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Mortgage Terms You Should Know
Adjustable Rate--An interest rate that changes periodically in
relation to an index. Payments may increase or decrease accordingly.
Amortization--A repayment
method in which the amount you borrow is repaid gradually though regular monthly
payments of principal and interest. During the first few years, most of each
payment is applied toward the interest owed. During the final years of the loan,
payment amounts are applied almost exclusively to the remaining principal.
Annual
Membership--An amount that may
be charged annually for having a line of credit available. Often charged
regardless of whether or not you use the line. Also referred to as a
"participation fee."
Annual Percentage Rate (APR)--The cost of credit on a yearly basis, expressed as a percentage. Required
to be disclosed by the lender under the federal Truth in Lending Act, Regulation
Z. Includes up-front costs paid to obtain the loan, and is, therefore, usually a
higher amount than the interest rate stipulated in the mortgage note. Does not
include title insurance, appraisal, and credit report.
Application--An initial statement of personal and financial
information which is required to approve your loan.
Application Fee--Fees that are paid upon application. An
application fee may frequently include charges for property appraisal
($200-$400) and a credit report ($30-50).
Appraisal--A fee charged by an appraiser to render an
opinion of market value as of a specific date. Required by most lenders to
obtain a loan.
Assumption
of Mortgage--The agreement of a
purchaser to become primarily liable for the payments on a mortgage loan. Unless
otherwise specified by the lender, the seller may remain secondarily liable for
payments.
Balloon
Payment--A lump sum payment for
the unpaid balance of the loan.
Cap--The highest
allowable increase, for either payment or interest rate, for a specified amount
of time on an adjustable rate mortgage.
Cash Out--Receiving money back when refinancing your
present mortgage.
Ceiling--The highest
allowable interest rate over the life of the loan of an adjustable rate
mortgage.
Closing
Costs--Any fees paid by the
borrowers or sellers during the closing of the mortgage loan. This normally
includes an origination fee, discount points, attorney's fees, title insurance,
survey, and any items which must be prepaid, such as taxes and insurance escrow
payments.
Conforming
Loan--Generally, a mortgage loan
under $203,150. Qualifying ratios and underwriting methods are standardized to a
large degree.
Contract of
Sale--The agreement between the
buyer and seller on the purchase price, terms, and conditions necessary to both
parties to convey the title to the buyer.
Credit
Limit--The highest amount that
you can borrow under a home equity plan.
Debt Service--The total amount of credit card, auto,
mortgage or other debt upon which you must pay.
Deed of Trust--Used in many western states, the agreement used
to pledge your home or other real estate as security for a loan. Similar to a
mortgage.
Discount Points
(or Points)--The amount paid
either to maintain or lower the interest rate charged. Each point is equal to
one percent (1%) of the loan amount (i.e., two points on a $100,000 mortgage
would equal $2,000).
Down
Payment--The difference between
the purchase price and that portion of the purchase price being financed. Most
lenders require the down payment to be paid from the buyer's own funds. Gifts
from related parties are sometimes acceptable, and must be disclosed to the
lender.
Due on
Sale--A clause in a mortgage
agreement providing that, if the mortgagor (the borrower) sells, transfers, or,
in some instances, encumbers the property, the mortgagee (the lender) has the
right to demand the outstanding balance in full.
Effective Interest Rate--The cost of credit on a yearly basis expressed as
a percentage. Includes up-front costs paid to obtain the loan, and is,
therefore, usually a higher amount than the interest rate stipulated in the
mortgage note. Useful in comparing loan programs with different rates and
points.
Encumbrance--A claim
against a property by another party which usually affects the ability to
transfer ownership of the property.
Equity--The difference between the fair market value (appraised value) of your
home and your outstanding mortgage balance.
First Mortgage--A mortgage which is in first lien position,
taking priority over all other liens (which are financial encumbrances).
Fixed
Rate--An interest rate which is
fixed for the term of the loan. Payments as well are fixed at one amount.
FHA
Loan--More appropriately termed
"FHA Insured Loan." A loan for which the Federal Housing Administration insures
the lender against losses the lender may incur due to your default.
Good Faith
Estimate--A written estimate of
closing costs which a lender must provide you within three days of submitting an
application.
Grace Period--A period of time during which a loan payment may
be paid after its due date but not incur a late penalty. Such late payments may
be reported on your credit report.
Gross Income--For qualifying purposes, the income of the
borrower before taxes or expenses are deducted.
Home Equity Line of Credit--A loan providing you with the ability to borrow
funds at the time and in the amount you choose, up to a maximum credit limit for
which you have qualified. Repayment is secured by the equity in your home.
Simple interest (interest-only payments on the outstanding balance) is usually
tax-deductible. Often used for home improvements, major purchases or expenses,
and debt consolidation.
Home Equity Loan--A fixed
or adjustable rate loan obtained for a variety of purposes, secured by the
equity in your home. Interest paid is usually tax -deductible. Often used for
home improvement or freeing of equity for investment in other real estate or
investment. Recommended by many to replace or substitute for consumer loans
whose interest is not tax-deductible, such as auto or boat loans, credit card
debt, medical debt, and education loans.
