Shopping for a mortgage? If you are one of the tens of thousands of today's home
shoppers, you probably have discovered that mortgage lending has a language all its own.
For example, you've probably heard about "points", "margins", and
"repayment penalties." Should you look for an "assumption?" What are
"acceleration clauses?" For the unprepared, this new terminology can be quite
confusing. As with any contract, before you sign your mortgage, you should know what you
are signing.
Allows the lender to speed up the rate at which your loan comes due or even to
demand immediate payment of the entire outstanding balance of the loan should your default
on you loan.
Is a mortgage in which the interest rate is adjusted periodically based on a
preselected index. Also sometimes known as the renegotiable rate mortgage, the variable
rate mortgage or the Canadian rollover mortgage.
Adjustment Interval
On an adjustable rate mortgage, the time between changes in the interest rate
and/or monthly payment, typically one, three or five years, depending on the index.
Amortization
Means loan payment by equal periodic payments calculated to pay off the debt at
the end of a fixed period, including accrued interest on the outstanding balance.
An interest rate reflecting the cost of a mortgage as a yearly rate. This rate is
likely to be higher than the stated note rate or advertised rate on the mortgage, because
it takes into account points and other credit costs. The APR allows homebuyers to compare
different types of mortgages based on the annual cost for each loan.
Appraisal
An estimate of the value of property, made by a qualified professional called an
"appraiser."
Assumption
The agreement between buyer and seller where the buyer takes over the payments on
an existing mortgage from the seller. Assuming a loan can usually save the buyer money
since this is an existing mortgage debt, unlike a new mortgage where closing costs and
new, possibly higher, market-rate interest charge will apply.
Usually a short-term fixed-rate loan which involves small payments for a certain
period of time and one large payment for the remaining amount of the principal at a time
specified in the contract.
Broker
An individual in the business of assisting in arranging funding or negotiating
contracts for a client but who does not loan the money himself. Brokers usually charge a
fee or receive a commission for their services.
Buydown
When the lender and/or the home builder subsidizes the mortgage by lowering the
interest rate during the first few years of the loan. While the payments are initially
low, they will increase when the subsidy expires.
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 costs of closing usually are about 3 percent to 6 percent of
the mortgage amount.
Commitment
An agreement, often in writing, between a lender and a borrower to loan money at
a future date subject to the completion of paperwork or compliance with stated conditions.
Construction Loan
A short term interim loan for financing the cost of construction. The lender
advances funds to the builder at periodic intervals as the work progresses.
Conventional Loan
A mortgage not insured by FHA or guarantee by the VA or Farmers Home
Administration (FmHA).
Credit 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 net effective income
(FHA/VA loans) or gross monthly income (Conventional loans).
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).
Down Payment
Money paid to make up the difference between the purchase price and mortgage
amount. Down payments usually are 10 percent to 20 percent of the sales price on
Conventional loans, and no money down up to 5 percent on FHA and VA loans.
Due-On-Sale Clause
A provision in a mortgage or deed of trust that allows the lender to demand
immediate payment of the balance of the mortgage if the mortgage holder sells the home.
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)
Is 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.
Escrow
Refers to a neutral third party who carries out the instructions of both the
buyer and seller to handle all the paperwork of settlement or "closing." Escrow
may also refer to an account held by the lender into which the homebuyers pays money for
tax or insurance payments.
Also called Freddie Mac, is a quasi-governmental agency that purchases
conventional mortgages 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
standard for underwriting mortgages.
Also known as Fannie Mae. A tax-paying corporation created by Congress
that purchases and sells conventional residential mortgages as well as those insured by
FHA or guaranteed by VA. This institution, which provides funds for one in seven
mortgages, makes mortgage money more available and more affordable.
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 moderate-priced homes almost anywhere in the country.
Requires a small fee (up to 3 percent of the loan amount) paid at closing or a
portion of this fee added to each monthly payment of an FHA loan to insure the loan with
FHA. On a 9.5 percent $75,000 30-year fixed-rate FHA loan, this fee would amount t o
either $2,250 at closing or an extra $31 a month for the life of the loan. In addition,
FHA mortgage insurance requires an annual fee of 0.5 percent of the current loan amount,
the more years the fee must be paid.
Fixed-Rate Mortgage
A mortgage on which the interest rate is set for the term of the loan.
Foreclosure
A legal procedure in which property securing debt is sold by the lender to pay a
defaulting borrower's debt .
Also known as Ginnie Mae, provides sources of funds for residential
mortgages, insured or guaranteed by FHA or VA.
