Understanding Common Mortgage Terms

Mortgages with a one time rate adjustment after seven years and five years respectively.

Adjustable Rate Mortgages in which rate is fixed for three-year, five-year, seven-year and 10-year periods, respectively, but may adjust annually after that.

An analysis of a buyer's 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.

Means loan payment by equal periodic payment calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance.

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.

APR is a measurement of the full cost of a loan including interest and loan fees expressed as a yearly percentage rate. Because all lenders apply the same rules in calculating the annual percentage rate, it provides consumers with a good basis for comparing the cost of loans.

An estimate of the value of property, made by a qualified professional called an "appraiser".

An opinion of a property's fair market value, based on an appraiser's knowledge, experience, and analysis of the property.

The transfer of a mortgage from one person to another.

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.

The agreement between buyer and seller where the buyer takes over the payments on an existing mortgage from the seller. Assuming a loan can usually save the buyer money since this is an existing mortgage debt, unlike a new mortgage where closing cost and new, probably higher, market-rate interest charges will apply.

The fee paid to a lender (usually by the purchaser of real property) when an assumption takes place.

A loan that is amortized for a longer period than the term of the loan. Usually this refers to a thirty-year amortization and a five year term. At the end of the term of the loan, the remaining outstanding principal on the loan is due. This final payment is known as a balloon payment. Many 2nd mortgages are 30/15 balloons. Amortized over 30 years to keep the payment down, but the loan comes due in 15 years and must be paid off at that time, which can be done by refinancing the remaining balance or paying the principal balance in full.

The final lump sum paid at the maturity date of a balloon 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.

One who applies for and receives a loan in the form of a mortgage with the intention of repaying the loan in full.

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."

An individual in the business of assisting in arranging funding or negotiating contracts for a client but who does not loan the money himself. Brokers usually charge a fee or receive a commission for their services.

When the lender and/or the home builder subsidizes the mortgage by lowering the interest rate during the first few years of the loan. While the payments are initially low, they will increase when the subsidy expires.

The amount of cash derived over a certain period of time from an income-producing property. The cash flow should be large enough to pay the expenses of the income producing property (mortgage payment, maintenance, utilities, etc.). For qualifying purposes Lenders typically allot (thereby subtracting) 25% of the income from the property towards maintenance costs.

Consumer safeguards which limit the amount the interest rate on an adjustable rate mortgage which may change per year and/or the life of the loan.

Consumer safeguards which limit the amount monthly payments on an adjustable rate mortgage may change.

The meeting between the buyer, seller and lender or their agents where the property and funds legally change hands, also called settlement.

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 usually include an origination fee, discount points, appraisal fee, application fee, attorney fees, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement. The Closing Costs are usually about 3 percent to 6 percent of the mortgage amount. Closing costs will vary according to the area country and the lenders used.

The final document that provides an itemized listing of the funds that are payable at closing. Items that appear on the statement include; Loan term, interest rate, monthly payment, total costs and total amount due at closing. There is an itemized breakdown of all the closing costs; Including loan fees, points, title fees, appraisal, lender fees and prepaid items and initial escrow amounts.

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.

A contract between purchaser and a seller of real estate to convey title after certain conditions have been met. It is a form of installment sale.

A mortgage not insured by FHA or guaranteed by the VA.

A report documenting the credit history and current status of a borrower's credit standing.

A credit risk score is a statistical summary of the information contained in a consumer's credit report. The most well known type of credit risk score is the Fair Isaac or FICO score. This form of credit scoring is a mathematical summary calculation that assigns numerical values to various pieces of information in the credit report. The overall credit risk score is highly relative in the credit underwriting process for a mortgage loan.

The ratio, expressed as a percentage, which results when a borrower's monthly payment obligation on long-term debts is divided by his or her gross monthly income. Also see housing expenses-to-income ratio.

Failure to meet legal obligations in a contract, specifically, failure to make the monthly payments on a mortgage.

When a mortgage is written with a monthly payment that is less than required to satisfy the note rate, the unpaid interest is deferred by adding it to the loan balance. See Negative Amortization.

Failure to make payments on time. This can lead to foreclosure.

see Points

Money paid to make up the difference between the purchase price and the mortgage amount.

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

Is a federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status or receipt of income from public assistance programs.

The difference between the fair market value and current indebtedness also referred to as the owner's interest. The value an owner has in real estate over and above the obligation against the property.

An account held by the lender into which the home buyer pays money for tax or insurance payments. Also earnest deposit held pending loan closing.

The use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, and other property expenses as they become due.

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.

see Federal National Mortgage Association.

