Mortgage Terms

Adjustable Rate Mortgage:  A mortgage in which the interest rate and payment changes periodically over the life of the loan based on changes in a specified index.  These changes are usually subject to a cap.

Alt-A:  A mortgage risk categorization that falls between prime and sub-prime, but is closer to prime also known as "A minus".

Amortization:  The payment of a mortgage loan through monthly installments of principal and interest.  The monthly payment amount is based on a schedule that will allow you to own your home at the end of a specific time period (for example 30 years).  Initially, most of the payment goes to interest but over time more and more of the payment goes towards principal until it is all paid off.

Annual Percentage Rate (APR):  The APR is a calculation based on a government formula designed to reflect the true annual cost of borrowing expressed as a percentage.  It includes the interest, points, mortgage insurance, and other various fees associated with the loan.  The rate is also adjusted for the time value of money, meaning that dollars paid by the borrower early on carry a heavier weight than dollars paid years later.  An important note, the APR is calculated on the assumption that the loan completes its full term, and is therefore potentially deceptive for borrowers who intend to sell early.

Appraisal:  A report that estimates the property's fair market value based on an analysis of the sales of comparable homes in the same area.  An appraisal is required by your lender and must be made by a qualified appraiser.

Balloon Mortgage:  A mortgage that typically offers low rates for an initial period of time (usually less than 10) years, and then requires that the balance is due or is refinanced by the borrower.  The loan is typically amortized as if it would be paid over a thirty year period to keep monthly payments low. 

Buy Down:  A permanent buy-down is the payment of points in exchange for a lower interest rate.  A temporary buy-down concentrates the rate reduction in the early years.

Cap:  The limit on an adjustable rate mortgage that the payment or interest rate can be increased or decreased during each adjustment (6 or 12 months).  Some ARMs also have a lifetime cap.

Cash-Out refi:  Refinancing for an amount in excess of the balance on the old loan plus settlement cots.  The borrower takes "cash-out" of the transaction.  This way of raising cash is usually an alternative to taking out a home equity loan.

Closing:  On a home purchase, the process of transferring ownership from the seller to the buyer, the disbursement of funds from the buyer and the lender to the seller, and the execution of all the documents associated with the sale and the loan.  On a refinance, there is no transfer of ownership, but the closing includes repayment of the old lender.

Closing Costs:  Costs that the borrower must pay at the time of closing, in addition to the down payment.  There are two categories of closing costs "non-recurring closing costs" and "pre-paid items."  Non-recurring closing costs are any items which are paid just once such as origination fees, discount points, attorney's fees, credit report, title insurance and survey.  "Pre-paids" are costs which recur during your loan, like property taxes and homeowners insurance.  Your lender will estimate the amount of non-recurring closing costs and prepaid items on the Good Faith Estimate  which must be issued to you within three days of receiving a home loan application. 

Co-Borrowers:  One or more persons who have signed the note, and are equally responsible for repaying the loan.  Unmarried co-borrowers who live together are advised to agree beforehand on what happens if they split.

Conforming Loan:  A mortgage loan which conforms to all of the guidelines and is therefore eligible for purchase by the two major federal agencies that buy mortgages which are Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC).

Construction Financing:  The method of financing used whan a borrower contracts to have a house built, as opposed to purchasing a comleted house. 

Credit Scoring:  An unbiased way of deciding who should receive credit.  Weights or scores are associated with your personal credit attributes, your income, debt and the time spent at your current address.  These scores are added to give a total credit score.  The total credit score is a prediction of how likely a person with that score is to default on their loan. 

Credit Report:  A report from a credit bureau containing detailed information bearing on credit-worthiness, including the individual's credit history.

Debt Consolidation:  Rolling short-term debt into a home mortgage loan, either at the time of purchase or refinance loan.

Discount Points (or Points):  The amounts paid to the lender (based on percentage of the loan amount) to buy down the interest rate.  Each point charged represents one percent of the loan amount; for example, one point on a $100,000 mortgage is $1,000.  In general, paying one point on a 30 year fixed mortgage reduces your interest rate 1/8 (.125) of a percent.

Equity:  In connection with a home, the difference between the value of the home the balance of outstanding mortgage loans on the home.

