Glossary of Mortgage Terms
ARM - An adjustable-rate mortgage is a loan with interest rates that are adjusted periodically based on changes in a pre-selected index. As a result, the interest rate on your loan will rise and fall with increases and decreases in overall interest rates. If interest rates rise, you can expect to see an increase in what you pay monthly as well.
An adjustable-rate mortgage often comes with an interest rate cap, which limits the amount by which the interest rate can change; look for this feature when you consider an ARM loan. Though they do have the potential to raise your monthly payments, an adjustable-rate mortgage can make a big difference in lowering your monthly payments, too. Whether you're buying your first home or refinancing, an adjustable-rate mortgage is a popular option.
When mortgage loans have an interest rate that is adjustable, the lender must specify how their interest rate changes, usually in terms of a relation to a national index. LIBOR is the most common index for short-term adjustable-rate mortgages.
Amortization - Mortgage amortization is the process of repayment of a loan with periodic payments of both principal and interest calculated to payoff the loan at the end of a fixed period of time. During the amortization of a mortgage, the loan balance declines by the amount of the scheduled payment, plus the amount of any extra payment. Unlike other repayment models, each repayment installment consists of both principal and interest. On amortization schedule, a greater amount of the monthly payment is applied to interest at the beginning of the loan, while more money is applied to principal at the end. Negative amortization of a loan can occur if the payments made do not cover the interest due. The remaining interest owed is then added to the outstanding loan balance, making it larger than the original loan amount.
Amount Financed - This figure represents the loan amount minus any prepaid finance charges.
Appraisal - Appraisal is a written analysis of the estimated value of the property. A qualified appraiser who has training, experience and insight into the marketplace prepares the home appraisal report. It demonstrates approximate fair market value based on recent sales in the neighborhood and is required to purchase or refinance the new home or property. A property appraisal like this is generally required by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property.
APR - Annual Percentage Rate includes the actual interest rate and any additional costs. Additional cost might include things like prepaid interest (points), private mortgage insurance or closing fees. APR represents the total cost of credit on a yearly basis after all charges are taken into consideration. It is typically higher than the actual interest rate because it includes these additional items.
AVM - Automated Valuation Model provides computer generated home appraisals for mortgages. AVM mortgage appraisals are designed to replace a lot of the work that is usually completed by licensed real estate appraisers. Most lenders use AVM mortgage appraisals to speed up the process and reduce costs.
Base Loan Amount - The foundation loan amount upon which loan payments are based. If any other charges accrue, those costs will be added to the base loan amount.
Borrower (or Mortgagor) - An individual who applies for and receives funds in the form of a loan and is obligated to repay the loan in full under the terms of the loan.
Broker - A person who is licensed to handle property transactions and acts as a go-between for buyers and sellers. Brokers also assist on negotiating contracts.
Cash-out - A cash-out refinance loan allows borrower to get a new loan that is larger than the remaining balance of the current mortgage, based upon the equity borrower has already built up in the house, and receive a cash balance of that lump sum. The cash out amount is calculated by subtracting the sum of the old loan and fees from the new mortgage loan.
Closing - The settlement or closing is the conclusion of borrower's real estate transaction. It includes the delivery of the security instrument, signing of the legal documents and the disbursement of the funds necessary to the sale of the home or loan transaction (refinance).
Closing Disclosure (CD) - Closing Disclosure is a form designed to help consumers understand all of the costs involved in the mortgage transaction. This Closing Disclosure is provided to the consumers at least three (3) business days before they close on their loan.
Closing Costs - Mortgage closing costs, also known as settlement costs, are fees charged for services that must be performed to process and close your loan application. Examples of mortgage closing costs include title fees, recording fees, appraisal fee, credit report fee, pest inspection, attorney's fees, taxes, and surveying fees. The closing cost of a loan will vary depending on your geographic location.
Co-Borrower - A co-borrower in mortgage lending is a person who, along with the primary borrower, accepts responsibility for repaying the debt. Also referred to as co-signers or co-applicants, co-borrowers are often required when the primary borrower applying is not credit worthy for one reason or another. Often, adding a co-borrower to a mortgage helps primary borrowers who have no credit history, poor credit history, or insufficient income get approved for a loan with better finance options.
CLTV - Combined Loan-to-Value is the percentage of the property value borrowed through a combination of more than one loan - for example, a first mortgage and a home equity loan. The percentage is calculated by adding the two loan amounts and dividing by the home's value.
Commission - Money paid to a real estate agent or broker for negotiating a real estate or loan transaction. Salespeople earn commissions for the work that they do and there are many sales professionals involved in each transaction, including Realtors, loan officers, title representatives, attorneys, escrow representative, and representatives for pest companies, home warranty companies, home inspection companies, insurance agents, and more.
Commitment - A promise to lend and a statement by the lender of the terms and conditions under which a loan is made.
Conforming Loan - A conforming loan is a mortgage loan that meets all requirements to be eligible for purchase by federal agencies such as Fannie Mae and Freddie Mac. Since Fannie Mae and Freddie Mac will only buy conforming loans that meet their guidelines, a lender cannot rely on the sale of a non-conforming mortgage to these agencies. Housing agencies Freddie Mac and Fannie Mae adjust the conforming loan limit every January based on the average home price appreciation from October to October of the previous year.
