2/1 Buy Down
Mortgage
The 2/1 Buy Down Mortgage allows the borrower to qualify at
below market rates so they can borrow more. The initial starting interest rate
increases by 1% at the end of the first year and adjusts again by another 1% at
the end of the second year. It then remains at a fixed interest rate for the
remainder of the loan term.
Borrowers often refinance at the end of the
second year to obtain the best long term rates; however, even keeping the loan
in place for three full years or more will keep their average interest rate in
line with the original market conditions.
Acceleration
Clause
Provision in a mortgage that allows the lender to demand
payment of the entire principal balance if a monthly payment is missed or some
other default occurs.
Additional
Principal Payment
A way to reduce the remaining balance on the loan
by paying more than the scheduled principal amount due.
Adjustable-Rate Mortgage
(ARM)
A mortgage with an interest rate that changes during the life
of the loan according to movements in an index rate. Sometimes called AMLs
(adjustable mortgage loans) or VRMs (variable-rate mortgages).
Adjusted
Basis
The cost of a property plus the value of any capital
expenditures for improvements to the property minus any depreciation taken.
Adjustment
Date
The date that the interest rate changes on an adjustable-rate
mortgage (ARM).
Adjustment
Period
The period elapsing between adjustment dates for an
adjustable-rate mortgage (ARM).
Affordability
Analysis
An analysis of a buyers ability to afford the purchase of a
home. Reviews income, liabilities, and available funds, and considers the type
of mortgage you plan to use, the area where you want to purchase a home, and the
closing costs that are likely.
Amortization
The gradual repayment of a mortgage
loan, both principal and interest, by installments.
Amortization
Term
The length of time required to amortize the mortgage loan
expressed as a number of months. For example, 360 months is the amortization
term for a 30-year fixed-rate mortgage.
Annual Percentage Rate
(APR)
The cost of credit, expressed as a yearly rate including
interest, mortgage insurance, and loan origination fees. This allows the buyer
to compare loans, however APR should not be confused with the actual note rate.
Appraisal
A
written analysis prepared by a qualified appraiser and estimating the value of a
property.
Appraised
Value
An opinion of a property's fair market value, based on an
appraiser's knowledge, experience, and analysis of the property.
Asset
Anything
owned of monetary value including real property, personal property, and
enforceable claims against others (including bank accounts, stocks, mutual
funds, etc.).
Assignment
The
transfer of a mortgage from one person to another.
Assumability
An assumable mortgage can be transferred
from the seller to the new buyer. Generally requires a credit review of the new
borrower and lenders may charge a fee for the assumption. If a mortgage contains
a due-on-sale clause, it may not be assumed by a new buyer.
Assumption
Fee
The fee paid to a lender (usually by the purchaser of real
property) when an assumption takes place.
Balance
Sheet
A financial statement that shows assets, liabilities, and net
worth as of a specific date.
Balloon
Mortgage
A mortgage with level monthly payments that amortizes over
a stated term but also requires that a lump sum payment be paid at the end of an
earlier specified term.
Balloon
Payment
The final lump sum paid at the maturity date of a balloon
mortgage.
Before-tax
Income
Income before taxes are deducted.
Biweekly Payment
Mortgage
A plan to reduce the debt every two weeks (instead of the
standard monthly payment schedule). The 26 (or possibly 27) biweekly payments
are each equal to one-half of the monthly payment required if the loan were a
standard 30-year fixed-rate mortgage. The result for the borrower is a
substantial savings in interest.
Bridge Loan
A
second trust that is collateralized by the borrower's present home allowing the
proceeds to be used to close on a new house before the present home is sold.
Also known as "swing loan."
Broker
An
individual or company that brings borrowers and lenders together for the purpose
of loan origination.
Buydown
When
the seller, builder or buyer pays an amount of money up front to the lender to
reduce monthly payments during the first few years of a mortgage.Buydowns can
occur in both fixed and adjustable rate mortgages.
Cap
Limits how much
the interest rate or the monthly payment can increase, either at each adjustment
or during the life of the mortgage. Payment caps don't limit the amount of
interest the lender is earning and may cause negative
amortization.