Graduated Payment Mortgage (GPM)
A type of flexible-payment mortgage where the payments increase for a specified
period of time and then level off. This type of mortgage has negative amortization built
into it.
Gross Monthly Income
The total amount the borrower earns per month, before any expenses are deducted.
Guarantee
A promise by one party to pay a debt or perform an obligation contracted by
another if the original party fails to pay or perform according to a contract.
The ratio, expressed as a percentage, which results when a borrower's housing
expenses are divided by his/her net effective income (FHA/VA loans) or gross monthly
income (Conventional loans).
That portion of a borrower's monthly payments held by the lender or servicer to
pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as
they become due. Also known as reserves.
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.
A loan which is larger (more than $250,000) 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.
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.
Mortgage Insurance
Money paid to insure the mortgage when the down payment is less than 20 percent.
See Private Mortgage Insurance or FHA Mortgage Insurance.
Occurs when your monthly payments are not large enough to pay all the interest
due on the loan. This unpaid interest is added to the unpaid balance of the loan. The
danger of negative amortization is that the homebuyers ends up owing more than the
original amount of the loan.
Net Effective Income
The borrower's gross income minus federal income tax.
Non-Assumption Clause
A statement in a mortgage contract forbidding the assumption of the mortgage
without the prior approval of the lender
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 face value
of the loan.
Principal, interest, taxes, and insurance. Also called monthly housing expense.
Points
See Discount Points
Power of Attorney
A legal document authorizing one person to act on behalf of another.
Prepaids
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 36 states and the District of Columbia.
Principal
The amount of debt, not counting interest, left on a loan.
In the event that you do not have a 20 percent down payments, lenders will allow
a smaller down payment-as low as 5 percent in some cases. With the smaller down payments
loans, however, borrowers are usually required to carry private mortgage insurance.
Private mortgage insurance will require an initial premium payment of 1.0 percent to 5.0
percent of your mortgage amount and may require an additional monthly fee depending on
your loan's structure. On a $75,000 house with a 10 percent down payments, this would mean
either an initial premium payment of $2,025 to $3,375, or an initial premium of $675 to
$1,130 combined with a monthly payment of $25 to $30.
A real estate broker or an associate holding active membership in a local real
estate board affiliated with the National Association of Realtors.
Recision
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.
Renegotiable Rate Mortgage (RRM)
A loan in which the interest rate is adjusted periodically. See Adjustable Rate
Mortgage.
Real Estate Settlement Procedures Act (RESPA)
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 information after application only.
Reverse Annuity Mortgage (RAM)
A form of mortgage in which the lender makes periodic payments to the borrower
using the borrower's equity in the home as security.
All the steps and operations a lender perform to keep a loan in good standing,
such as collection of payments, payment of taxes, insurance, property inspections and the
like.
Settlement
See Closing.
Settlement Costs
See Closing Costs.
Shared Appreciation Mortgage (SAM)
A mortgage in which a borrower receives a below-market interest rate in return
for which a lender (or another investor such as a family member or other partner) receives
a portion of the future appreciation in the value of the property. May also apply to
mortgages where the borrower shares the monthly principal and interest payments with
another party in exchange for a part of the appreciation.
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 building.
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 homebuyers
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.
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 homebuyers
shortly after they apply for the loan.
Two-Step Mortgage
A mortgage in which the borrower receives a below-market interest rate for a
specified number of years (most often seven or 10 years), and then receives a new interest
rate adjusted (within certain limits) to market conditions at that time. The lender
sometimes has the option to call the loan, due within 30 days notice at the end of seven
or 10 years. Also called "Super Seven" or "Premier" mortgage.
The decision whether to make a loan to a potential homebuyers based on credit,
employment, assets, and other factors and the matching of this risk to an appropriate rate
and term or loan amount.
A long-term, low-or no-down payment loan guaranteed by the Department of Veterans
Affairs. Restricted to individuals qualified by military service or other entitlements.
VA Mortgage Funding Fee
A premium of up to 2 percent (depending on the size of the down payment) paid on
a VA-backed loan. On a $75,000 30-year fixed-rate mortgage with no down payment, this
would amount to $1,406 either paid at closing or added to the amount financed.
Variable Rate Mortgage (VRM)
See Adjustable Rate Mortgage.
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
A document signed by the borrower's employer verifying his/her position and
salary.
Results when an existing assumable loan is combined with a new loan, resulting in
an interest rate somewhere between the old rate and the current market rate. The payments
are made to a second lender or the previous homeowner, who then forwards the payments to
the first lender after taking the additional amount off the top.
