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Mortgage Terms

ADJUSTABLE-RATE MORTGAGE (ARM)

A mortgage in which the interest rate is adjusted periodically based on a pre-selected margin, index and adjustment interval. aka: Variable-Rate Mortgage

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 may change on an ARM.

AFFORDABILITY ANALYSIS

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 planned, the area where a home is located, and the closing costs that are likely to be incurred.

AGENCY

A legal relationship created by law or contract in which the agent performs certain acts on behalf of the principal.

AMORTIZATION

Periodic payments on a loan requiring payment of enough principal and interest to ensure complete repayment of the loan by the end of the loan term.

AMORTIZATION SCHEDULE

A table that shows the portion of each payment that will be applied to interest and principal, and the balance remaining after the payment has been applied.

ANNUAL PERCENTAGE RATE (APR)

A uniform measurement of the cost of a loan, including interest and financed costs of closing, expressed as a yearly percentage rate.

APPRAISAL

An estimate of the fair market value of a real or personal property.

APPRAISED VALUE

An opinion of a property’s fair market value based on an appraiser’s knowledge, experience, and an analysis of the property utilizing recent comparable sales and market conditions.

ASSUMABLE MORTGAGE

A mortgage that a seller can transfer to a new buyer, with the buyer taking over the payments on the seller’s existing mortgage. Lenders may require a credit review of the new borrower and payment of a fee for the assumption. If a mortgage contains a due-on-sale clause, the mortgage is not assumable by a new buyer.

BALLOON MORTGAGE

A mortgage with periodic payments including a final payment that is considerably larger than the preceding payments.

BORROWER’S CREDITS

Credits at closing that are subtracted from the final closing costs. These might include fees or points paid by the seller, a portion of the yield spread premium, or fees paid by the borrower prior to closing, such as the appraisal fee.

BRIDGE LOAN

A short-term loan collateralized by the borrower’s present home and used to close on a new house before the present home is sold. aka: Swing Loan

CAPS (FOR ARMS)

Consumer protections which limit the amount the interest rate or payment on an ARM may change. There are four caps in common use.

Initial Rate Cap A limit on the amount that the interest rate can increase during the first adjustment period for an ARM.

Periodic Rate Cap A limit on the amount that the interest rate can change during any adjustment periods.

Lifetime Rate Cap A limit on the amount that an interest rate can change over the life of an ARM. aka: Rate Ceiling

Payment Cap A limit on the amount that the payment can change during one adjustment period on an ARM. Payment caps can result in negative amortization

CLOSING

A meeting between the buyer, seller and lender or their agents where real estate funds for its purchase legally change hands. aka: Settlement

CLOSING COSTS

Expenses over and above the price of the property 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 of the country and the lenders used.

COMBINED LOAN TO VALUE RATIO

A comparison, expressed as a percentage, of the combined cost of all mortgages on a home and the value of the home used to secure the loans.

CONFORMING LOAN

A loan that meets the lending limits and other criteria established by Fannie Mae or Freddie Mac.

CONVERSION CLAUSE

A provision in an ARM allowing the loan to be converted to a fixed-rate at some point during the loan term.

DOWN PAYMENT

Money paid towards the purchase price of a home that is not financed.

EARNEST MONEY

Money paid by a buyer to a seller at the time of entering a contract to indicate intent and ability of the buyer to carry out the contract.

ESCROW ACCOUNT

An account held by the lender into which the homebuyer deposits money for taxes and/or insurance payments. Escrow accounts may also hold other funds related to a real estate purchase such as earnest money.

FICO SCORE

The credit score obtained from the use of software developed by Fair, Isaac and Company. Although each major CRA ultimately developed its own formula for credit scoring, the term “FICO Score” is widely used today to refer to any credit score.

FINANCE CHARGE

Any kind of fees or charges associated with obtaining credit. Finance charges can include many items,including loan fees, miscellaneous fees, per diem interest, escrows for mortgage insurance, etc.