Certificate of
Eligibility
A document issued by the federal government certifying a
veteran’s eligibility for a Department of Veterans Affairs (VA) mortgage.
Certificate of Reasonable Value
(CRV)
A document issued by the Department of Veterans Affairs (VA)
that establishes the maximum value and loan amount for a VA mortgage.
Change
Frequency
The frequency (in months) of payment and/or interest rate
changes in an adjustable-rate mortgage (ARM).
Closing
A meeting
held to finalize the sale of a property. The buyer signs the mortgage documents
and pays closing costs. Also called "settlement."
Closing
Costs
These are expenses - over and above the price of the property-
that are incurred by buyers and sellers when transferring ownership of a
property. Closing costs normally include an origination fee, property taxes,
charges for title insurance and escrow costs, appraisal fees, etc. Closing costs
will vary according to the area country and the lenders used.
Compound
Interest
Interest paid on the original principal balance and on the
accrued and unpaid interest.
Consumer Reporting
Agency (or Bureau)
An organization that handles the preparation of
reports used by lenders to determine a potential borrower's credit history. The
agency gets data for these reports from a credit repository and from other
sources.
Conversion
Clause
A provision in an ARM allowing the loan to be converted to a
fixed-rate at some point during the term. Usually conversion is allowed at the
end of the first adjustment period. The conversion feature may cost
extra.
Credit
Report
A report detailing an individual's credit history that is
prepared by a credit bureau and used by a lender to determine a loan applicant's
creditworthiness.
Credit Risk
Score
A credit score measures a consumer’s credit risk relative to
the rest of the U.S. population, based on the individual’s credit usage history.
The credit score most widely used by lenders is the FICO® score, developed by
Fair, Issac and Company. This 3-digit number, ranging from 300 to 850, is
calculated by a mathematical equation that evaluates many types of information
that are on your credit report. Higher FICO® scores represents lower credit
risks, which typically equate to better loan terms. In general, credit scores
are critical in the mortgage loan underwriting process.
Deed of
Trust
The document used in some states instead of a mortgage. Title
is conveyed to a trustee.
Default
Failure
to make mortgage payments on a timely basis or to comply with other requirements
of a mortgage.
Delinquency
Failure to make mortgage payments on
time.
Deposit
This is a
sum of money given to bind the sale of real estate, or a sum of money given to
ensure payment or an advance of funds in the processing of a loan.
Discount
In an
ARM with an initial rate discount, the lender gives up a number of percentage
points in interest to reduce the rate and lower the payments for part of the
mortgage term (usually for one year or less). After the discount period, the ARM
rate usually increases according to its index rate.
Down
Payment
Part of the purchase price of a property that is paid in
cash and not financed with a mortgage.
Effective Gross
Income
A borrowers normal annual income, including overtime that is
regular or guaranteed.Salary is usually the principal source, but other income
may qualify if it is significant and stable.
Equity
The amount
of financial interest in a property. Equity is the difference between the fair
market value of the property and the amount still owed on the mortgage.
Escrow
An item of
value, money, or documents deposited with a third party to be delivered upon the
fulfillment of a condition. For example, the deposit of funds or documents into
an escrow account to be disbursed upon the closing of a sale of real estate.
Escrow
Disbursements
The use of escrow funds to pay real estate taxes,
hazard insurance, mortgage insurance, and other property expenses as they become
due.
Escrow
Payment
The part of a mortgagor’s monthly payment that is held by
the servicer to pay for taxes, hazard insurance, mortgage insurance, lease
payments, and other items as they become due.
Fannie Mae
A
congressionally chartered, shareholder-owned company that is the nation's
largest supplier of home mortgage funds.
FHA Mortgage
A
mortgage that is insured by the Federal Housing Administration (FHA). Also known
as a government mortgage.
FICO Score
FICO®
scores are the most widely used credit score in U.S. mortgage loan underwriting.
This 3-digit number, ranging from 300 to 850, is calculated by a mathematical
equation that evaluates many types of information that are on your credit
report. Higher FICO® scores represent lower credit risks, which typically equate
to better loan terms.
First
Mortgage
The primary lien against a property.
Fixed
Installment
The monthly payment due on a mortgage loan including
payment of both principal and interest.
