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7/23 and 5/25
Mortgages
Mortgages with a one time rate adjustment after seven years and five
years respectively.
3/1, 5/1, 7/1
and 10/1 ARMs
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.
A
Acceleration
The right of the mortgagee
(lender) to demand the
immediate repayment of the
mortgage loan balance upon
the default of the mortgagor
(borrower), or by using the
right vested in the
Due-on-Sale Clause.
Adjustable rate
mortgage (ARM)
Is a mortgage in which the
interest rate is adjusted
periodically based on a
preselected index. Also
sometimes known as the
renegotiable rate mortgage,
the variable rate mortgage
or the Canadian rollover
mortgage.
Adjustment interval
On an adjustable rate
mortgage, the time between
changes in the interest rate
and/or monthly payment,
typically one, three or five
years depending on the
index.
Amortization
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.
Annual percentage
rate (A.P.R.)
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.
Appraisal
An estimate of the value of
property, made by a
qualified professional
called an "appraiser".
Assessment
A local tax levied against a
property for a specific
purpose, such as a sewer or
street lights.
Assumption
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.
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B
Balloon Mortgage
A loan which is amortized
for a longer period than the
term of the loan. Usually
this refers to a thirty-year
amortization and a five year
tem. 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.
Blanket Mortgage
A mortgage covering at least
two pieces of real estate as
security for the same
mortgage.
Borrower (Mortgagor)
One who applies for and
receives a loan in the form
of a mortgage with the
intention of repaying the
loan in full.
Broker
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.
Buy-down
When the lender and/or the
home builder subsidized 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.
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C
Caps (interest)
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.
Certificate of
Eligibility
The document given to
qualified veterans which
entitles them to VA
guaranteed loans for homes,
business and mobile homes.
Certificates of eligibility
may be obtained by sending
form DD-214 (Separation
Paper) to the local VA
office with VA form 1880
(request for Certificate of
Eligibility)
Certificate of
Reasonable Value (CRV)
An appraisal issued by the
Veterans Administration
showing the property's
current market value.
Certificate of
veteran status
The document given to
veterans or reservists who
have served 90 days of
continuous active duty
(including training time) It
may be obtained by sending
DD 214 to the local VA
office with form 26-8261a
(request for certificate of
veteran status. This
document enables veterans to
obtain lower down payments
on certain FHA insured
loans).
Closing
The meeting between the
buyer, seller and lender or
their agents where the
property and funds legally
change hands, also called
settlement. Closing costs
usually include an
origination fee, discount
points, appraisal fee, title
search and insurance,
survey, taxes, deed
recording fee, credit report
charge and other costs
assessed at settlement. The
cost of closing usually are
about 3 percent to 6 percent
of the mortgage amount.
COFI
Adjustable-rate mortgage
with rate that adjusts based
on a cost-of-funds index,
often the 11th District Cost
of Funds.
Construction loan
A short term interim loan to
pay for the construction of
buildings or homes. These
are usually designed to
provide periodic
disbursements to the builder
as he progresses.
Contract sale or
deed
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.
Conventional loan
A mortgage not insured by
FHA or guaranteed by the VA.
Credit Report
A report documenting the
credit history and current
status of a borrower's
credit standing.
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D
Deferred interest
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.
Deed of trust
In many states, this
document is used in place of
a mortgage to secure the
payment of a note.
Debt-to-Income Ratio
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. See housing
expenses-to-income ratio.
Default
Failure to meet legal
obligations in a contract,
specifically, failure to
make the monthly payments on
a mortgage.
Delinquency
Failure to make payments on
time. this can lead to
foreclosure.
Department of
Veterans Affairs (VA)
An independent agency of the
federal government which
guarantees long-term, low-or
no-down payment mortgages to
eligible veterans.
Discount Point
(Please see point)
Down Payment
Money paid to make up the
difference between the
purchase price and the
mortgage amount.
Due-on-Sale-Clause
A provision in a mortgage or
deed of trust that allows
the lender to demand
immediate payment of the
balance of the mortgage if
the mortgage holder sells
the home.
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E
Earnest Money
Money given by a buyer to a
seller as part of the
purchase price to bind a
transaction or assure
payment.
Entitlement
The VA home loan benefit is
called entitlement.
Entitlement for a VA
guaranteed home loan. This
is also known as
eligibility.
Equal Credit
Opportunity Act (ECOA)
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.
Equity
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.
Escrow
An account held by the
lender into which the home
buyer pays money for tax or
insurance payments. Also
earnest deposits held
pending loan closing.
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F
Fannie Mae
(Please see Federal National
Mortgage Association)
Farmers Home
Administration (FmHA)
Provides financing to
farmers and other qualified
borrowers who are unable to
obtain loans elsewhere.
