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Adjustable rate
mortgage (ARM) ^top^
A mortgage on which the interest rate, after an initial
period, can be changed. Most ARMs base rate changes
on a pre-selected interest rate index over which the
lender has no control. These are "indexed ARMs".
There is no discretion associated with rate changes
on indexed ARMs.
Amortization
^top^
The repayment of principal from scheduled mortgage
payments that exceed the interest due. The scheduled
payment less the interest equals amortization. The
loan balance declines by the amount of the scheduled
payment, plus the amount of any extra payment.
Amortization
schedule ^top^
A table showing the mortgage payment, broken down
by interest and amortization, the loan balance, tax
and insurance payments if made by the lender, and
the balance of the tax/insurance escrow account.
Application
^top^
A request for a loan that includes the information
about the potential borrower, the property and the
requested loan that the solicited lender needs to
make a decision. In a narrower sense, the application
refers to a standardized application form called the
"1003" which the borrower is obliged to
fill out.
Appraisal
^top^
A written estimate of a property's current market
value prepared by an appraiser.
APR ^top^
The Annual Percentage Rate, which must be reported
by lenders under Truth in Lending regulations. It
is a comprehensive measure of credit cost to the borrower
that takes account of the interest rate, points, and
flat dollar charges. It is also adjusted for the time
value of money, so that dollars paid by the borrower
up-front carry a heavier weight than dollars paid
ten years down the road. However, the APR is calculated
on the assumption that the loan runs to term, and
is therefore potentially deceptive for borrowers with
short time horizons.
Balloon
mortgage ^top^
A mortgage which is payable in full after a period
that is shorter than the term.
Balloon
^top^
The loan balance remaining at the time the loan contract
calls for full repayment.
Bimonthly
mortgage ^top^
A mortgage on which the borrower pays half the monthly
payment on the first day of the month, and the other
half on the 15th.
Biweekly
mortgage ^top^
A mortgage on which the borrower pays half the monthly
payment every two weeks. Because this results in 26
(rather than 24) payments per year, the biweekly mortgage
amortizes before term.
Cash-Out
refinance ^top^
Refinancing for an amount in excess of the balance
on the old loan plus settlement costs. The borrower
takes "cash-out" of the transaction.
This way of raising cash is usually an alternative
to taking out a home equity loan.
Closing
^top^
On a home purchase, the process of transferring ownership
from the seller to the buyer, the disbursement of
funds from the buyer and the lender to the seller,
and the execution of all the documents associated
with the sale and the loan. On a refinance,
there is no transfer of ownership, but the closing
includes repayment of the old lender.
Conforming
mortgage ^top^
A loan eligible for purchase by the two major Federal
agencies that buy mortgages, Fannie Mae and Freddie
Mac.
Construction
financing ^top^
The method of financing used when a borrower contracts
to have a house built, as opposed to purchasing a
completed house.
Conventional
mortgage ^top^
A home mortgage that is neither FHA-insured nor VA-guaranteed.
Delinquency
^top^
A mortgage payment that is more than 30 days late.
Down
payment ^top^
The difference between the value of the property and
the loan amount, expressed in dollars, or as a percentage
of the price. For example, if the house sells for
$100,000 and the loan is for $80,000, the down payment
is $20,000 or 20%.
Equity
^top^
The difference between the value of the home and the
balance of outstanding mortgage loans on the home.
Escrow
^top^
It is common for home mortgage transactions to include
an escrow agreement where the borrower adds a specified
amount for taxes and hazard insurance to the regular
monthly mortgage payment. The money goes into
an escrow account out of which the lender pays the
taxes and insurance when they come due.
Fixed
rate mortgage (FRM) ^top^
A mortgage on which the interest rate and monthly
mortgage payment remain unchanged throughout the term
of the mortgage.
Float
^top^
Allowing the rate and points to vary with changes
in market conditions. The borrower may elect to lock
the rate and points at any time but must do so a few
days before the closing. Allowing the rate to
float exposes the borrower to market risk.