Conventional Loan - A conventional loan is any type of mortgage that is not secured by a government sponsored entity such as the Federal Housing Administration or the Veterans Administration.
Courier Fee - On refinance transactions, we typically use an overnight courier to expedite the payment of the existing loan. This fee covers the cost of the courier.
Credit Report - A credit report is a detailed summary of borrowing history. Credit report shows previous and current credit accounts along with the payment history. Lenders buy credit reports from these agencies when borrower apply for a loan to determine whether they should take a risk and lend him the money. There are three main credit reporting bureaus: Experian, TransUnion and Equifax. All provide credit reports to consumers.
Credit Score - Credit Score is technically a statistical method of assessing borrower's creditworthiness. Credit scores are based on several different factors including credit card history, amount of outstanding debt and the type of credit borrower use. Negative information, such as bankruptcies or late payments, is also used to calculate credit report score as well as collection accounts and judgments. Too little credit history and too many credit lines with the maximum amount borrowed are also included in credit-scoring models to determine the credit score.
Debt Consolidation - Debt consolidation is the process of rolling the short-term debt into the home loan.
DTI - Debt-to-Income ratio is the comparison of the gross income to housing as compared to the non-housing expenses. The FHA usually requires your monthly mortgage payment to be no more than 29% of your monthly gross income (before taxes) and the mortgage payment combined with non-housing debts should not exceed 41% of your income.
Deed - Legal document with which title to real property is transferred from one owner to another. The deed contains a description of the property, and is signed, witnessed, and delivered to the buyer at closing.
Deed of Trust - A legal document that conveys title to real property to a third party. The third party holds title until the owner of the property has repaid the debt in full.
Delinquency - Failure to make payments as agreed in the loan agreement.
Discount Points (or Mortgage Point) - An up-front fee paid to the lender at the time borrowers get their loan. Each point equals one percent of your total loan amount. Points and interest rates are inherently connected: in general, the more points you pay, the lower your interest rate. However, the more points you pay, the more cash you need up front since points are paid in cash at closing. This is also known as a "buy-down" or a "discount," since you are essentially paying for a reduced rate over the entire term of the loan.
Down Payment - The down payment is the amount of the property purchase price borrower need to supply up front in cash to get the loan. Home buyers seeking conventional loans should strive for a down payment that's at least 20% of the home's value, since lenders generally do not require private mortgage insurance with down payments of at least 20% of your home's purchase price.
E-Signature - An e-signature is an electronic and legally binding alternative to signing a document in person. With the ability to quickly review and sign loan applications online, this e-mail signature expedites the application process and has even eliminated up to five days from the loan application process.
ECOA - Without credit, it would not be possible for the majority of today's homeowners to own their home. The Equal Credit Opportunity Act ensures that everyone has an equal chance to obtain credit, and own a home.
Equity - Equity is the difference between the current market value of a property and the total debt obligations against the property. On a new mortgage loan, the down payment represents the equity in your new home. There are three ways to build equity in your home: paying principal on your mortgage, making home improvements and determining if the average market value of your real estate has appreciated over time.
Escrow - Mortgage escrow accounts are special accounts that a lender uses to hold a borrower's monthly payments toward property taxes, homeowner's insurance and mortgage insurance. By distributing these annual fees as components of monthly mortgage payments, borrower does not have to worry about getting an exorbitant bill in the mail that he cannot afford. Instead, he pay a portion of the expected fee into an escrow account throughout the year and the lender disburses payment for these fees when they become due.
Estimated Market Value - Real estate fair market value is a term used to describe an appraisal of a property, which is required by a lender before loan approval. A fair market value is based on an estimate of what a buyer could be expected to pay and what a seller could be expected to accept.
Fannie Mae - Fannie Mae is the official name of the Federal National Mortgage Association and is also a United States Government-sponsored corporation, insured by the Federal Housing Administration (FHA). Fannie Mae's role in the mortgage lending process is to buy mortgages from lenders and sell them to investors on the open market. This process is essential in replenishing the supply of lend-able money available for new home purchases. Freddie Mac is a similar corporation and is a competitor of Fannie Mae. In order to be eligible for purchase by Fannie Mae (or Freddie Mac), home loans have to be underwritten using specific guidelines. These guidelines are an industry standard for residential conventional lending. Loans that do not conform to these guidelines are subject to slightly higher interest rates because they are not guaranteed by Fannie Mae or Freddie Mac.
FDIC - FDIC stands for Federal Deposit Insurance Corporation. The FDIC is an independent deposit insurance agency created by the United States Government to maintain stability and public confidence in the nation's banking system.
FHA - Federal Housing Administration, a federal agency within the Department of Housing and Urban Development (HUD), which insures residential mortgage loans made by private lenders and sets standards for underwriting mortgage loans. The FHA sets standards for construction and underwriting, however it does not lend money or plan or construct housing.