Federal Home Loan
Bank Board (FHLBB)
The former name for the
regulatory and supervisory
agency for federally
chartered savings
institutions. Agency is now
called the Office of Thrift
Supervision Federal Home
Loan Mortgage
Corporation(FHLMC) also
called "Freddie Mac", is a
quasi-governmental agency
that purchases conventional
mortgage from insured
depository institutions and
HUD-approved mortgage
bankers.
Federal Housing
Administration (FHA)
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.
Federal National
Mortgage Association (FNMA)
also know as "Fannie Mae"
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.
FHA loan
A loan insured by the
Federal Housing
Administration open to all
qualified home purchasers.
While there are limits to
the size of FHA loans
($155,250 as of 1/1/96),
they are generous enough to
handle moderately-priced
homes almost anywhere in the
country.
FHA mortgage
insurance
Requires a fee (up to 2.25
percent of the loan amount)
paid at closing to insure
the loan with FHA. 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.
FHLMC
The Federal Home Loan
Mortgage Corporation
provides a secondary market
for savings and loans by
purchasing their
conventional loans. Also
known as "Freddie Mac."
Firm Commitment
A promise by FHA to insure a
mortgage loam for a
specified property and
borrower. A promise from a
lender to make a mortgage
loan.
Fixed Rate Mortgage
The mortgage interest rate
will remain the same on
these mortgages throughout
the term of the mortgage for
the original borrower.
FNMA
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."
Foreclosure
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.
Freddie Mac
(Please see Federal Home
Loan Mortgage Corporation)
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G
Ginnie Mae
(Please see Government
National Mortgage
Association)
Graduated Payment
Mortgage (GPM)
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.
Guaranty
A promise by one party to
pay a debt or perform an
obligation contracted by
another if the original
party fails to pay or
perform according to a
contract.
H
Hazard Insurance
A form of insurance in which
the insurance company
protects the insured from
specified losses, such as
fire, windstorm and the
like.
Housing
Expenses-to-Income Ratio
The ratio, expressed as a
percentage, which results
when a borrower's housing
expenses are divided by
his/her gross monthly
income. See debt-to-income
ratio.
I
Impound
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.
Index
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.
Indexed rate
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.
Interim Financing
A construction loam made
during completion of a
building or a project. A
permanent loan usually
replaces this loan after
completion.
Investor
A money source for a lender.
J
Jumbo Loan
A loan which is larger (more than $214,600 as of 1/1/97) 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.
K
L
Lien
A claim upon a piece of property for the payment or satisfaction of
a debt or obligation.
Loan-to-Value
Ratio
The relationship between the amount of the mortgage loan and the
appraised value of the property expressed as a percentage.
Lock
Lender's guarantee that the mortgage rate quoted will be good for a
specific number of days from day of application.
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M
Margin
The amount a lender adds to the index on an adjustable rate mortgage
to establish the adjusted interest rate.
Market Value
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.
MIP (Mortgage
Insurance Premium)
It is insurance from FHA to the lender against incurring a loss on
account of the borrower's default.
Mortgage
Insurance
Money paid to insure the mortgage when the down payment is less than
20 percent. See private mortgage insurance, FHA mortgage insurance.
Mortgagee
The lender.
Mortgagor
The borrower or homeowner.
N
Negative
Amortization
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.
Net Effective
Income
The borrower's gross income minus federal income tax.
Non Assumption
Clause
A statement in a mortgage contract forbidding the assumption of the
mortgage without the prior approval of the lender. Note: The signed
obligation to pay a debt, as a mortgage note.
O
Office of
Thrift Supervision (OTS)
The regulatory and supervisory agency for federally chartered
savings institutions. Formally known as Federal Home Loan Bank
Board.
One-year
adjustable
Mortgage whose annual rate changes yearly. The rate is usually based
on movements of a published index plus a specified margin, chosen by
the lender.
Origination Fee
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.
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P
Permanent Loan
A long term mortgage,
usually ten years or more.
Also called an "end loan."
PITI
Principal, Interest, Taxes
and Insurance. Also called
monthly housing expense.
Pledged account
Mortgage (PAM)
Money is placed in a pledged
savings account and this
fund plus earned interest is
gradually used to reduce
mortgage payments.
Points (loan
discount points)
Prepaid interest assessed at
closing by the lender. Each
point is equal to 1 percent
of the loan amount (e.g.,
two points on a $100,000
mortgage would cost $2,000).
Power of Attorney
A legal document authorizing
one person to act on behalf
of another.
Prepaid Expenses
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.