Good
faith estimate ^top^
The form that lists the settlement charges the borrower
must pay at closing, which the lender is obliged to
provide the borrower within three business days of
receiving.
Hazard
insurance ^top^
Insurance purchased by the borrower, and required by
the lender, to protect the property against loss from
fire and other hazards. Also known as "homeowner
insurance".
Home
equity line of credit (HELOC) ^top^
A mortgage set up as a line of credit against which
a borrower can draw up to a maximum amount, as opposed
to a loan for a fixed dollar amount. For example,
using a standard mortgage you might borrow $150,000,
which would be paid out in its entirety at closing.
Using a HELOC instead, you receive the lender’s
promise to advance you up to $150,000, in an amount
and at a time of your choosing.
Housing
expense ^top^
The sum of mortgage payment, hazard insurance, property
taxes, and homeowner association fees. Same as
PITI and "monthly housing expense."
Housing
expense ratio ^top^
The ratio of housing expense to borrower income, which
is used (along with the total expense ratio and other
factors) in qualifying borrowers.
HUD1 form
^top^
The form a borrower receives at closing that details
all the payments and receipts among the parties in a
real estate transaction, including borrower, lender,
home seller, mortgage broker and various other service
providers.
Interest-only
mortgage ^top^
A mortgage on which for some period the monthly mortgage
payment consists of interest only. During that period,
the loan balance remains unchanged.
Interest
rate ^top^
The rate charged the borrower each period for the loan
of money, by custom quoted on an annual basis.
A mortgage interest rate is a rate on a loan secured
by a specific property.
Loan-to-value
ratio ^top^
The loan amount divided by the lesser of the selling
price or the appraised value. Also referred to as LTV.
The LTV and down payment are different ways of expressing
the same set of facts.
Lock ^top^
An option exercised by the borrower, at the time of
the loan application or later, to "lock in"
the rates and points prevailing in the market at that
time.
Mortgage
insurance ^top^
Insurance against loss provided to a mortgage lender
in the event of borrower default.
Non-conforming
mortgage ^top^
A mortgage that does not meet the purchase requirements
of the two Federal agencies, Fannie Mae and Freddie
Mac, because it is too large or for other reasons such
as poor credit or inadequate documentation.
Note ^top^
A document that evidences a debt and a promise to repay.
A mortgage loan transaction always includes both a note
evidencing the debt, and a mortgage evidencing the lien
on the property, usually in two documents.
Piggyback
mortgage ^top^
A combination of a first mortgage for 80% of property
value, and a second for 5%, 10%, 15%, or 20% of value.
These combinations are usually designated as 80/5/15,
80/10/10, 80/15/5, and 80/20/0, respectively. Piggybacks
are a substitute for mortgage insurance for borrowers
who cannot put 20% down.
Rate-Term
Refinance ^top^
Paying off an old loan while simultaneously taking a
new one. This may be done to reduce borrowing costs
under conditions where the borrower can obtain a new
loan at an interest rate below the rate on the existing
loan. It may be done to raise cash, as an alternative
to a home equity loan. Or it may be done to reduce
the monthly payment.
Second
mortgage ^top^
A loan with a second-priority claim against a property
in the event that the borrower defaults.
Settlement
costs ^top^
Costs that the borrower must pay at the time of closing,
in addition to the down payment.
Subordinate
financing ^top^
A second mortgage on the property which is not paid
off when a new loan is taken out. The second mortgage
lender must allow subordination of the second to the
new first mortgage.
Title
insurance ^top^
Insurance against loss arising from problems connected
to the title to property.
Total
expense ratio ^top^
The ratio of housing expense plus current debt service
payments to borrower income, which is used (along with
the housing expense ratio and other factors) in qualifying
borrowers.
Truth
in Lending (TIL) ^top^
The Federal law that specifies the information that
must be provided to borrowers on different types of
loans. Also, the form used to disclose this information.
