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Terms and Definitions 

A

Adjustable-Rate Mortgage (ARM) - A mortgage whose interest rate and monthly payments vary throughout its life. ARMs typically start with an unusually low interest rate that gradually rises over time. If the overall level of interest rates drops, as measured by a variety of different indexes the interest rate of an ARM generally will follow. Similarly, if interest rates rise, so does a mortgage's interest rate and monthly payment. The amount that the interest can fluctuate is limited by caps.

Adjustment Period or Adjustment Frequency - How often the interest rate for and adjustable-rate mortgage changes. Some adjustable-rate mortgages change every month, but one or two adjustments per year is more typical. The less frequently your loan rate shifts, the less financial uncertainty you may have.

Amortization - Lender jargon for the process of gradually paying down a debt, usually by making monthly payments throughout the loan's term. In the early years of a mortgage, most of the monthly payment goes toward payment of interest and little toward reducing the loan balance.

Annual Percentage Rate (APR) - A figure that states the total yearly cost of a mortgage as expressed by the actual rate of interest paid. The APR includes the base interest rate, points, and any other add-on fees and costs. As a result, the APR is invariably higher than the rate of interest that the lender quotes for the mortgage but gives a more accurate picture of the likely cost of the loan over the term.

Appraisal - A professional opinion about the market value of the house you want to buy or refinance. You must pay for the mortgage lender to hire an appraiser, because this opinion helps protect the lender from lending you money on a home that's not worth enough.

Accessed Value - The value of a property according to the local county tax assessor for the purpose of determining property taxes.

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C

Cap - One of two different types of limits for adjustable-rate mortgages. The life cap limits the highest or lowest interest rate that is allowed over the entire life of a mortgage.

Cash Reserve - A sufficient amount of cash left over after closing on a mortgage loan to make the first two mortgage payments or to cover a financial emergency. This amount is required by most lenders.

Closing Costs - Costs that generally total from 2 to 5 percent of a home's purchase price and are completely independent of the down payment. Closing costs include such expenses as points, an appraisal fee, credit report, mortgage interest for the period between the closing date and the first loan payment, homeowner's insurance premium, title insurance, prorated property tax, and recording and transferring charges.

Conforming Loans - Mortgages that fall within Fannie Mae and Freddie Mac's loan limits (417,000 or less). If you borrower less than this amount, you'll get a lower interest rate than on so-called nonconforming or jumbo loans.

Contingencies - Conditions contained in almost all home-purchase offers. The seller or buyer must meet or waive all their respective contingencies before the deal can be closed. These conditions are related to such factors as the buyer's review and approval of a property inspections or the buyer's ability to obtain the mortgage financing specified in the contract.

Cosigner - A friend or relative who comes to a borrower's rescue by cosigning a mortgage. If you have had troubled credit in the past, you may need help obtaining a mortgage. A cosigner can't improve your credit report but can improve your chances on obtaining a mortgage.

Credit Line - A credit account that permits a reverse mortgage borrower to control the timing and amount of the loan advances.

Credit Report - A report that documents your history of repaying debt. It's the main report lenders utilize to determine your creditworthiness. You must pay for this report, which is used to determine your ability to handle all forms of credit and to pay off loans in a timely fashion.

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D

Debt-to-Income Ratio - Measures your future monthly housing expenses, which include your proposed mortgage payment (debt), property tax, and insurance in relation to your monthly income. Depending on the lender and type of loan debt-to income ratios can range from 38% to 50%.

Deed - The document that conveys title to real property. Before you receive the deed to your new home , the escrow holder must received the payoff for the old loan on the property, your new mortgage financing, and your payments for the down payment and closing costs. The title insurance company must also show that the seller holds clear and legal title to the property for which the title is being conveyed.

Default - Status that is most often cause by failure to make monthly mortgage payments on time. You are officially in default when you have missed two or more monthly payments.

Depreciation - Decrease in a properties value.

Discount Point - Amount payable to the lending institution to increase the lender's effective yield. Basically means buying the rate down lower than the where current market rates are at.

Down Payment - The part of the purchase price that the buyer pays in cash, up front, and does not finance with a mortgage.

E

Equity - Refers to the difference between the market value of a home and the amount the borrower owes on it.

Escrow - The holding of important documents and money related to the purchase/sale of real estate by neutral third party prior to the close of the transaction. After the seller accepts an offer, the buyer doesn't immediately move into the house. A period when contingencies have to be met or waived exists. During this period, the escrow service holds the down payment and other buyer and seller documents related to the sale. Once the loan is funded escrow will disperse remaining money.

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F

Fixed-Rate Mortgage - A mortgage that allows you to lock in and interest rate for the entire term of the mortgage. Your mortgage payments will consist of principle and interest. These payments will be fixed for the term of the loan.

Foreclosure - The legal process by which a lender takes possession of and sells your property in an attempt to satisfy mortgage indebtedness. When you default on a loan and the lender deems that you are incapable of making payments, you may lose your home to foreclosure.

G

Good Faith Estimate - The Good Faith Estimate (GFE) is a mandatory disclosure which provides consumers with estimates of the charges which will be due at the time of settlement. The GFE is due three business days after receipt or preparation of a loan application.