FHA Loans - Fixed or adjustable-rate loans insured by the U.S. Department of Housing and Urban Development. FHA loans are designed to make housing more affordable, particularly for first-time homebuyers. FHA loans typically permit borrowers to buy a home with a lower down payment than conventional loans. With FHA insurance, eligible buyers can purchase a home with a down payment of as little as 3% of the appraised value or the purchase price-whichever is lower. The current FHA loan limits vary depending on home type and home location.
FICO - The FICO score is the most common credit-scoring model used by lenders, it is also known as a Fair, Isaac score. FICO scores can range from 200 to 900. According to this model, the higher your FICO scoring, the less likely you are to default on your loan. Several factors go in to determining your FICO score, or credit score, including your payment history, amounts you owe, your length of credit history, new credit and types of credit you currently have in use.
Finance Charge - The total of all the interest borrower would pay over the entire life of the loan, assuming he kept the loan to maturity, as well as all prepaid finance charges. Loan charges include origination fees, discount points, mortgage insurance, and other applicable charges. If the seller pays any of these charges, they cannot be included in the finance charge. If borrower pre-pay any principal during his loan, the monthly payments remain the same, but the total finance charge will be reduced.
First Mortgage - A first mortgage is the loan that is in first lien position and takes priority over all other liens. This means that in case of a foreclosure, the first mortgage loan will be repaid before any other mortgages on the property is repaid to the lender.
Fixed-Rate Mortgage - Fixed-rate mortgages have interest rates that do not change over the life of the loan and as a result, monthly payments for principal and interest do not fluctuate. Fixed-rate mortgages typically have 15-year or 30-year term and with a fixed-rate loan, you can have the assurance to know how much your monthly mortgage payment will be, long before it's ever due.
Flood Certification Fee - Federal law requires that borrower obtain flood certification insurance if their property lies in a flood zone. The flood certification fee that is issued to the client covers the cost of the assessment and is included in your closing costs and fees when you close on a home.
Flood Insurance - Insurance that compensates for physical damage to a property by flood. Typically not covered under standard hazard insurance.
Flood Life of Loan Coverage - Flood zone determinations may change from time to time. The "Life of Loan Coverage" fee allows us to track any changes in your property's flood zone status over the life of your loan.
Foreclosure - Foreclosure is the legal process by which mortgaged properties may be sold to pay off a mortgage loan that is in default. In the event of foreclosure on a home, the first mortgage will be repaid before any other mortgages.
Freddie Mac - This agency buys loans that are underwritten to its specific guidelines. These guidelines are an industry standard for residential conventional lending.
Gross Income - Gross income is your total income before taxes or expenses are deducted. Gross income is used in calculating one of the two guideline ratios used to qualify you for a mortgage. The top ratio is calculated by dividing your new total monthly mortgage payment by your gross income per month. The bottom ratio is equal to your new total monthly mortgage payment plus your total monthly debt divided by your gross income per month.
Guideline Ratios - There are two guideline ratios used to qualify you for a mortgage. The first is called the front-end ratio, or top ratio, and is calculated by dividing your new total monthly mortgage payment by your gross monthly income. The second is called the back-end, or bottom ratio, and is equal to your new total monthly mortgage payment plus your total monthly debt divided by your gross monthly income.
Hazard Insurance - Protects the insured against loss due to fire or other natural disaster in exchange for a premium paid to the insurer.
Home Equity - The difference between the current market value of a property and the total debt obligations against the property. In other words, it's how much a property is worth minus any mortgages or other liens on the property.
Home Equity Loan - A home equity loan is a second mortgage that "converts" home equity into cash which is typically used for financing home improvements or paying off high-interest credit card debt.
Home Inspection - A home inspection is a process carried out by a professional that evaluates the structural and mechanical condition of a property. The home inspection is a crucial part of the home buying process and it will make you aware of any potential hazards or home repairs that may be needed before closing on your mortgage. A certified home inspection will reveal any potentially serious problems that may lead to large, costly repairs.
HUD - Housing and Urban Development, is the U.S. government agency established to implement federal housing and community development programs. HUD oversees the Federal Housing Administration (FHA).
HUD regulates Fannie Mae and Freddie Mac and watches over all aspects of the housing and real estate market to protect consumers. The mission at HUD is to "increase homeownership, support community development and increase access to affordable housing free from discrimination." HUD also sells properties at reduced prices for low to moderate-income Americans.
Index - The mortgage rate index affects the interest rate changes in an adjustable-rate mortgage. When mortgage loans have an interest rate that is adjustable, the lender must specify how their interest rate changes. The LIBOR index is a daily reference rate based on short-term interest rates charged among banks in a foreign money market.
Initial Cap - Initial caps are consumer safeguards that limit the amount that the interest rate on an adjustable rate mortgage can change during the first adjustment period. Initial caps are generally higher than the caps that follow. Typically, the longer initial fixed period you have on a mortgage, the higher the interest rate caps. For example, if your initial cap is 1% and your current rate is 7%, then your newly adjusted rate must fall between 6% and 8% regardless of actual changes in the index.
Installment Loan - An installment loan is an amount of borrowed money that is repaid over a specific period of time. Student and automobile loans are often times an example of an installment loan. Credit card payments are revolving loans and unlike automobile and student loans, revolving loans vary depending on the amount of money spent.
