THE MORTGAGE GLOSSARY
ADJUSTABLE RATE MORTGAGE: An ARM is a mortgage whose interest rate is adjusted periodically based on a pre-selected index (see below).
AMORTIZATION: This refers to the periodic principal pay-down of a mortgage loan.
ANNUAL PERCENTAGE RATE (APR): 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 home buyers to compare different types of mortgages based on the annual cost for each loan.
BALLOON MORTGAGE: 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 herself.
CLOSINGS: 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 is about 3 percent to 6 percent of the mortgage amount.
COLLATERAL: Property pledged to secure
CONVENTIONAL LOAN: A mortgage not insured
by FHA or guaranteed by the VA.
DEED: The written document conveying real property. Once recorded at the Courthouse, the original piece of paper is not needed to convey title in the future.
DEFAULT: Failure to meet legal obligations in a contract, specifically, failure to make the monthly payments on a mortgage.
DEFERRED INTEREST MORTGAGE: A mortgage written with a monthly payment less than what’s required to satisfy the note-rate, the unpaid interest is deferred by adding it to the loan balance.
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. Down payments usually are 5 percent to 20 percent of the sales price on conventional loans.
EASEMENT: The right to use the land of another for a specific limited purpose.
ENCROACHMENT: The physical intrusion of a structure or improvement on the land of another. Examples include a fence or driveway over the property line.
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 value an owner has in real estate over and above the obligation against the property.
ESCROW: Funds that are set aside and held in trust, usually for payment of taxes and insurance on real property. Also earnest deposits held pending loan closing.
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC): Also known as "Freddie Mac." The Federal Home Loan Mortgage Corporation provides a secondary market for mortgage financing by purchasing conventional loans.
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.
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA): Also known as "Fannie Mae." A secondary mortgage institution which is the largest single holder of home mortgages in the United States. FNMA buys VA, FHA, and conventional mortgages from primary lenders.
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.
FIXED RATE MORTGAGE: The mortgage interest rate will remain the same on these mortgages throughout the term of the mortgage for the original borrower.
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.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA): Provides sources of funds for residential mortgages, insured or guaranteed by FHA or VA. Also known as Ginnie Mae.
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.
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, which is then used to adjust the interest rate on an adjustable mortgage up or down.
INTERIM FINANCING: A construction loan
made during completion of a building or a project. A permanent
loan usually replaces this loan after completion.
LIEN: A claim or charge against property. Property is said to be encumbered by a lien and the lien must be removed to clear title.
MARGIN: The amount a lender adds to the
index on an adjustable rate mortgage to establish the adjusted
MORTGAGE INSURANCE: Money paid to insure the mortgage when the down payment is less than 20 percent.
MORTGAGEE: The lender.
NEGATIVE AMORTIZATION: 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 home buyer ends up owing more than the original amount of the loan.
NEGOTIABLE RATE MORTGAGE (RBM): A loan in which the interest rate is adjusted periodically.
NET EFFECTIVE INCOME: The borrower's gross income minus federal income tax.
NOTE: A written promise to pay a certain sum of money at a certain time. A negotiable note starts "Pay to the order of" and is transferable by endorsement similar to a check.
ORIGINATION FEE: The fee charged by a lender to prepare loan documents, perform credit checks, inspect and sometimes appraise a property; usually computed as a percentage of the face value of the loan.
PERMANENT LOAN: A long term mortgage, usually ten years or more. Also called an "end loan."
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).
PRE-PAYMENT PENALTY: An additional charge imposed by the lender for paying off a loan before the due date.
PRIMARY MORTGAGE MARKET: Lenders making mortgage loans directly to borrower's such as savings and loan associations, commercial banks, and mortgage companies. These lenders sometimes sell their mortgages into the secondary mortgage markets.
PRINCIPAL: The amount of debt, not counting interest, left on a loan.
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 5 percent in some cases. With the smaller down payment 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 you loan's structure.
QUITCLAIM DEED: A deed releasing whatever interest you may hold in a property but making no warranty whatsoever.
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 a settlement. The law requires lenders to furnish the information after application only.
REALTOR®: A real estate broker or an associate holding active membership in a local real estate board affiliated with the National Association of Realtors.
REFINANCE: Obtaining a new mortgage loan on a property already owned. Often to replace existing loans on the property.
REVERSE ANNUITY MORTGAGE: Form of mortgage in which the lender makes periodic payments to the borrower using the borrower's equity in the home as Satisfaction of Mortgage: The document issued by the mortgagee when the mortgage loan is paid in full. Also called a "release of mortgage."
SECOND MORTGAGE: A mortgage made subsequent to another mortgage and subordinate to the first one.
SECONDARY MORTGAGE MARKET: The place where primary mortgage lenders sell the mortgages they make to obtain more funds to originate more new loans. It provides liquidity for the lenders.
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.
SWEAT EQUITY: Equity created by a purchaser performing work on a property being purchased.
TITLE: Document that gives evidence of an individual's ownership of property
TITLE INSURANCE: Insurance that provides an indemnity against loss or damage as a result of defect in title ownership to a particular piece of property. Title insurance covers mistakes made during a Title Search as well as matters which could not be found or discovered in the public records such as missing heirs, mistakes, fraud and forgery.
TITLE SEARCH: An examination of municipal records to determine the legal ownership of property. Usually is performed by a title company.
TRUTH-IN-LENDING ACT (TILA): Federal law requiring disclosure of the Annual Percentage Rate to home buyers shortly after they apply for the loan.
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.
VA LOANS: 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.
VERIFICATION OF DEPOSITS (VOD): Document signed by the borrower's financial institution verifying the status and balance of his/her financial accounts.
VERIFICATION OF EMPLOYMENT (VOE): Document signed by the borrower's employer verifying his/her position and salary.
WRAPAROUND: The debt secured includes an existing debt already on the property. The payments made to the holder of the wraparound include payments due on the existing loan and the holder must forward the appropriate portion of each payment to the existing noteholder.
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