Prepayment
A privilege in a mortgage
permitting the borrower to
make payments in advance of
their due date.
Prepayment Penalty
Money charged for an early
repayment of debt.
Prepayment penalties are
allowed in some form (but
not necessarily imposed) in
many states.
Primary Mortgage
Market
Lenders making mortgage
loans directly to borrower's
such as savings and loan
associations, commercial
banks, and mortgage
companies. These lenders
sometimes sell their
mortgages into the secondary
mortgage markets such as to
FNMA or GNMA, etc.
Principal
The amount of debt, not
counting interest, left on a
loan.
Private Mortgage
Insurance (PMI)
In the event that you do not
have a 20 percent down
payment, lenders will allow
a smaller down payment - as
low as 5 percent in some
cases. With the smaller down
payment loans, however,
borrowers are usually
required to carry private
mortgage insurance. Private
mortgage insurance will
usually require an initial
premium payment and may
require an additional
monthly fee depending on you
loan's structure.
Q
R
Realtor
A real estate broker or an
associate holding active
membership in a local real
estate board affiliated with
the National Association of
Realtors.
Recession
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.
Recording Fees
Money paid to the lender
for recording a home sale
with the local authorities,
thereby making it part of
the public records.
Refinance
Obtaining a new mortgage
loan on a property already
owned. Often to replace
existing loans on the
property.
Renegotiable Rate
Mortgage
A loan in which the
interest rate is adjusted
periodically. See adjustable
rate mortgage.
RESPA
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.
Reverse Annuity Mortgage
(RAM)
A form of mortgage in
which the lender makes
periodic payments to the
borrower using the
borrower's equity in the
home as Satisfaction of
Mortgage: The document
issued by the mortgagee when
the mortgage loan is paid in
full. Also called a "release
of mortgage."
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S
Second Mortgage
A mortgage made
subsequent to another
mortgage and subordinate to
the first one.
Secondary Mortgage Market
The place where primary
mortgage lenders sell the
mortgages they make to
obtain more funds to
originate more new loans. It
provides liquidity for the
lenders security.
Servicing
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.
Settlement/Settlement
Costs
(Please see
closing/closing costs)
Shared Appreciation
Mortgage (SAM)
A mortgage in which a
borrower receives a
below-market interest rate
in return for which the
lender (or another investor
such as a family member or
other partner) receives a
portion of the future
appreciation in the value of
the property. May also apply
to mortgage where the
borrowers shares the monthly
principal and interest
payments with another party
in exchange for part of the
appreciation.
Simple Interest
Interest which is
computed only on the
principle balance.
Survey
A measurement of land,
prepared by a registered
land surveyor, showing the
location of the land with
reference to know points,
its dimensions, and the
location and dimensions of
any buildings.
Sweat Equity
Equity created by a
purchaser performing work on
a property being purchased.
T
Title
A document that gives
evidence of an individual's
ownership of property.
Title Insurance
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.
Title Search
An examination of
municipal records to
determine the legal
ownership of property.
Usually is performed by a
title company.
Truth-In-Lending
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.
Two-Step Mortgage
A mortgage in which the
borrower receives a
below-market interest rate
for a specified number of
years (most often seven or
10), and then receives a new
interest rate adjusted
(within certain limits) to
market conditions at that
time. The lender sometimes
has the option to call the
loan due with 30 days notice
at the end of seven or 10
years. also called "Super
Seven" or "Premier"
mortgage.
U
Underwriting
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.
USURY
Interest charged in excess of the legal rate established by law.
V
VA Loan
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.
VA Mortgage
Funding Fee
A premium of up to 1-7/8 percent (depending on the size of the down
payment) paid on a VA-backed loan. On a $75,000 fixed-rate mortgage
with no down payment, this would amount to $1,406 either paid at
closing or added to the amount financed.
Variable Rate
Mortgage (VRM)
(Please see
adjustable rate mortgage)
Verification of
Deposit (VOD)
A document signed by the borrower's financial institution verifying
the status and balance of his/her financial accounts.
Verification of
Employment (VOE)
A document signed by the borrower's employer verifying his/her
position and salary.
W
Warehouse Fee
Many mortgage firms must borrow funds on a short term basis in order
to originate loans which are to be sold later in the secondary
mortgage market (or to investors). When the prime rate of interest
is higher on short term loans than on mortgage loans, the mortgage
firm has an economic loss which is offset by charging a warehouse
fee.
Wraparound
mortgage
Results when an existing assumable loan is combined with a new loan,
resulting in an interest rate somewhere between the old rate and the
current market rate. The payments are made to a second lender or the
previous homeowner, who then forwards the payments to the first
lender after taking the additional amount off the top.
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