Interest - The fee a lender charges for permitting the borrower to use their money for a specific length of time.
Interest Rate - The interest rate is the yearly rate a lender charges for permitting the borrower to use money for a specific length of time. The rate is calculated by dividing the total amount of interest charged by the loan amount.
Interest Rate Ceiling - This is the highest interest rate that you can receive under an Adjustable Rate Mortgage.
Interest Rate Floor - The interest rate floor is the lowest interest rate that you can receive under an adjustable-rate mortgage.
Interest-Only Home Loan - An interest-only home loan is one that gives you the option of paying just the interest or the interest and as much principal as you want in any given month during an initial period of time. Interest-only home loans can be 30-year fixed-rate mortgages or adjustable-rate mortgages.
Joint Liability - Liability shared among two or more people, each of whom is liable for the full debt.
Jumbo Loan - Jumbo Loans are mortgages larger than the limits set every January by government agencies such as Fannie Mae and Freddie Mac. These government agencies purchase the underlying securities from mortgage originators. Anything below the limit set by the government is considered a conforming loan eligible for purchase, while loans above that limit are non-conforming Jumbo Loans and are subject to slightly higher interest rates. The current Jumbo Loan amount is anything above $417,000.
Land Contracts - Real estate land contracts are deals made between the buyer and seller where the seller's mortgage remains in place and the buyer makes payments towards it instead of arranging a new mortgage loan upon "purchase." Land purchase contracts like these usually require the buyer to pay installments to a liaison who forwards the payments to the seller's mortgage. Complete ownership of the property and title transaction does not become official until all payments are made or until the buyer refinances the mortgage in his or her name.
Lender (or Mortgagee) - The bank, mortgage company, or mortgage broker offering the loan.
Lender Fees - Mortgage lender fees are costs that are to be paid by the lender during the home buying process and at closing. Some typical lender fees paid for by the buyer include: fees for the attorneys, an application fee, recording fees, a courier fee and more. Whenever a transaction as heavily documented as a mortgage is arranged, there are inevitably mortgage lender fees for all of the preparation, recording and filing that must take place in order to make everything official.
Lender Processing Fee - The lender processing fee covers the cost of analyzing your loan application and compiling and packaging the necessary supporting documentation to close your loan.
LIBOR - London Interbank Offered Rate, is a daily reference rate based on short-term interest rates charged among banks in the foreign money market. LIBOR rates are commonly used as a reference rate or index for adjustable-rate mortgages.
When mortgage loans have an interest rate that is adjustable, the lender must specify how their interest rate changes, usually in terms of a relation to a national index. LIBOR is the most common index for short-term adjustable-rate mortgages. An ARM with rates tied to the LIBOR will rise and fall with increases and decreases in interbank rates, and as a result you'll see your monthly ARM payments fluctuate accordingly.
Lien - A lien is a legal claims made by one person on the property of another that secures the payment of a debt. A mortgage is a type of lien. A lender has the right to seize the property if certain terms of the mortgage agreement are not fulfilled.
Listing Agent - A listing agent is the real estate professional who represents the seller and helps you sell your home. Listing agents handle a variety of tasks on the selling end, but their most important concern is marketing your home to potential buyers.
Loan Application - A mortgage loan application is an initial statement of personal and financial information required to apply for a loan. A personal loan application does not bind you legally to a loan. Whether you're purchasing your first home or refinancing your current mortgage, the home loan application process at Reliance First Capital is as fast and easy as possible.
Loan Application Fee - Fee charged by a lender to cover the initial costs of processing a loan application. The fee may include the cost of obtaining a property appraisal, a credit report, and a lock-in fee or other closing costs incurred during the process or the fee may be in addition to these charges.
Loan Balance - The amount of a loan that is left to be paid. The loan balance is equal to the loan amount minus the sum of all prior payments to the loans principal. Commonly referred to as Balance.
Loan Estimate (LE) - Form designed to help consumers understand the key features, costs and risks of the mortgage loan for which they are applying. The Loan Estimate is provided to consumers no later than three (3) business days after they submit a loan application. The Loan Estimate replaces the Good Faith Estimate (GFE) and early Truth-In-Lending Disclosure (TIL).
Loan Origination Fee - Fee charged by a lender to cover administrative costs of processing a loan.
Loan Term - A home loan term is the period of time between the closing date and the date of your last payment is paid. Short-term loans are loans that mature in less than 10 years, while long-term loans encompass loans of 10 years or more in maturity.
LTV - The Loan-to-Value ratio is the percentage of the loan amount to the appraised value (or the sales price, whichever is less) of the property. The loan-to-value ratio and down payment are different ways of expressing the same set of facts. The loan-to-value ratio is calculated by taking the amount to be borrowed divided by the value of the home.
The loan to value ratio is used to qualify borrowers for a mortgage, and the higher the LTV, the tighter the qualification guidelines for certain mortgage programs become. Low loan-to-value ratios are considered below 80%, and carry lower rates since borrowers are lower risk. Lenders are more likely to consider people with poor credit and financial history who have a low LTV.
