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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 pre-selected 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.
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.
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.
Government National Mortgage
Association
(GNMA)
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.
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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.
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.
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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.
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.
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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."
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.
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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.
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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.
X
Y
Z
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