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Adjustable-Rate Mortgage (ARM): A mortgage loan that has a fluctuating interest rate based on a particular interest rate index. There are advantages and disadvantages to this type of loan. The lender may offer an initial discount on the interest rate index that would make the loan less expensive than a traditional fixed rate mortgage. The loan payment, however, can go up or down depending on the economy and the particular interest rate index making the actual loan payment unpredictable.
Amortization: The process of gradually reducing debt such as a mortgage by making regular payments over a specific period of time. The scheduled payments must be sufficient to cover principal and interest.
Annual Percentage Rate (APR): This is an interest rate that reflects the cost of a mortgage as a yearly rate. The APR is to be used by homebuyers as a reference point in order to compare different types of mortgages based on the annual cost of each loan. It is usually higher than the stated note rate due to the fact that it takes into account points and other credit costs.
Appraisal: A formal report done by a professional appraiser that states the current market value of a home. A property appraisal is usually required in order to obtain a mortgage loan.
Assumable Mortgage: A loan that can be transferred from the current homeowner to a homebuyer when the home is sold. An assumed mortgage can usually save the buyer because obtaining a new mortgage requires closing costs and most likely higher market rate interest charges.
Balloon Mortgage: A type of mortgage loan with a fixed rate that is usually short term. At maturity, the loan must be paid off in cash or refinanced. The advantage is that the initial rate is usually lower than a regular fixed rate loan. However, a disadvantage is that you may have to refinance or pay off the loan if the home is not sold by the time the loan matures.
Buy-down: To pay additional points to reduce the monthly mortgage rate. This can be a temporary buy down which reduces the mortgage the first few years or a permanent buy down to reduce the interest rate the entire life of the mortgage. A lender or homebuilder can also subsidize the mortgage by lowering the interest rate for the first few years to make the initial payments low.
Closing: A meeting between a buyer, seller, and lender to legally exchange property and funds.
Closing Costs: At the time of closing, closing costs can include an origination fee, discount points, appraisal fee, insurance, title policy, survey, taxes, title search, deed recording fee, credit report charge and any other costs incurred. These costs are usually between 3 and 6 percent of the mortgage amount.
Contingency: A condition that must be met before a contract is legally binding. For example, homebuyers often include a contingency that specifies that the contract is not binding until they sell their current home or until there is a satisfactory home inspection on the home they are buying.
Contract: An agreement between two or more people, or entities, that represents a legal commitment.
Conventional Loan: A mortgage loan that is not guaranteed or insured by the government.
Debt-to-Income Ratio: This is a formula that calculates how much of a monthly mortgage payment a person can afford. It represents the sum of all monthly debt including a monthly mortgage payment divided by total monthly income. It is expressed as a percentage. Usually debt ratios of 36-38% are acceptable for Conventional Loans, 41-43% for FHA Loans, and 41% for VA Loans.
Default: Failure to pay monthly mortgage payments on time.
Down Payment: Money that is paid by the homebuyer for the difference in the purchase price of the home and the loan amount. It is usually paid in cash.
Earnest Money: Money that is given to the seller by a homebuyer that demonstrates the intention to complete the purchase of the home. The earnest money is applied towards the down payment when the home is closed. If the sale does not close, the earnest money will be forfeited unless the binder specifically states otherwise.
Equity: The amount of your home that you own outright. For example, a 40 percent down payment would mean that you have 40 percent equity in your home.
Escrow: An account held by the lender that is funded by the homebuyer to pay for property taxes, homeowner’s insurance, mortgage insurance, and any special assessments. The funds should be adequate to cover anticipated yearly expenditures.
FHA (Federal Housing Authority) Loan: This is a type of government loan that is insured by the Federal Housing Administration. An FHA loan is open to all qualified homebuyers; however, the size of these loans are limited.
FHA Mortgage Insurance: A small fee required at closing or a portion of the fee is added to each monthly payment to insure the loan with FHA. An annual fee of up to .5 percent of the current loan amount is then paid in monthly installments. The lower the down payment, the more years the insurance fee must be paid.
Homeowner’s Insurance: A multiple peril insurance policy for homeowners that covers the home and contents in the case of fire or wind damage, theft, liability for property damage and personal liability.
Interest: A specific amount of money that is charged for use of the borrowed money. Expressed as a percentage of the money borrowed.
Lein: A claim by one person or entity on a property owned by another as security for a debt.
Lock in Rate: A guaranteed interest rate that is set for a specific amount of time. This rate is for a future loan and the lock in time period is usually between 1-3 months. A fee is usually required by the lender to lock in the rate.
Margin: The amount a lender adds to the index to produce an adjusted interest rate.
Market Value: The price a buyer is willing to pay and the seller is willing to accept for a home. This market value can be different than the actual price of the property at any given time.
Mortgage: A loan for the purchase of real estate.
Mortgage Insurance: Insurance that protects the lender from a borrower’s default on a loan.
Mortgagee: A lender.
Mortgagor: A homebuyer, borrower.
Origination Fee: A fee charge by a lender for preparation of loan documents. This process can include credit checks, inspections, and property appraisals. It can be represented as a percentage of the face value of the loan.
PITI: Abbreviation for principal, interest, taxes, and insurance. The items included in a mortgage payment.
Points: A fee paid at the time of closing by the mortgagor to the lender to lower the mortgage rate. One point equals one percent of the total mortgage amount.
Private Mortgage Insurance (PMI): Lenders require borrowers to carry this insurance when they make a down payment less than 20%. It may involve an initial premium payment and then an additional monthly fee.
Recording Fees: The borrower pays this fee to the lender for recording the home sale with the local authorities, which makes it public record.
Survey: A licensed surveyor prepares this document that shows the land location, improvements, elevations, boundaries, and the relation between it and the surrounding area.
Title: A document that represents the rights of ownership of a particular property.
Title Insurance: A policy issued by a title insurance company that protects lenders or homeowners from loss of their interest in a property due to errors in a title.
Underwriting: This is the process of analyzing the risk a lender would assume by granting a particular borrower a loan. Underwriters evaluate the property and the borrower’s ability and willingness to repay a loan.
Veteran’s Administration (VA): An independent agency of the federal government, created in 1930. The VA home loan guaranty program is designed to encourage lenders to offer long-term, low down payment mortgages to eligible veterans by guaranteeing the lender against loss.