Lock / Lock-In Period - A mortgage lock period is a set period of time that a lender will guarantee an interest rate. This lock-in protects you against market increases during that period of time. A lock period is typically a short window of time during which you must close on your loan, likely between 15 and 60 days.
Most lenders will lock your interest rate after you complete your mortgage application. That way, the plan you reviewed with your banker will be the same as the papers you sign at closing.
Manufactured (Mobile) Home - A manufactured home, also known as a mobile home, is a dwelling that is built to the Manufactured Home Construction and Safety Standards. Unlike a modular home, these standards are set by the U.S. Department of Housing and Urban Development (HUD). Manufactured homes are built in a controlled setting, typically a manufacturing plant or a factory, and are transported in 1 or 2 pieces (single or double-wide) on a permanent steel chassis to a location using its own wheels.
Manufactured homes are often confused with modular homes. Modular homes are built from 3 or more pieces, assembled onsite, and built on a permanent foundation. Modular homes resemble traditional single family homes and do not have a HUD tag.
Margin - A mortgage margin is the percentage difference between the index for a particular loan and the interest rate charged. It is a number predetermined by the lender, a fixed percentage point that is added to the index to compute the interest rate. A lender's margin remains fixed for the entire term of the loan. Your lending company is required by law to disclose the index to which your loan is tied, the margin they will tack on to your rate as well as any rate or payment caps that apply.
Maturity - Maturity is the date in which the principal loan balance is due. At the point when your mortgage has reached maturity, your interest and principal is paid for in its entirety.
Modular Home - A modular home, unlike a manufactured (mobile) home, is a home that adheres to the same construction codes as a site-built home. Modular homes are typically constructed at a manufacturing plant or facility, in 3 or more pieces, and then transported to a permanent site on a flatbed truck to be assembled on a permanent foundation.
Modular homes are often confused with manufactured homes. Manufactured homes are built in a controlled setting, typically a manufacturing plant or a factory and are transported in 1 or 2 pieces (single or double-wide) on a permanent steel chassis, to a location using its own wheels. Manufactured homes always have a data (HUD) tag.
Modular homes resemble traditional single family homes and, unlike manufactured homes, do not have a HUD tag.
Monthly Mortgage Payment - A monthly mortgage payment typically contains four parts called the PITI (principal, interest, taxes, and insurance).
Monthly Principal and Interest (P &I) Payment - A monthly principal and interest payment is a mortgage payment where the borrower has made his own arrangements to pay the taxes and insurance instead of paying it into an escrow through the lender.
Mortgage - A mortgage is the actual legal document by which real property is pledged as security for the repayment of a loan, but generally speaking the word "mortgage" encompasses several different loan options for purchasing or refinancing a home or tapping in to your home's equity.
Mortgage Banker - A Mortgage Banker is an individual or lending company that originates and/or services mortgage loans.
Mortgage Broker - A mortgage broker is an individual or company that arranges financing for borrowers. The mortgage broker matches lenders with borrowers who meet the lenders criteria. The mortgage broker does not fund the loan but they do receive a payment from the lender for their services.
Mortgage Insurance - Private mortgage insurance, or PMI, is insurance that protects lenders if you default on your loan. With conventional loans, mortgage insurance is generally required if you do not make a down payment of at least 20% of the home's appraised value. (Note, however, that FHA and VA loans have different insurance guidelines.) Mortgage insurance payments are generally included in your monthly mortgage payment and may be tax-deductible
Mortgage Lender - A mortgage lender is the bank or mortgage company that is offering the home loan. Mortgage brokers or bankers differ from the actual bank or mortgage company in that they don't actually lend money; they act as a go-between which helps clients find a mortgage that suits their needs.
As one of the documents required at closing, your mortgage note will contain many of the important loan elements, such as your loan amount, interest rate, due dates, late charges and the terms of your mortgage. In addition to the mortgage note, other financial documents you'll need at closing include the HUD-1 Settlement Statement, Truth-In-Lending Statement, Mortgage/Deed of Trust, and Monthly Payment Letter.
Mortgage Payoff - Mortgage payoff is the act of paying down loan principal ahead of the amortization schedule. Early loan payoff can save the borrower money that would have gone to interest.
Negative Amortization - A loan payment schedule in which the outstanding principal balance of a loan goes up rather than down because the payments do not cover the full amount of interest due. The monthly shortfall in payment is added to the unpaid principal balance of the loan.
Notary - A notary is a certified witness that validates signatures on official documents. In order to legally operate, notaries must obtain licensing and become certified within the state they are employed. A notary may authenticate the signing of contracts between individuals and the government, or between two individuals.
Notary services are necessary during the home buying or selling process. A notary signing agent is always present during the transfer of real estate to verify signatures on various documents. For example, a notary would verify the signatures on a deed.
Note - Legal document obligating a borrower to repay a loan at a stated interest rate during a specified period of time. The agreement is secured by a mortgage or deed of trust or other security instrument.
Notice of Default - A step in the foreclosure process in which the lender formally informs the court that the borrower is in late in payments.