Is a quasi-governmental agency that purchases conventional mortgage from insured depository institutions and HUD-approved mortgage bankers.

A division of the Department of Housing and Urban Development. Its main activity is the insuring of residential mortgage loans made by private lenders. FHA also sets standards for underwriting mortgages.

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. This institution, which provides funds for one in seven mortgages, makes mortgage money more available and more affordable.

A loan insured by the Federal Housing Administration open to all qualified home purchasers. While there are limits to the size of FHA loans (based on the county and state and type of property), they are generous enough to handle moderately-priced homes almost anywhere in the country.

Requires a fee (up to 1.5 percent of the loan amount) paid at closing to insure the loan with FHA. This can be financed into the loan. In addition, FHA mortgage insurance requires an annual fee of up to 0.5 percent of the current loan amount, paid in monthly installments. The lower the down payment, the more years the fee must be paid.

The Federal Home Loan Mortgage Corporation provides a secondary market for savings and loans by purchasing their conventional loans. Also known as "Freddie Mac."

The primary lien against a property.

The monthly payment due on a mortgage loan including payment of both principal and interest.

The mortgage interest rate will remain the same on these mortgages throughout the term of the mortgage for the original borrower.

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.

The Federal National Mortgage Association is a secondary mortgage institution which is the largest single holder of home mortgages in the United States. FNMA buys VA, FHA, and conventional mortgages from primary lenders. Also known as "Fannie Mae."

A legal process by which the lender or the seller forces a sale of a mortgaged property because the borrower has not met the terms of the mortgage. Also known as a repossession of property.

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

A type of flexible-payment mortgage where the payments increase for a specified period of time and then level off. This type of mortgage has negative amortization built into it.

A form of insurance in which the insurance company protects the insured from specified losses, such as fire, windstorm and the like.

The ratio, expressed as a percentage, which results when a borrower's housing expenses are divided by his/her gross monthly income. Also see Debt-to-Income Ratio.

That portion of a borrower's monthly payments held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also known as reserves.

A published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments (such as one- three-, and five-year U.S. Treasury security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average costs-of-funds incurred by savings and loans), which is then used to adjust the interest rate on an adjustable mortgage up or down.

The sum of the published index plus the margin. For example if the index were 9% and the margin 2.75%, the indexed rate would be 11.75%. Often, lenders charge less than the indexed rate the first year of an adjustable- rate mortgage.

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."

A mortgage that is protected by the Federal Housing Administration (FHA) or by private mortgage insurance (MI).

For an adjustable-rate mortgage (ARM), the maximum interest rate, as specified in the mortgage note.

For an adjustable-rate mortgage (ARM), the minimum interest rate, as specified in the mortgage note.

A money source for a lender.

A loan which is larger (more than $417,000 as of 01/01/2007) than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.

The penalty a borrower must pay when a payment is made a stated number of days (usually 15) after the due date.

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 down payment.

A person's financial obligations. Liabilities include long-term and short-term debt. For qualifying purposes; debt that is counted as liabilities on the application is the debt that is on the borrower's credit report, any automatic deductions that appear on a paystub, such as loan repayments, child support, and alimony.

For an adjustable-rate mortgage (ARM), a limit on the amount that payments can increase or decrease over the life of the mortgage.

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.

The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage. Example: Property value is 300,000 loan amount is 240,000. LTV is 80%.

The initial document providing an estimate of closing costs and loan terms. This document is similar to the final Closing Disclosure as it provides an itemized listing of the funds that are payable at closing. Items that appear on the statement include; Loan term, interest rate, monthly payment, total costs and total amount due at closing. There is an itemized breakdown of all the closing costs; Including loan fees, points, title fees, appraisal, lender fees and prepaid items and initial escrow amounts.

Lender's guarantee that the mortgage rate quoted will be good for a specific number of days from day loan was locked.

The amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate.

The highest price that a buyer would pay and the lowest price a seller would accept on a property. Market value may be different from the price a property could actually be sold for at a given time.

It is insurance from FHA to the lender against incurring a loss on account of the borrower's default.

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.

A legal document that pledges a property to the lender as security for payment of a debt. This document is recorded with the county and this is the document that places the lien against the property. The mortgage and lien are released when the mortgage loan is paid off.

A company that originates mortgages exclusively for resale in the secondary mortgage market.

An individual or company that charges a service fee to bring borrowers and lenders together for the purpose of loan origination.

The lender.

Money paid to insure the mortgage when the down payment is less than 20 percent. See Private Mortgage Insurance, and FHA Mortgage 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.