Hazard Insurance--A contract between purchaser and an insurer, to
compensate the insured for loss of property due to hazards (fire, hail damage,
etc.), for a premium.
HUD
I Settlement Statement--A form
utilized at loan closing to itemize the costs associated with purchasing the
home. Used universally by mandate of HUD, the Department of Housing and Urban
Development.
Index--A number, usually a percentage, upon which future interest rates for
adjustable rate mortgages are based. Common indexes include the Cost of Funds
for the Eleventh Federal District of banks or the average rate of a one year
Government Treasury Security.
Interest Rate--The
periodic charge, expressed as a percentage, for use of credit.
Jumbo
Loan--Mortgage loans over
$203,150. Terms and underwriting requirements may vary from conforming loans.
Loan to Value Ratio
(LTV)--A ratio determined by
dividing the sales price or appraised value into the loan amount, expressed as a
percentage. For example, with a sales price of $100,000 and a mortgage loan of
$80,000, your loan to value ratio would be 80%. Loans with an LTV over 80% may
require Private Mortgage Insurance, defined below.
Lock or Lock In--A commitment you obtain from a lender assuring
you a particular interest rate or feature for a definite time period. Provides
protection should interest rates rise between the time you apply for a loan,
acquire loan approval, and, subsequently, close the loan and receive the funds
you have borrowed.
Margin--An amount, usually a percentage, which is added to the index to determine
the interest rate for adjustable rate mortgages.
Minimum Payment--The minimum amount that you must pay, usually
monthly, on a home equity loan or line of credit. In some plans, the minimum
payment may be "interest only," (simple interest). In other plans, the minimum
payment may include principal and interest (amortized).
Mortgage Banker--Originates mortgage loans, loaning you their
funds and closing the loan in their name.
Mortgage Broker--As do mortgage bankers, takes loan application
and processes the necessary paperwork. Unlike a mortgage banker, brokers do not
fund the loan with their own money, but work on behalf of several investors,
such as mortgage bankers, S and L's, banks, or investment bankers.
Mortgage Insurance (MIP
or PMI)--Insurance purchased by
the borrower to insure the lender or the government against loss should you
default. MIP, or Mortgage Insurance Premium, is paid on government-insured loans
(FHA or VA loans) regardless of your LTV (loan-to-value). Should you pay off a
government-insured loan in advance of maturity, you may be entitled to a small
refund of MIP. PMI, or Private Mortgage Insurance, is paid on those loans which
are not government-insured and whose LTV is greater than 80%. When you have
accumulated 20% of your home's value as equity, your lender may waive PMI at
your request.
Mortgage Loan--A loan which utilizes real estate as security
or collateral to provide for repayment should you default on the terms of your
loan. The mortgage or Deed of Trust is your agreement to pledge your home or
other real estate as security.
Mortgagee--The lender in
a mortgage loan transaction.
Mortgagor--The borrower
in a mortgage loan transaction.
Negative Amortization--Amortization in which the payment made is insufficient to fund complete
repayment of the loan at its termination. Usually occurs when the increase in
the monthly payment is limited by a ceiling. The portion of the payment which
should be paid is added to the remaining balance owed. The balance owed may
increase, rather than decrease over the life of the loan.
PITI--Principal, interest, taxes and insurance, which
comprise your monthly mortgage payment.
Points--The amount paid either to maintain or lower the interest rate charged.
Each point is equal to one percent (1%) of the loan amount (i.e., two points on
a $100,000 mortgage would equal $2,000).
Prepayment
Penalty--A fee paid to the
lending institution for paying a loan prior to the scheduled maturity date.
Qualifying
Ratios--Comparisons of a
borrower's debts and gross monthly income.
Right to Rescission--The legal right to void or cancel your mortgage
contract in such a way as to treat the contract as if it never existed. Right of
rescission is not applicable to mortgages made to purchase a home, but may be
applicable to other mortgages, such as home equity loans.
Security
Interest--An interest that a
lender takes in the borrower's property to assure repayment of a debt.
Servicing a
Loan--The ongoing process of
collecting your monthly mortgage payment, including accounting for and payment
of your yearly tax and/or homeowners insurance bills.
Title--The written evidence that proves the right of ownership of a specific
piece of property.
Title
Insurance--Protection for
lenders or homeowners against financial loss resulting from legal defects in the
title.
Transaction
Fee--A fee which may be charged
each time you draw on a home equity credit line.
Underwriting--The process of verifying data and approving a
loan.
VA
Loan--More appropriately termed
"VA Insured Loan." A loan for which the Veteran's Administration insures the
lender against losses the lender may incur due to your default. Available only
to veterans possessing a Certificate of Eligibility
Variable
Rate--An interest rate that
changes periodically in relation to an index. Payments may increase or decrease
accordingly.
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