Option ARM - An option ARM is an adjustable rate mortgage which typically gives you the option to choose between four different payments. Most option ARMs carry a risk of very large payments in the later years of the loan, but managed wisely, they also give people great flexibility in managing their financial needs.
You can choose to make a 30-year amortizing, 15-year amortizing or interest-only payment. The reason they carry some payment risk is because you can also choose to make the minimum payment which is less than the interest due for any given month. The interest not paid is added onto your loan balance, so when you only paying the minimum, your loan balance keeps growing.
Origination Fee - A loan origination fee (also referred to as points) is a fee that is charged by a lender to cover the administrative costs of processing a loan. The origination fee is used in the calculation of the annual percentage rate, varying from 0.5% to 2% of the loan amount. For example, an origination fee of 2% on a $200,000 loan is $4,000.
Payment Schedule - A payment schedule indicates what your required monthly payment will be throughout the life of your loan. Disclosing your loan payment schedule varies depending on your loan type. For fixed-rate loans, the loan payment schedule indicates what your required monthly payment will be throughout the life of your loan. The mortgage payment schedule for VA, FHA, one-time MIP and uninsured conventional loans should also indicate a fixed monthly payment. The loan payment schedule for fixed-rate insured loans may gradually decrease over time due to a declining insurance premium. For adjustable-rate loans, the mortgage payment schedules will vary by loan type and are based on conservative assumptions of future interest rates.
Piggyback Mortgage (Simultaneous Second Mortgage) - A piggyback mortgage helps borrowers avoid costly mortgage insurance when borrowers who do not have or do not want to put a lot of money into their down payment. A piggyback mortgage closes simultaneously with your first mortgage and are considered second mortgages with rights that are subordinate to the first mortgage. Piggyback mortgage loans are used to supplement the amount that exceeds what the buyer has for 20% down payment.
PITI - PITI is the abbreviation for Principal, Interest, Taxes and Insurance, the components of a monthly mortgage payment. Payments of principal and interest go directly towards repaying the loan while the portion of the PITI payment that covers taxes and insurance (homeowner's and mortgage, if applicable) go into an escrow account to cover the fees when they are due.
Borrowers are advised when purchasing a new home to maintain a PITI reserve, which is a specific amount of cash you will want to have on hand after making a down payment and paying all closing costs.
PPP - Pre-Payment Penalty is a fee that is charged if the loan is paid off earlier than the specified term of the loan. Depending on your loan program and applicable state law, you may or may not incur a pre-payment penalty.
A pre-payment penalty is attached to a loan usually in exchange for a slightly lower rate, which benefits the borrower. The lender will benefit from pre-payment penalties because borrowers are discouraged from refinancing if rates should fall in the future. This penalty will ultimately guarantee the lender a higher rate of return. Though a pre-payment penalty can be structured differently depending on the loan, it is usually paid as a percentage of the outstanding balance at the time of the pre-payment, or sometimes a specified number of months of interest.
PUD - Planned Unit Development, is a project or subdivision that consists of common property and improvements that are owned and maintained by an owner's association for the benefit and use of the individual units within the project. For a project to qualify as a planned unit development, the owners' association must require automatic, non-severable membership for each individual unit owner, and provide for mandatory assessments. Contrast with condominium, where an individual actually owns the airspace of his unit, but the buildings and common areas are owned jointly with the others in the development or association.
Points (or Discount Points) - An up-front fee paid to the lender at the time borrowers get their loan. Each point equals one percent of your total loan amount. Points and interest rates are inherently connected: in general, the more points you pay, the lower your interest rate. However, the more points you pay, the more cash you need up front since points are paid in cash at closing. This is also known as a "buy-down" or a "discount," since you are essentially paying for a reduced rate over the entire term of the loan.
Power of Attorney - A power of attorney is a legal document that authorizes one person to act on behalf of another. A power of attorney can grant complete authority or can be limited to certain acts and/or certain periods of time. Full power of attorney would be when someone is granted complete control to make all decisions on behalf of another. Limited power of attorney is often used in the event that you are not able to attend the closing, for example. A power of attorney form is required in this case in order to grant someone else (likely your spouse) the power to sign documents on your behalf.
Pre-approval - The process of determining how much money a prospective homebuyer or refinancer will be eligible to borrow prior to application for a loan. A pre-approval includes a preliminary screening of a borrower's credit history. Information submitted during pre-approval is subject to verification at application.
Pre-qualification - Pre-qualification is the process of finding out how much money you can afford to borrow. Mortgage pre-qualification is determined based on several factors including, how much you earn in income and how much in liquid assets and liabilities you have. This step is taken before actually applying for a loan. Use our online calculators to instantly get an estimate of the loan amount you may pre-qualify to borrow. When you prequalify for a mortgage, you are not actually filling out a complete application for approval, but just getting a good estimate of what you could potentially afford.
Prepaid Interest - Interest that is paid in advance of when it is due. Typically charged to a borrower at closing to cover interest on the loan between the closing date and the first payment date.
Prepayment - Mortgage prepayment is full or partial repayment of the principal before the contractual due date. Borrowers will often take advantage of loan prepayment to save on interest in the long run; the most popular form of prepayment is through refinancing to lock in a lower interest rate. Some lenders will attach prepayment penalties to loans in exchange for a lower interest rate to discourage borrowers from refinancing.