FIRST MORTGAGE

The oldest lien against a property, or the lien with first priority.

FIXED-RATE MORTGAGE

A mortgage with an interest rate that will remain the same for the entire term of the mortgage.

FLOOD INSURANCE

Insurance that compensates for physical property damage resulting from flooding. It is required for properties located in federally designated flood zones.

FORECLOSURE

A legal process by which the lender forces a sale of a mortgaged property because the borrower has not met the repayment terms of the mortgage.

FULLY AMORTIZED ARM

An ARM with a monthly payment that is sufficient to amortize the remaining balance, at the interest accrual rate, over the amortization term.

FULLY INDEXED RATE

In an ARM, the interest rate indicated by adding the current index value and the margin.

GOOD FAITH ESTIMATE

An estimate of closing costs, made in compliance with RESPA requirements, that must be given to mortgage applicants within three days after loan application is complete.

GROSS INCOME

For qualifying purposes, the income of the borrower before taxes and expenses are deducted.

HAZARD INSURANCE

A form of insurance that indemnifies the insured from fire, burglary, and other specified losses. aka: Homeowners Insurance

HOME EQUITY LINE OF CREDIT (HELOC)

A loan secured by a mortgage, a HELOC establishes a credit line that can be drawn upon as needed until the borrower reaches the maximum credit amount allowed.

HOUSING EXPENSES-TO-INCOME RATIO

The relationship, expressed as a percentage, between a borrower’s housing expenses and their gross monthly income. aka: Housing Ratio, Front End Ratio

INITIAL INTEREST RATE

The interest rate of an ARM at the time of closing. This rate changes for an adjustable-rate mortgage (ARM). aka: Start Rate, Teaser Rate

INTEREST RATE BUYDOWN PLAN

An arrangement that allows a party 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.

MORTGAGE INSURANCE (MI)

Insurance that indemnifies the lender against default by the borrower. MI is often required when the LTV exceeds 80%.

MORTGAGE INSURANCE PREMIUM (MIP)

The fee paid by borrowers for mortgage insurance on an FHA loan.

PITI

Principal, Interest, Taxes and Insurance are the monthly housing expenses that a lender calculates in order to determine a borrower’s housing expense ratio.

PRE-APPROVAL

Lender’s approval to make a loan based on verification of a loan applicant’s income and examination of credit history. Pre-approval does not include a commitment by the lender to a particular interest rate or lending terms.

PRE-QUALIFICATION

Examination of information that a loan applicant has provided about his/her income and financial obligations to estimate how much money the loan applicant might be eligible to borrow.

PREPAID EXPENSES

Funds collected at closing that are 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. aka: prepaids

PRIME LOANS

Loans made to borrowers who have good credit scores, stable income histories, down payments, and low debt ratios.

PRIVATE MORTGAGE INSURANCE (PMI)

Mortgage insurance purchased from a private (non-governmental) insurance company. PMI is often required by a lender when the LTV on a conventional loan exceeds 80%.

PROMISSORY NOTE

A legal agreement for a borrower to repay a loan.

QUITCLAIM DEED

A deed that transfers ownership without any guarantees or warranties. It is used to remove any clouds on a title (for instance, due to un-released mortgages). Quitclaims are also commonly used in cases of mortgage fraud such as property flipping.

RATE LOCK

A lender’s guarantee that the interest rate quoted will be good for a specific number of days from the day the lock is applied.

REVERSE MORTGAGE

A form of mortgage in which the lender makes scheduled periodic payments to the borrower using the borrower’s equity in the home as security for the loan with repayment deferred until the occurrence of certain events such as death or the selling of the home.

REVOLVING DEBT

A type of credit arrangement in which a consumer is pre-approved for a line of credit and they may make purchases against that credit. Credit cards are a common form of revolving credit.

UNDERWRITING

The process of evaluating a loan applicant’s financial information and facts about the real estate used to secure a loan to determine whether a potential loan is an acceptable risk for a lender.

UNENCUMBERED PROPERTY

Real Estate with free and clear title.