Fixed-Rate Mortgage
(FRM)
A mortgage interest that are fixed throughout the entire term
of the loan.
Fully Amortized
ARM
An adjustable-rate mortgage (ARM) with a monthly payment that is
sufficient to amortize the remaining balance, at the interest accrual rate, over
the amortization term.
GNMA
A
government-owned corporation that assumed responsibility for the special
assistance loan program formerly administered by Fannie Mae. Popularly known as
Ginnie Mae.
Growing-Equity Mortgage
(GEM)
A fixed-rate mortgage that provides scheduled payment
increases over an established period of time. The increased amount of the
monthly payment is applied directly toward reducing the remaining balance of the
mortgage.
Guarantee
Mortgage
A mortgage that is guaranteed by
a third party.
Housing Expense
Ratio
The percentage of gross monthly income budgeted to pay housing
expenses.
HUD-1 statement
A
document that provides an itemized listing of the funds that are payable at
closing. Items that appear on the statement include real estate commissions,
loan fees, points, and initial escrow amounts. Each item on the statement is
represented by a separate number within a standardized numbering system. The
totals at the bottom of the HUD-1 statement define the seller's net proceeds and
the buyer's net payment at closing.
Hybrid ARM (3/1 ARM, 5/1
ARM, 7/1 ARM)
A combination fixed rate and adjustable rate loan -
also called 3/1,5/1,7/1 - can offer the best of both worlds. A lower interest
rates (like ARMs) and a fixed payment for a longer period of time than most
adjustable rate loans. For example, a "5/1 loan" has a fixed monthly payment and
interest for the first five years and then turns into a traditional adjustable
rate loan, based on then-current rates for the remaining 25 years. It's a good
choice for people who expect to move or refinance, before or shortly after, the
adjustment occurs.
Index
The index is
the measure of interest rate changes a lender uses to decide the amount an
interest rate on an ARM will change over time.The index is generally a published
number or percentage, such as the average interest rate or yield on Treasury
bills. Some index rates tend to be higher than others and some more volatile.
Initial Interest
Rate
This refers to the original interest rate of the mortgage at
the time of closing. This rate changes for an adjustable-rate mortgage (ARM).
It's also known as "start rate" or "teaser."
Installment
The regular periodic payment that a
borrower agrees to make to a lender.
Insured
Mortgage
A mortgage that is protected by the Federal Housing
Administration (FHA) or by private mortgage insurance (MI).
Interest
The fee
charged for borrowing money.
Interest Accrual
Rate
The percentage rate at which interest accrues on the mortgage.
In most cases, it is also the rate used to calculate the monthly
payments.
Interest Rate Buydown
Plan
An arrangement that allows the property seller to deposit money
to an account. That money is then released each month to reduce the mortgagor's
monthly payments during the early years of a mortgage.
Interest Rate
Ceiling
For an adjustable-rate mortgage (ARM), the maximum interest
rate, as specified in the mortgage note.
Interest Rate
Floor
For an adjustable-rate mortgage
(ARM), the minimum interest rate, as specified in the mortgage note.
Late
Charge
The penalty a borrower must pay when a payment is made a
stated number of days (usually 15) after the due date.
Lease-Purchase
Mortgage Loan
An alternative financing option that allows low- and
moderate-income home buyers to lease a home with an option to buy. Each month's
rent payment consists of principal, interest, taxes and insurance (PITI)
payments on the first mortgage plus an extra amount that accumulates in a
savings account for a downpayment.
Liabilities
A
person's financial obligations. Liabilities include long-term and short-term
debt.
Lifetime Payment
Cap
For an adjustable-rate mortgage
(ARM), a limit on the amount that payments can increase or decrease over the
life of the mortgage.
Lifetime Rate
Cap
For an adjustable-rate mortgage (ARM), a limit on the amount
that the interest rate can increase or decrease over the life of the loan. See
cap.
Line of
Credit
An agreement by a commercial bank or other financial
institution to extend credit up to a certain amount for a certain
time.
Liquid
Asset
A cash asset or an asset that is easily converted into cash.
Loan
A sum of
borrowed money (principal) that is generally repaid with interest.