Prime Rate - Prime rate, also called "prime", is the prime interest rate that commercial banks charge their best or most credit-worthy customers, which are usually prominent and stable business customers who are not very likely to default on a loan.
Principal - The loans balance still owed to the lender or the loan amount borrowed from the lender, excluding interest.
PMI - Private Mortgage Insurance is insurance that protects the lender in case you default on your loan. With conventional loans, mortgage insurance is generally not required if you make a down payment of at least 20 percent of the home's purchase price. (Note, however, that FHA and VA loans have different insurance guidelines.)
Property Taxes - Property taxes (also known as real estate taxes) are assessed on the property by the local government (e.g. city, county, village or township) for the various services provided to the property owner. When you pay property tax each year, you're paying for necessities that are provided by the city, such as police and fire department services, garbage pickup and snow removal.
Typically, you will pay property taxes into an escrow account and your lender will forward the payment to your local government when it becomes due. Property taxes and the interest you pay on your mortgage are usually tax-deductible.
Purchase agreement - The purchase agreement is the contract signed by the buyer and the seller stating the terms and conditions under which a property will be sold. Purchase agreements indicate the amount of your offer and may also include, for instance, which appliances stay and when you'd like to take possession, etc.
The purchase agreement is generally required when you apply for a home loan. It's possible to get approved based on your income and asset information, but having a signed purchase agreement will make the process faster and easier.
Real Estate Agent - A person with a state license to represent a buyer or a seller in a real estate transaction in exchange for a commission.
Real Estate Taxes - Annual taxes based on the appraised value of a property.
Recording - The act of entering documents concerning title to a property into the public records. Examples of documents involved in recording are deeds, mortgage notes, or an extension of the mortgage.
Recording Fee - A recording fee is money that is paid to a government agent for entering the sale of a property into the public records.
Refinancing - Mortgage refinancing is the process of paying off one loan with the proceeds from a new loan secured by the same property. Mortgage refinancing is usually done to secure better loan terms than your current loan, like a lower interest rate or lower monthly payment.
RESPA - The Real Estate Settlement Procedures Act (RESPA) is a federal law that gives consumers the right to review information about loan settlement costs after you apply for a loan and again at loan settlement. RESPA guidelines oblige lenders to provide these disclosures at various times in the transaction. As part of RESPA regulations, this procedure helps to outlaw kickbacks that increase the cost of settlement services for consumers.
ROI - Return-On-Investment expressed as a percentage, it is the rate of how much you spend on or invest in making improvements to how much it is worth someone who is potentially interested in buying your home.
Reverse Mortgage - A reverse mortgage is just the opposite of a traditional or "forward" mortgage. A reverse mortgage loan is when a homeowner receives money using the equity from their home without having to make monthly payments. As time goes on, the borrower's debt will increase and their equity will decrease.
The amount you receive with a reverse mortgage depends on your age and the value of your home. The older you are, the more money you'll get. Proceeds paid from the loan are not considered income and therefore, will not affect Medicare, Social Security, Medicaid or Supplemental Security Income (SSI).
A reverse mortgage can be set up as a monthly cash advance, a lump sum, a credit line type of account or as a combination of these methods.
Right to Rescission - Under the provisions of the Truth-in-Lending Act, the borrower's right, on certain kinds of loans, to cancel the loan within three days of signing a mortgage.
Sales Agreement - A sales agreement (also known as the "purchase agreement" or "agreement of sale") is the contract signed by buyer and seller stating the terms and conditions under which a property will be sold. The real estate sales agreement indicates the amount of your offer as well as any special stipulations like which appliances stay and when you would like to take possession.
Sales agreements are generally required upon application for a home loan. While it is possible to get approved based on your income and asset information, having a signed sales agreement will make the process faster and easier.
Second Mortgage - An additional mortgage placed on a property that has rights that are subordinate to the first mortgage. A second mortgage is a lien in which you are given a lump sum amount that you pay off in installments over a specified period of time. In the case of a foreclosure, the lender who holds the second mortgage gets paid only after the lender holding the first mortgage is paid.
Seller Concessions - Also known as seller contributions, it is an agreement between the home buyer and the seller where the seller pays for certain costs on behalf of the buyer at the mortgage closing. Closing Costs can include (but are not limited to), title insurance, appraisal fees, origination and/or processing fees, fees for pulling Credit Score, and attorney fees, and are typically paid during the mortgage closing.
The amount charged can vary depending on which fees may be required and by geographic location where the property exists. How much a seller can contribute toward the transaction-which can be anywhere from two to nine percent of the home's purchase price or appraised value-depends on the size of the loan, type of mortgage and type of occupancy.
Servicer - A mortgage servicer is the party that homeowners pay their mortgage payments to each month. The mortgage servicer, or loan servicer, is then in charge of processing the mortgage payment and crediting the borrower's loan account. In addition, servicers oftentimes maintain a borrower's escrow account. In these instances, loan servicers ensure that payment for the homeowner's property taxes and insurance fees are disbursed when they become due.