H

Home Equity - The market value of a home minus any debt against it.

Home Equity Loan - Second mortgage that allows you to borrower against the equity in your house.

Homeowner's Insurance - A policy that protects what is probably your most valuable asset - your home. Mortgage lenders will always require that you have this coverage before funding your loan. "Dwelling Coverage" covers the cost to rebuild a house. The liability insurance portion of this policy protects you against accidents that occur on your property. The personal property coverage pays to replace your lost worldly possessions.

Hud-I Settlement Statement - Shows the actual settlement costs for the loan. The disclosure is due at the time of closing or signing. This is the borrowers chance to make sure there are no discrepancies with the charges they originally agreed upon.

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I

Index - A measure of the overall level of market interest rates that the lender uses as a reference to calculate the specific interest rate on an adjustable-rate loan. The index plus the margin determines the interest rate on an adjustable-rate mortgage.

Interest Rate - Interest charges generally accrued as a percentage of the amount borrowed. Interest is the amount lenders charge you to use their money.

J

Jumbo Loans - Mortgages that exceed the Fannie Mae and Freddie Mac maximum permissible conforming loan limits. The interest rate on jumbo fixed-rate mortgages generally runs about .5 percent higher than on conforming loans. Jumbo loans have loan amounts above 417,000.

L

Lien - A legal claim against a property for the purpose of securing payment for work performed and money owed on account of loans, judgments, or claims. Liens are encumbrances that must be paid off before a property can be sold or title can transfer to a subsequent buyer. The liens that are a matter of public record on a property for sale appear on a property's preliminary report.

Life Cap - The limit that determines the maximum amount your adjustable-rate mortgage interest rate and monthly payment can fluctuate up or down during the duration of the loan. The life cap is different from the periodic cap that limits the extent to which your interest rate can change up or down in any one adjustment period.

M

Margin - The amount that is added to the index in order to calculate the interest rate for and adjustable-rate mortgage.

Maturity - When a loan becomes due and payable.

Mortgage - A word used by lenders to describe a formidable stack of legal documents borrowers must sign to get the money they need to refinance or buy real property.

Mortgage Broker - A person who can help you obtain a mortgage and has many different lenders to choose from to get the best pricing.

N

Negative Amortization - Occurs when an outstanding mortgage balance increases despite the fact that the borrower is making the required monthly payments. Negative amortization occurs with adjustable-rate mortgages that cap the increase in the monthly loan payment but do not cap the interest rate. Therefore, the monthly payments do not cover all the interest that the borrower actually owes.

O

Origination - The administrative process of setting up a mortgage, including the preparation of documents.

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P

Piggyback Financing - A loan made jointly by two or more lenders on the same property under one mortgage deed of trust. 

Points - Interest charges paid upfront when a borrower closes on a loan. Also known as the origination fee, points are a percentage of the loan amount financed.

Pre-Payment - The payment of extra principal on a mortgage or making higher payments than the minimum amount required.

Pre-Payment Penalty - A fee that discourages borrowers from making additional payments on their mortgage loan principal in order to pay the loan off faster.

Pre-Qualification - A process where lenders based entirely on the information you disclose about your financial situation, provide an opinion about the amount of money you may be able to borrow. This assessment is neither binding nor necessarily accurate, because the lenders haven't verified any of your financial information.

Primary Markets - Banks, credit unions, mortgage bankers, and savings and loans which provide funding to qualified borrowers for mortgages.

Principal - The amount borrowed for a loan.

Property Tax - Yearly tax assessed on a home. Property tax annually averages 1 to 2 percent of a home's value, but property tax rates vary widely by county.

R

Refinance - Taking out a new mortgage loan to pay off an existing mortgage.

Reverse Mortgage - A loan that enables elderly homeowners, who typically are low on cash, to tap into their home's equity without selling their home or moving from it. Specifically, a lending institution makes a check out to the homeowners each month, who use the proceeds any way they wish. This money is really a loan against the value of the home. The downsides of these loans are that they deplete estate equity, the fees and interest rates ten to be on the high side.

S

Secondary Markets - Lenders in the primary market do not hold onto mortgage loans. The secondary market is made up of investors who buy the mortgages made by primary lenders, and pool them with similar mortgages, creating a security for purchase by Wall Street Investors.

Second Mortgage - A mortgage that ranks after the a first mortgage in priority of recording. In the event of a foreclosure, the proceeds from the sale of the home are used to pay off the loans in order in which they were recorded. Since second mortgages have higher risk to the lender they typically have higher interest rates.

T

Tax Deductible - Payments that you may deduct against your federal and state income. The interest portion of mortgage payments, discount points, and property taxes are tax deductible.

Teaser Rate - The attractively low interest rate that most adjustable-rate mortgages start with. This rate is also known as the initial start rate.

Term - In a mortgage plan, the amount of time a lender gives a borrower to repay the loan.

Title Insurance - Insurance that covers the legal fees and expenses necessary to defend your title against claims that may be made against your ownership of the property. The extent of your coverage depends upon whether you have an owner's standard coverage or extended-coverage title insurance policy.

Y

Yield Spread Premium - A payment which a lender makes to a mortgage broker when the broker originates a loan with an interest rate above the market rate (par rate).

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