Loan-to-Value (LTV)
Percentage
The relationship between the principal balance of the
mortgage and the appraised value (or sales price if it is lower) of the
property. For example, a $100,000 home with an $80,000 mortgage has an LTV of 80
percent.
Lock-In
Period
The guarantee of an interest rate for a specified period of
time by a lender, including loan term and points, if any, to be paid at closing.
Short term locks (under 21 days), are usually available after lender loan
approval only. However, many lenders may permit a borrower to lock a loan for 30
days or more prior to submission of the loan application.
Margin
The number
of percentage points the lender adds to the index rate to calculate the ARM
interest rate at each adjustment.
Maturity
The
date on which the principal balance of a loan becomes due and payable.
Monthly Fixed
Installment
That portion of the total monthly payment that is
applied toward principal and interest. When a mortgage negatively amortizes, the
monthly fixed installment does not include any amount for principal reduction
and doesn't cover all of the interest. The loan balance therefore increases
instead of decreasing.
Mortgage
A legal
document that pledges a property to the lender as security for payment of a
debt.
Mortgage
Banker
A company that originates mortgages exclusively for resale in
the secondary mortgage market.
Mortgage
Broker
An individual or company that brings borrowers and lenders
together for the purpose of loan origination.
Mortgage
Insurance
A contract that insures the lender against loss caused by
a mortgagor's default on a government mortgage or conventional mortgage.
Mortgage insurance can be issued by a private company or by a government agency.
Mortgage Insurance Premium
(MIP)
The amount paid by a mortgagor for mortgage
insurance.
Mortgage Life
Insurance
A type of term life insurance In the event that the
borrower dies while the policy is in force, the debt is automatically paid by
insurance proceeds.
Mortgagor
The
borrower in a mortgage agreement.
Negative
Amortization
Amortization means that monthly payments are large
enough to pay the interest and reduce the principal on your mortgage. Negative
amortization occurs when the monthly payments do not cover all of the interest
cost. The interest cost that isn't covered is added to the unpaid principal
balance. This means that even after making many payments, you could owe more
than you did at the beginning of the loan. Negative amortization can occur when
an ARM has a payment cap that results in monthly payments not high enough to
cover the interest due.
Net Worth
The
value of all of a person's assets, including cash.
Non Liquid
Asset
An asset that cannot easily be converted into cash.
Note
A legal
document that obligates a borrower to repay a mortgage loan at a stated interest
rate during a specified period of time.
Origination
Fee
A fee paid to a lender for processing a loan application. The
origination fee is stated in the form of points. One point is 1 percent of the
mortgage amount.
Owner
Financing
A property purchase transaction in which the party selling
the property provides all or part of the financing.
Payment Change
Date
The date when a new monthly payment amount takes effect on an
adjustable-rate mortgage (ARM) or a graduated-payment mortgage (GPM). Generally,
the payment change date occurs in the month immediately after the adjustment
date.
Periodic Payment
Cap
A limit on the amount that payments can increase or decrease
during any one adjustment period.
Periodic Rate
Cap
A limit on the amount that the interest rate can increase or
decrease during any one adjustment period, regardless of how high or low the
index might be.
PITI
Reserves
A cash amount that a borrower must have on hand after
making a down payment and paying all closing costs for the purchase of a home.
The principal, interest, taxes, and insurance (PITI) reserves must equal the
amount that the borrower would have to pay for PITI for a predefined number of
months (usually three).
Points
A point is
equal to one percent of the principal amount of your mortgage. For example, if
you get a mortgage for $165,000 one point means $1,650 to the lender.Points
usually are collected at closing and may be paid by the borrower or the home
seller, or may be split between them.
Prepayment
Penalty
A fee that may be charged to a borrower who pays off a loan
before it is due.
Pre-Approval
The process of determining how much
money you will be eligible to borrow before you apply for a loan.
Prime Rate
The
interest rate that banks charge to their preferred customers.Changes in the
prime rate influence changes in other rates, including mortgage interest rates.
Principal
The
amount borrowed or remaining unpaid. The part of the monthly payment that
reduces the remaining balance of a mortgage.
Principal
Balance
The outstanding balance of principal on a mortgage not
including interest or any other charges.
Principal, Interest, Taxes, and
Insurance (PITI)
The four components of a monthly mortgage payment.
