Removing the Mystery from … Mortgage Terminology

adjustable rate mortgage (ARM)
A mortgage that changes interest rate periodically based upon the changes in a specified index.

amortization The repayment of a mortgage loan by installments with regular payments to cover the principal and interest.

annual percentage rate (APR) The cost of a mortgage stated as a yearly rate over the entire life of the mortgage; includes such items as interest, mortgage insurance, and loan origination fee (points). Can often be very misleading. Check with your lender on this one!

appraisal A written analysis of the estimated value of a property prepared by a qualified appraiser.

appreciation An increase in the value of a property due to changes in market conditions or other causes. The opposite of depreciation.

balloon mortgage A mortgage that has level monthly payments that will amortize over a stated term, but that provides for a lump sum payment to be due at the end of an earlier specified term.

bridge loan A form of second trust that is collateralized by the borrower's present home (which is usually for sale), in a manner that allows the proceeds to be used for closing on a new house before the present home is sold.

cash-out refinance A refinance transaction in which the amount of money received from the new loan exceeds the total of the money needed to repay the existing first mortgage, closing costs, points, and the amount required to satisfy any outstanding subordinate mortgage liens. In other words, a refinance transaction in which the borrower receives additional cash that can be used for any purpose.

clear title A title that is free of liens or legal questions as to ownership of the property.

closing A meeting at which a sale of a property is finalized by the buyer signing the mortgage documents and paying closing costs. Also called "settlement."

closing costs Expenses (over and above the price of the property) incurred by buyers and sellers in transferring ownership of a property. Closing costs normally include an origination fee, a closing fee, and charges for obtaining title insurance and an appraisal. Closing costs will vary according to the loan. We differentiate between the terms “closing costs” (the fees associated with a loan) and “prepaids” (the prepaid interest and escrow taxes and insurance required at closing). Both however, are costs required to close your loan.

closing statement Also referred to as the HUD1. The final statement of costs incurred to close on a loan or to purchase a home.

community property A form of ownership under which property acquired during a marriage is presumed to be owned jointly, unless acquired as separate property of either spouse.

conforming mortgage loan The current conforming loan limit for 2005 is $359,650.

contingency A condition that must be met before a contract is legally binding. For example, home purchasers often include a contingency that specifies that the contract is not binding until the purchaser obtains a satisfactory home inspection report from a qualified home inspector.

credit report A report of an individual's credit history prepared by a credit bureau and used by a lender in determining a loan applicant's creditworthiness.

deed of trust The document used in some states instead of a mortgage; title is conveyed to a trustee.

discount rate The rate at which the Federal Reserve lends money to its eligible banks. These are short-term loans to fulfill immediate cash needs, not supplement the bank’s capital.

down payment The part of the purchase price of a property that the buyer pays in cash and does not finance with a mortgage.

earnest money deposit A deposit made by the potential home buyer to show that he or she is serious about buying the house.

encumbrance Anything that affects or limits the fee simple title to a property, such as mortgages, leases, easements, or restrictions.

escrow account The account in which a mortgage servicer holds the borrower's escrow payments prior to paying property expenses.

Fannie Mae (FNMA) A congressionally chartered, shareholder-owned company that is the nation's largest supplier of home mortgage funds.

Federal funds rate The interest rate at which a depository institution lends immediately available funds (balances at the Federal Reserve) to another depository institution overnight. This is what news reports are referring to when they talk about the Fed changing interest rates. In fact, the FOMC sets a target for this rate, but not the actual rate itself (because it is determined by the open-market).

Federal Housing Administration (FHA) An agency of the U.S. Department of Housing and Urban Development (HUD). Its main activity is the insuring of residential mortgage loans made by private lenders. The FHA sets standards for construction and underwriting, but does not lend money or plan or construct housing.

first mortgage A mortgage that is the primary lien against a property.

good faith estimate An estimate of charges which a borrower is likely to incur in connection with a settlement.

hazard insurance Insurance protecting against loss to real estate caused by fire, some natural causes, vandalism, etc., depending upon the terms of the policy.

Home Equity Line of Credit or HELOC Typically a type of second mortgage where you have a line of credit with your home as security. You can borrow against this “line” up to your “line amount” and pay it back down at will. This type of loan is generally carries an adjustable rate tied to the Prime rate and may have favored tax status.

HUD The US Department of Housing and Urban Development.

jumbo mortgage The current loan limit for a conforming loan is $240,000. Loans for amounts above $240,000 are considered non-conforming or jumbo mortgages.

lien An encumbrance against property for money due, either voluntary or involuntary.

lifetime cap A provision of an ARM that limits the highest rate that can occur over the life of the loan.

loan to value ratio (LTV) The ratio of the amount of your loan to the appraised value of the home. The LTV will affect programs available to the borrower. Generally, the lower the LTV, the more favorable the terms of the programs offered by lenders.

mortgage A legal document that pledges a property to the lender as security for payment of a debt.

Mortgage insurance (MI) Insurance written by an independent mortgage insurance company protecting the mortgage lender against loss incurred by a mortgage default. Usually required for loans with an LTV of 80.01% or higher.

note A written agreement containing a promise of the signer to pay to a named person, or order, or bearer, a definite sum of money at a specified date or on demand.

origination fee A fee charged by a lender to cover certain processing expenses in connection with making a real estate loan. Usually a percentage of the amount loaned, such as one percent.

PITI Principal, interest, taxes and insurance--the components of a monthly mortgage payment.

points Charges levied by the mortgage lender and usually payable at closing. One point represents 1% of the face value of the mortgage loan.

preapproval A lender's decision to extend credit after a borrower has submitted a formal loan application with a credit analysis.  A prequalification is an opinion, a preapproval is an underwriter’s decision to extend credit.  A letter of preapproval usually carries more weight than a prequalification.

prepaids Those expenses of property which are paid in advance of their due date such as prepaid interest, taxes, insurance, etc.

prequalification A lender's opinion on a loan's viability based on summary information supplied by a borrower.  A prequalification is an opinion, a preapproval is an underwriter’s decision to extend credit.  A prequalification letter which we can provide to you is very helpful in shopping for a new property.

Prime rate The interest rate that commercial banks charge their most creditworthy customers, generally large corporations. Also a very common index for a Home Equity Line of Credit (HELOC).

refinancing The process of paying off one loan with the proceeds from a new loan, using the same property as security.

second mortgage A mortgage that is the second lien against a property. This is typically a Home Equity Line of Credit or “HELOC” or a fixed rate second mortgage. In a foreclosure, the “first mortgagee” is in line ahead of the “second mortgagee” in the repayment of debt.

subordination Generally refers to the process of keeping second in line or “subordinating” a second mortgage while swapping out the first mortgagee. This frequently occurs when you have a Home Equity Line of Credit (HELOC) or other second mortgage and you are refinancing your first mortgage.

title insurance Insurance against loss resulting from defects of title to a specifically described parcel of real property.

Truth-in-Lending Act A federal law requiring a disclosure of credit terms using a standard format. This is intended to facilitate comparisons between the lending terms of different financial institutions.

Veterans Administration (VA) A government agency guaranteeing mortgage loans with no down payment to qualified veterans.