Glossary of Terms

Adjustable Rate Mortgage (ARM)

A mortgage with an interest rate and payment that changes periodically over the life of the loan based on the change in the specific index. Adjustable rate mortgages may have features that allow for the interest rate and payments to be fixed for an initial period (3 years, 5 years, 7 years, 10 years) and thereafter adjusting periodically based on the specific index.

Adjustment Date

The date on which the interest rate changes for an adjustable-rate mortgage (ARM).

Annual Percentage Rate (APR)

The cost of a mortgage stated as a yearly rate; includes such items as interest, mortgage insurance, and loan origination fee.

Appraisal

A written analysis of the estimated value of a property prepared by a qualified appraiser.

Balloon (Payment) 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.

Buydown Mortgage

A temporary buydown is a mortgage on which an initial lump sum payment is made by any party to reduce a borrower’s monthly payments during the first few years of a mortgage.

Cap

A provision of an adjustable-rate mortgage (ARM) that limits how much the interest rate or mortgage payments may increase or decrease.

Cash-out Refinance

A refinance transaction in which the amount of money received from the new loan exceeds the total of the money needed to repay the existing first mortgage, closing costs, points, and the amount required to satisfy any outstanding subordinate mortgage liens.

Closing Costs

Expenses (over and above the price of the property) incurred by buyers and sellers in transferring ownership of a property. Closing costs normally include an origination fee, discount points, an attorney’s fee, taxes, title insurance, survey and any other costs assessed at settlement.

Conventional Loan

A mortgage loan that is not insured or guaranteed by the federal government. The maximum mortgage amount for a conventional conforming loan is $417,000.

Construction to Permanent

A mortgage loan which provides funds for the construction or renovation of a residential property. During the construction/renovation phase, funds are disbursed based on completion of the construction. The construction phase may be up to twelve months in duration and requires payment of interest only on the outstanding balance. Upon completion, the mortgage is modified to a fixed rate or adjustable rate mortgage amortized for 30 or 15 years. A benefit of this product is that only one closing is required, therefore eliminating the cost of duplicate closings.

grass and clouds

Credit Report

A report of an individual’s credit history prepared by a credit bureau and used by a lender in determining a loan applicant’s creditworthiness.

Discount Points

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

The part of the purchase price of a property that the buyer pays in cash and does not finance with a mortgage.

Earnest Money

A deposit given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment.

Equity

A homeowner’s financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on its mortgage.

Federal Home Loan Mortgage Corporation (Freddie Mac)

Also called Freddie Mac, is a quasi-governmental agency that purchases conventional mortgages from insured depository institutions and HUD-approved mortgage bankers.

Federal National Mortgage Association (Fannie Mae)

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.

FHA Mortgage

A mortgage that is insured by the Federal Housing Administration (FHA). Also known as a government mortgage.

Fixed-rate Mortgage (FRM)

A mortgage in which the interest rate does not change during the entire term of the loan.

Good Faith Estimate

An estimate of charges which a borrower is likely to incur in connection with a settlement.

Government National Mortgage Association (GNMA)

Also known as Ginnie Mae, provides sources of funds for residential mortgages, insured or guaranteed by FHA or VA.

Index

A published interest rate to which the interest rate on an Adjustable Rate Mortgage (ARM) is tied. Some commonly used include the 1 Year Treasury Bill, 6 Month and 12 month London Interbank Offered Rate (LIBOR), and the 11th District Cost of Funds (COFI).

Interest Only Loan

A mortgage is considered “interest only” if the monthly payment does not include any repayment of principal the mortgage payment covers only the interest & the actual loan balance remains unchanged.

Jumbo Loan

A loan which is larger (more than $417,000) than the limits set by Fannie Mae and Freddie Mac. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.

Lifetime Cap

A provision of an ARM that limits the highest rate that can occur over the life of the loan.

Loan to Value Ratio (LTV)

The ratio of the amount of your loan to the appraised value of the home. The LTV will affect programs available to the borrower and generally, the lower the LTV the more favorable the terms of the programs offered by lenders.

Margin

The number of percentage points added to the index value to calculate the ARM interest rate at each adjustment period.

Mortgage Insurance (MI)

Insurance written by an independent mortgage insurance company protecting the mortgage lender against loss incurred by a mortgage default. Usually required for loans with an LTV of 80.01% or higher.

Origination Fee

A fee imposed by a lender to cover certain processing expenses in connection with making a real estate loan.

PITI

Principal, interest, taxes and insurance–the components of a monthly mortgage payment.

Power of Attorney

A legal document authorizing one person to act on behalf of another.

Prepaids

Those expenses of property which are paid in advance of their due date and will usually be prorated upon sale, such as taxes, hazard insurance, private mortgage insurance and special assessments.

Rate Cap

A limit on how much the interest rate can change, either at each adjustment period or over the life of the loan.

Refinancing

The process of paying off one loan with the proceeds from a new loan using the same property as security.

Survey

A measurement of land, prepared by a registers land surveyor, showing the location of the land with reference to known points, its dimensions, and the location and dimensions of any building.

Title

A document that gives evidence of an individual’s ownership of property.

VA Loan

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.