Principal refers to the part of the monthly payment that reduces the remaining
balance of the mortgage. Interest is the fee charged for borrowing money. Taxes
and insurance refer to the monthly cost of property taxes and homeowners
insurance, whether these amounts that are paid into an escrow account each month
or not.
Private Mortgage Insurance
(PMI)
Mortgage insurance provided by a private mortgage insurance
company to protect lenders against loss if a borrower defaults. Most lenders
generally require MI for a loan with a loan-to-value (LTV) percentage in excess
of 80 percent.
Qualifying
Ratios
Calculations used to determine if a borrower can qualify for
a mortgage. They consist of two separate calculations: a housing expense as a
percent of income ratio and total debt obligations as a percent of income ratio.
Rate Lock
A
commitment issued by a lender to a borrower or other mortgage originator
guaranteeing a specified interest rate and lender costs for a specified period
of time.
Real Estate
Agent
A person licensed to negotiate and
transact the sale of real estate on behalf of the property owner.
Real Estate Settlement
Procedures Act (RESPA)
A consumer protection law that requires
lenders to give borrowers advance notice of closing costs.
Realtor®
A real
estate broker or an associate who is an active member in a local real estate
board that is affiliated with the National Association of Realtors.
Recording
The
noting in the registrar’s office of the details of a properly executed legal
document, such as a deed, a mortgage note, a satisfaction of mortgage, or an
extension of mortgage, thereby making it a part of the public
record.
Refinance
Paying off one loan with the proceeds from a new loan using the
same property as security.
Revolving
Liability
A credit arrangement, such as a credit card, that allows a
customer to borrow against a preapproved line of credit when purchasing goods
and services.
Secondary Mortgage
Market
Where existing mortgages are bought and sold.
Security
The property that will be pledged as
collateral for a loan.
Seller
Carry-back
An agreement in which the owner of a property provides
financing, often in combination with an assumable mortgage. See owner financing.
Servicer
An
organization that collects principal and interest payments from borrowers and
manages borrowers’ escrow accounts. The servicer often services mortgages that
have been purchased by an investor in the secondary mortgage market.
Standard Payment
Calculation
The method used to determine the monthly payment
required to repay the remaining balance of a mortgage in substantially equal
installments over the remaining term of the mortgage at the current interest
rate.
Step-Rate
Mortgage
A mortgage that allows for the interest rate to increase
according to a specified schedule (i.e., seven years), resulting in increased
payments as well. At the end of the specified period, the rate and payments will
remain constant for the remainder of the loan.
Third-party
Origination
When a lender uses another party to completely or
partially originate, process, underwrite, close, fund, or package the mortgages
it plans to deliver to the secondary mortgage market.
Total Expense
Ratio
Total obligations as a percentage of gross monthly income
including monthly housing expenses plus other monthly debts.
Treasury
Index
An index used to determine interest
rate changes for certain adjustable-rate mortgage (ARM) plans. Based on the
results of auctions that the U.S. Treasury holds for its Treasury bills and
securities or derived from the U.S. Treasury's daily yield curve, which is based
on the closing market bid yields on actively traded Treasury securities in the
over-the-counter market.
Truth-in-Lending
A federal law that requires lenders
to fully disclose, in writing, the terms and conditions of a mortgage, including
the annual percentage rate (APR) and other charges.
Two-step
Mortgage
An adjustable-rate mortgage (ARM) with one interest rate
for the first five or seven years of its mortgage term and a different interest
rate for the remainder of the amortization term.
Underwriting
The process of evaluating a loan
application to determine the risk involved for the lender. Underwriting involves
an analysis of the borrower's creditworthiness and the quality of the property
itself.
VA Mortgage
A
mortgage that is guaranteed by the Department of Veterans Affairs (VA). Also
known as a government mortgage.
"Wrap Around"
Mortgage
A mortgage that includes the remaining balance on an
existing first mortgage plus an additional amount requested by the mortgagor.
Full payments on both mortgages are made to the "Wrap Around" mortgagee, who
then forwards the payments on the first mortgage to the first mortgagee. These
mortgages may not be allowed by the first mortgage holder, and if discovered,
could be subject to a demand for full payment.
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