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 maximum 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 maximum 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 $207,000. 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 maximum 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., one points on a $100,000 mortgage would equal $1,000).
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. Please note that such insurance does not constitute a
form of life insurance which pays off the loan in case of death.
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. See Mortgage and Deed of Trust
above.
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.
Variable Rate
An interest rate that changes periodically in relation to
an index. Payments may increase or decrease accordingly.
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.
Note: The above definitions are excerpts
from "Mortgage Banking Terms," published by the Mortgage Bankers'
Association of America.
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