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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: 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.
Real Estate Agent®
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 Real Estate
Agents.
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 pre-approved 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. |
