMC

The Federal Home Loan Mortgage Corporation provides a secondary market for savings and loans by purchasing their conventional loans. Also known as "Freddie Mac."

Firm Commitment

A promise by FHA to insure a mortgage loan for a specified property and borrower. A promise from a lender to make a mortgage loan. 

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

The mortgage interest rate will remain the same on these mortgages throughout the term of the mortgage for the original borrower.

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.

Foreclosure

A legal process by which the lender or the seller forces a sale of a mortgaged property because the borrower has not met the terms of the mortgage. Also known as a repossession of property.

Hazard Insurance

A form of insurance in which the insurance company protects the insured from specified losses, such as fire, windstorm and the like.

Housing Expenses-to-Income Ratio

The ratio, expressed as a percentage, which results when a borrower's housing expenses are divided by his/her gross monthly income. See debt-to-income ratio.

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.

Index

A published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments (such as one, three, and five year U.S. Treasury security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average costs-of-funds incurred by savings and loans), which is then used to adjust the interest rate on an adjustable mortgage up or down.

Indexed Rate

The sum of the published index plus the margin. For example if the index is 4% and the margin is 2.75%, the indexed rate would be 6.75%. Often, lenders charge less than the indexed rate the first year of an adjustable rate mortgage.

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 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.

Interim Financing

A construction loan made during completion of a building or a project. A permanent loan usually replaces this loan after completion.

Jumbo Loan

A loan which is larger than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.

Late Charge

The penalty a borrower must pay when a payment is made a stated number of days after the due date.

Liabilities

A person's financial obligations. Liabilities include long term and short term debt.

Lien

A claim upon a piece of property for the payment or satisfaction of a debt or obligation.

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.

Loan

A sum of borrowed money (principal) that is generally repaid with interest.

Loan to Value Ratio

The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage.

Lock

A lender's guarantee that the mortgage rate quoted will be good for a specific number of days from the day of application.

Margin

The amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate.

Market Value 

The highest price that a buyer would pay and the lowest price a seller would accept on a property. Market value may be different from the price a property could actually be sold for at a given time.

Maturity

The date on which the principal balance of a loan becomes due and payable.

Monthly Fixed Installment

The 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.

Mortgagee

The lender.

Mortgage Insurance

Money paid to insure the mortgage when the down payment is less than 20 percent. See private mortgage insurance, FHA 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.

One Year Adjustable Rate Mortgage

Mortgage where the annual rate changes yearly. The rate is usually based on movements of a published index plus a specified margin, chosen by the lender.

Origination Fee

The fee charged by a lender to prepare loan documents, make credit checks, inspect and sometimes appraise a property; usually computed as a percentage of the face value of the loan.

Points (Loan Discount Points)

Prepaid interest assessed at closing by the lender. Each point is equal to 1 percent of the loan amount (e.g., two points on a $100,000 mortgage would cost $2,000).

Power of Attorney

A legal document authorizing one person to act on behalf of another.

Preapproval

The process of determining how much money you will be eligible to borrow before you apply for a loan.

Prepaid Expenses

Necessary to create an escrow account or to adjust the seller's existing escrow account. Can include taxes, hazard insurance, private mortgage insurance and special assessments.

Prepayment

A privilege in a mortgage permitting the borrower to make payments in advance of their due date.

Prepayment Penalty 

Money charged for an early repayment of debt. Prepayment penalties are allowed in some form (but not necessarily imposed) in many states.

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 are paid into an escrow account each month or not.

Private Mortgage Insurance (PMI) 

In the event that you do not have a 20 percent down payment, lenders will allow a smaller down payment - as low as 3 percent in some cases. With the smaller down payment loans, however, borrowers are usually required to carry private mortgage insurance. Private mortgage insurance will usually require an initial premium payment and may require an additional monthly fee depending on your loan's structure.

 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 another mortgage originator guaranteeing a specified interest rate and lender costs for a specified period of time.

Realtor®

A real estate broker or an associate holding active membership in a local real estate board affiliated with the National Association of Realtors.

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.

Recission

The cancellation of a contract. With respect to mortgage refinancing, the law that gives the homeowner three days to cancel a contract in some cases once it is signed if the transaction uses equity in the home as security.

Recording Fees

Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records.

Refinance

Obtaining a new mortgage loan on a property already owned often to replace existing loans on the property.

RESPA

Short for the Real Estate Settlement Procedures Act. RESPA is a federal law that allows consumers to review information on known or estimated settlement costs once after application and once prior to or at settlement. The law requires lenders to furnish the information after application only.

Second Mortgage

A mortgage made subsequent to another mortgage and subordinate to the first one.

Security

The property that will be pledged as collateral for a loan.

Settlement/Settlement Costs

See closing/closing costs

Simple Interest

Interest which is computed only on the principle balance.

Survey

A measurement of land, prepared by a registered land surveyor, showing the location of the land with reference to known points, its dimensions, and the location and dimensions of any buildings.

Title

A document that gives evidence of an individual's ownership of property.

Title Insurance

A policy, usually issued by a title insurance company, which insures a home buyer against errors in the title search. The cost of the policy is usually a function of the value of the property, and is often borne by the purchaser and/or seller. Policies are also available to protect the lender's interests.

Title Search

An examination of municipal records to determine the legal ownership of property. Usually is performed by a title company.

Truth in Lending

A federal law requiring disclosure of the Annual Percentage Rate to home buyers shortly after they apply for the loan. Also known as Regulation Z.

Underwriting

The decision whether to make a loan to a potential home buyer based on credit, employment, assets, and other factors and the matching of this risk to an appropriate rate and term or loan amount.

Verification of Deposit (VOD)

A document signed by the borrower's financial institution verifying the status and balance of his/her financial accounts.

Verification of Employment (VOE)

 A document signed by the borrower's employer verifying his/her position and salary.