Settlement (or Closing) - The settlement, or closing, is the conclusion of your real estate transaction. The settlement includes the delivery of your security instrument, signing of your legal documents and the disbursement of the funds necessary to the sale of your home or loan transaction.
Settlement Costs - Money paid by the borrowers and sellers to complete the closing of a mortgage.
Subject Property - The home that you intend to obtain the mortgage on is called the subject property.
Survey - A mortgage survey is a bird's eye sketch of your property that shows the boundary lines of your lot, and details any encroachments between you and your neighbors.
Survey Fee - The survey fee covers the cost of the survey.
Tax Service Fee - A fee collected to set up third-party monitoring of the borrower's property tax payments. This is done to ensure that the payments are made on time, and to prevent tax liens from occurring to the detriment of the lender.
Term - The period of time which covers the life of the loan. For example, a 30-year fixed loan has a term of 30 years.
Third Party Fee - Fees paid to a third party for services requested by the lender on your behalf.
Title - The title is the actual document that gives evidence of ownership of a property. The title also indicates the rights of ownership and possession of the property. Individuals who will have legal ownership in the property are considered "on title" and will sign the mortgage and other documentation.
Before your closing, a title search will be conducted to ensure that a proper chain of ownership for the property is documented, and that it is not subject to any unacceptable liens. Home buyers pay a Title Insurance Premium to the title company that conducts this title search and handles the transfer of funds among the parties at the closing. Title insurance is required to protect the lender against title disputes that may arise. Title companies also provide an owner's title insurance service that insures the buyer.
Title Company - A company that insures title to property.
Title Company Closing Fee - This fee is paid to the title insurance company that conducts your closing and handles the transfer of funds among the parties.
Title Insurance - Title insurance protects lenders against any title dispute that may arise over a particular property. Home title insurance is a required fee paid at closing. Having a copy of your title insurance will help verify the legal description of the property, the taxes, and the names on the title. You may also purchase owner's title insurance which protects you as the homeowner. Mortgage title insurance rates will vary from state to state.
Title Insurance Premium - In order to determine that the property is properly owned and not subject to any unacceptable liens, we require a search of the local real estate records, and a title insurance policy insuring the lender that there are no defects in title. The Title Insurance Premium covers the cost of the search and the insurance. The cost of title insurance varies both by state and by county.
Title Search - Examination of local real estate records to ensure that the seller is the legal owner of a property and that there are no liens or other claims against the property.
Trade Lines - Trade lines are the different credit accounts listed on your credit report. Trade lines can affect your credit score, determine which financial programs you're eligible for and can impact your loan approval process.
Truth-in-Lending Form - The Truth-in-Lending form is a document that the lender is required to provide before closing. This form discloses key terms of the mortgage and all the borrowing costs and fees that are involved. The Federal Truth-in-Lending Act is designed to protect consumers and provide a uniform manner of calculating and presenting the terms of mortgages so that consumers can compare interest rates and costs on other loans to find the best deal.
Prior to the Truth-in-Lending disclosure form, borrowers were often taken advantage of because comparing one loan to another was virtually impossible. The Federal Truth-in-Lending form is designed to help you make informed financial decisions.
Underwriting - Commercial loan underwriting is the process of determining the risks involved in a particular loan and establishing suitable terms and conditions for the loan. Mortgage underwriting includes a review of the potential borrower's credit and employment history, financial statements and a judgment of the quality of the property. The person who completes the underwriting services is called an underwriter.
Underwriting Fee - Mortgage underwriting fees cover the cost of evaluating your total loan application package, including your credit report, employment history, financial documents and appraisal, to determine whether your loan request can be approved. Borrower will be expected to pay the underwriting fee as part of the closing costs. Lenders are required by law to disclose an estimate of your Closing Costs prior to the closing.
Usury - An illegal amount of interest charged in excess of the legal rate established by law.
VA Loans - Veterans Affairs Loan is a fixed-rate loan guaranteed by the U.S. Department of Veterans Affairs. The VA home loan was created to make housing affordable for eligible U.S. veterans. VA home loans are available to veterans, reservists, active-duty military personnel, and surviving spouses of veterans with 100% entitlement. Eligible veterans may be able to buy a home with no down payment, no Private Mortgage Insurance, no cash reserve, no application fee, and lower than other financing options.
VOD - The Verification of Deposit is a document signed by the borrower's bank or other financial institution verifying the borrower's account balance and history.
VOE - The mortgage lender's Verification of Employment form is a document signed by the borrower's employer verifying the borrower's position and salary. When you apply for a mortgage, you're usually required to show proof of income, likely original pay stubs for the last 30 days, two years worth of W-2s and verification of employment.
VOM - A Verification of Mortgage is documentation of a borrower's mortgage payment history that is often required when applying for a loan. In mortgage lending, the VOM is also used to verify the existing balance and monthly payments, and to check for any late payments on the account. A verification of mortgage is one of the many documents needed to prove that a borrower is reputable and capable of paying back the money loaned.
W-2 - A tax form used to report wages you earn and the taxes withheld by your employer.
Waiver - A waiver is defined as a voluntary relinquishment or surrender of some right or privilege.