The borrower or homeowner.

Occurs when your monthly payments are not large enough to pay all the interest due on the loan. This unpaid interest is added to the unpaid balance of the loan. The danger of negative amortization is that the home buyer ends up owing more than the original amount of the loan.

A statement in a mortgage contract forbidding the assumption of the mortgage without the prior approval of the lender.

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

The fee charged by a lender to prepare loan documents, make credit checks, inspect and sometimes appraise a property; usually computed as a percentage of the face value of the loan.

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.

A limit on the amount that payments can increase or decrease during any one adjustment period.

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.

Principal, Interest, Taxes and Insurance. Also called monthly housing expense.

Each point is equal to 1 percent of the loan amount (e.g., two points on a $100,000 mortgage would cost $2,000., one point on a 100,000 mortgage would cost $1000.).

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

The process of determining how much money you will be eligible to borrow before you apply for a loan.

Necessary to create an escrow account or to adjust the seller's existing escrow account. Can include taxes, hazard insurance, private mortgage insurance and special assessments.

A privilege in a mortgage permitting the borrower to make payments in advance of their due date.

Money charged for an early repayment of debt. Prepayment penalties are allowed in some form (but not necessarily imposed) in many states.

The outstanding balance of principal on a mortgage not including interest or any other charges.

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 are not these amounts that are paid into an escrow account each month they are included in the PITI calculation.

In the event that you do not have a 20 percent down payment, lenders will allow a smaller down payment - as low as zero percent in some cases. With the smaller down payment loans, however, borrowers are usually required to carry private mortgage insurance. Private mortgage insurance can require an initial premium payment and but usually just requires an additional monthly fee depending on your loan's structure.

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.

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.

The cancellation of a contract. With respect to mortgage refinancing, the law that gives the homeowner three days to cancel a contract in some cases once it is signed if the transaction uses equity in the home as security.

Money paid for recording a home sale with the local authorities, thereby making it part of the public records.

Obtaining a new mortgage loan on a property already owned. Often to replace existing loans on the property.

Short for the Real Estate Settlement Procedures Act. RESPA is a federal law that allows consumers to review information on known or estimated settlement cost once after application and once prior to or at a settlement. The law requires lenders to furnish the information after application only.

A credit arrangement, such as a credit card, that allows a customer to borrow against a line of credit when purchasing goods and services.

The document issued by the mortgagee when the mortgage loan is paid in full. Also called a "release of mortgage."

A mortgage made subsequent to another mortgage and subordinate to the first one.

The property that will be pledged as collateral for a loan.

An agreement in which the owner of a property provides financing.

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.

All the steps and operations a lender performs to keep a loan in good standing, such as collection of payments, payment of taxes, insurance, property inspections and the like.

see Closing/Closing costs

Interest which is computed only on the principle balance.

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.

When a borrower does not have good credit or cannot qualify for conventional Fannie Mae, Freddie Mac, FHA or VA loans for whatever reason, the other alternative is subprime. Subprime loans usually have higher interest rates. Subprime originally referred to credit below the prime minimum score of 620.

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

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.

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

A policy, usually issued by a title insurance company, which insures a home buyer against errors in the title search. The cost of the policy is usually a function of the value of the property, and is often borne by the purchaser and/or seller. Policies are also available to protect the lender's interests.

An examination of municipal records to determine the legal ownership of property. Usually is performed by a title company.

Total obligations as a percentage of gross monthly income including monthly housing expenses plus other monthly debts.

A federal law requiring disclosure of the Annual Percentage Rate to home buyers shortly after they apply for the loan. Also known as Regulation Z.

The decision whether to make a loan to a potential home buyer based on credit, employment, assets, and other factors and the matching of this risk to an appropriate rate and term or loan amount.

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.

The VA Funding Fee is a one-time fee paid directly to the Department of Veterans Affairs (VA) for every VA purchase or refinance loan. The money received from the VA Funding Fee is used to offset the loans that go into default.

Borrowers have the option to pay the fee upfront, but usually it is included in the loan.

Borrowers with service-connected disabilities can secure an exemption from the VA Funding Fee; VA will make the final decision when declaring a borrower exempt and that exemption will be noted on the Veteran's Certificate of Eligibility.

A document signed by the borrower's financial institution verifying the status and balance of his/her financial accounts.

A document signed by the borrower's employer verifying his/her position and salary.

A document signed by the borrower's present mortgage company verifying the status and balance of his/her mortgage account. Mainly used to verify any 30 plus day late payments in the last 12 months.

A document signed by the borrower's financial institution verifying the status of his/her financial rental record.