Adjustable Rate Mortgage (ARM): 

An adjustable rate mortgage is a loan with an interest rate that changes according to an index. Payments may increase or decrease according to shifts in that index. Generally, you can expect make lower initial payments with an ARM. If interest rates increase over time, your monthly payments may increase, too. 

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Amortization:

The gradual repayment of a mortgage loan, both principal and interest, by installments.

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Annual Percent Rate (APR): 

The cost of credit articulated as a yearly rate. APR is not an interest rate. It is a way to measure the total cost of credit. It takes into account interest, origination fees, loan discounts, transaction charges, and any premiums for credit-guarantee insurance. APR is designed to give you a tool for comparing the costs of similar loans.

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Appraisal:

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

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Asset:

Anything owned of monetary value including real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, etc.).

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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.

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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.”

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Broker:

An individual or company that brings borrowers and lenders together for the purpose of loan origination.

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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.

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Certificate of Eligibility:

A document issued by the federal government certifying a Veteran’s eligibility for a Department of Veterans Affairs (VA) mortgage.

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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.

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Closing: 

Closing refers to the transfer of ownership from the seller to you, the buyer. It includes the completion of all necessary paperwork and the payment of closing costs. In a mortgage situation, it also refers to the disbursement of funds from the lender to the seller. In refinancing, closing refers to the final payment of the existing loan with the refinanced loan. Also called “settlement.”

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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. There are mortgage loans that offer “no closing cost” options.

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Debt-to-Income (DTI) Ratio:

The percentage of your gross monthly income that goes toward your debt.

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Deed of Trust:

The document used in some states instead of a mortgage. Title is conveyed to a trustee.

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Discount Fees: 

These are also called Points and Discount Points. Each point is equal to 1% of the principal amount of a mortgage loan. Points are commonly paid on both fixed rate and adjustable rate mortgages to cover loan origination and other types of costs supplied by the lender. Points are paid at closing and may be paid by either the borrower or seller of the property, or even split between them. Sometimes, points are incorporated into the mortgage amount, but this strategy increases the loan amount and the full cost of the loan. You can also volunteer to pay points in exchange for a lower interest rate in some cases.

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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. Also called Home Equity.

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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.

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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.

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Fannie Mae:

A congressionally chartered, shareholder-owned company (otherwise called a “government-sponsored enterprise” or “GSE”) that is the nation’s largest supplier of home mortgage funds. Fannie Mae buys home loans from lenders. To finance these purchases, they package the loans into pools and then issue securities against them.

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FHA:

The Federal Housing Administration

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FHA Mortgage:

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

 

FICO:

FICO® stands for Fair Isaac Corporation, which are the creators of the FICO® score. This score is used to make up part of a credit report that lenders use to determine the borrower’s risk when extended a loan.

 

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.

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Fixed Rate Mortgage:

A home loan in which the interest rate remains the same throughout the term of the loan. A Fixed Rate Mortgage will allow you to plan a budget and make consistent payments.

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Freddie Mac:

A government-sponsored enterprise (GSE) that buys home loans from lenders. To finance these purchases, they package the loans into pools and then issue securities against them.

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Ginnie Mae (GNMA): 

A wholly owned government corporation, Ginnie Mae offers government-insured loans like FHA, VA, PIH, and RD. Ginnie Mae is not a Government Sponsored Enterprise (GSE). To understand the difference, please visit GinnieMae.gov.

 

Good Faith Estimate (GFE): 

The list of the settlement charges that you must pay at the closing. The lender must provide this to you within three business days of receiving the mortgage application.

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Housing Expense Ratio:

The percentage of gross monthly income budgeted to pay housing expenses.

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HUD:

The U.S. Department of Housing and Urban Development

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Interest-Only Mortgage:

A mortgage that gives the borrower the option of paying only the interest portion of a payment without paying on the principal balance.

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Liabilities:

A person’s financial obligations. Liabilities include long-term and short-term debt.

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Lien: 

The mortgage company’s right to claim your property if you default on your loan.

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Loan to Value Ratio (LTV):

It is a percentage calculated as the amount of your mortgage divided by the appraised value of the property. For example, a loan amount of $70,000 for a home appraised at $100,000 would equal an LTV of 70%. Generally, the higher your credit score, the higher your LTV is allowed to be when qualifying for a loan.

 

Lock: 

An option that you may exercise between application and closing to guarantee you will receive the current rate and points in the market.

 

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.

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Mortgage:

A legal document that pledges a property to the lender as security for payment of a debt. Also refers to the loan used to purchase property that is paid back over time. Many different types of mortgages are available depending on a borrower’s needs and financial status.

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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.

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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.

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Note:

A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.

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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.

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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).

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Prepayment Penalty:

A fee that may be charged to a borrower who pays off a loan before it is due.

 

Pre-Approval: 

A written commitment from a lender to extend a mortgage to you up to a specific amount for a specific time. It involves an analysis of your financial status and credit history.

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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.

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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. This may be done to receive more favorable rates, lower payments, or a decreased term. It may also be done to receive additional cash.

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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.

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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.

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USDA Loan: 

A loan guaranteed by the U.S. Department of Agriculture that can be used to buy or repair a home in designated rural areas.

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VA Loan:

A mortgage that is guaranteed by the Department of Veterans Affairs (VA). Also known as a government mortgage.