Fannie Mae (FNMA):  The nickname for Federal National Mortgage Association.  Fannie Mae is a congressionally chartered and shareholder-owned company that is the nation's largest source of financing for home mortgages.

Federal Housing Administration (FHA):  An agency of the US department of Housing and Urban Development (HUD).  They mainly insure residential mortgage loans made by private lenders.  They also set the standards for construction and underwriting but do not plan or construct housing nor lend money.

Fixed Rate Mortgage (FRM):  A mortgage on which the interest rate and monthly mortgage payment remain unchanged throughout the term of the mortgage. 

Float:  Allowing the rate and points to vary with changes in market conditions.  The borrower may elect to lock the rate and points at any time but must do a few days before the closing.  Allowing the rate to float exposes the borrower to market risk, and also to the risk of being taken advantage of by the loan provider.

Freddie Mac:  A common nickname for Federal Home Loan Mortgage Corporation (FHLMC).  They are a federally chartered corporation that purchases residential mortgages, and then sells and insures securities based on the mortgages to investors.

Gift of Equity:  A sales price below market value, where the difference is a gift from the seller to the buyers.  Such gifts are usually between family members.  Lenders will usually allow the gift to count as a down payment.

Good Faith Estimate:  A written estimate provided by the lender of the closing costs a borrower is likely to pay at settlement.  This estimate must be provided to all loan applicants within three business days after a loan application is received.

Hazard Insurance:   Insurance to protect the homeowner and the lender against physical damage to a property from fire, wind, vandalism, and certain other natural causes.  Mortgage lenders often require the borrower to carry an amount of hazard insurance on the property that is at least equal to the amount of the loan amount.

Home Equity Line of Credit (HELOC):  A mortgage set up as a line of credit against which a borrower can draw a maximum amount, as opposed to a loan for a fixed dollar amount.  For example, using a standard mortgage you might borrow $150,000, which would be paid out in its entirety at closing.  Using a HELOC instead, you receive the lender's promise to advance you up to $150,000, in an amount at a time of your choosing.  You can draw on the line by writing a check, using a specical credit card, or in other ways.

Home Equity Loan (aka Second Loan):  A loan with a second-priority claim against a property in the event that the borrower defaults.  The lender who holds the second mortgage gets paid only after the lender holding the first mortgage is paid. 

Housing Expense Ratio:  The ratio of housing expense to borrower income, which is used (along with the total expense ratio and other factors) in qualifying borrowers.

Interest-Only Mortgage:  A mortgage on which for some eriod the monthly mortgage payment consists of interest only.  During that period, the loan balance remains unchanged.

Interest Rate:  The rate charged the borrower each period for the loan of money, by custom quoted on an annual bass.  A rate of 6%, for example, means a rate of 1/2% per month.  A mortgage interest rate is a rate on a loan secured by a specific property.

Jumbo Loan:  A loan that exceeds the legislated purchase limits of Federal National Mortgage Association (Fannie Mae) or Federal Home Loan Mortgage Corporation (Freddie Mac).  Also called a non-conforming loan.

Lease-to-Own Purchase:  A transaction in which a hopeful home buyer leases a home with an option to buy it within a specified period.

Loan to Value Ratio (LTV):  The loan amount divided by the value of the property expressed as a percentage.  Value is defined as the lower of sales price or appraised value of the property.  Generally, the lower the LTV the more favorable the terms of the programs offered by lenders.

Lock or Lock In:  A designated period of time during which a borrower and a lender have agreed to a specific interest rate.  Most locks are from 30 to 45 days.  This usually involves paying a fee to the lender.  Mortgage rates not "locked in" are subject to changing market conditions.   Under some conditions, if you lock and the rates drop, the better rate can be obtained.

Lock Period:  The number of days for which any lock or float-down holds.  Ordinarily, the longer the period, the higher the price to the borrower.

Mortgage:   A written document evidencing the lien on a property taken by a lender as a security for the repayment of a loan.  The term "mortgage" or "mortgage loan" is used loosely to refer both to the lien and the loan.  In most cases, they are defined in two separate documents: a mortgage and a note.

Mortgage-Backed Security (MBS):  A security backed by a group of mortgages issued by the Federal Home Loan Mortgage Corporation (FNMA) and the Federal National Mortgage Association (FHLMC).  Investors of mortgage backed securities receive payments derived from the interest and principal of the underlying mortgages.

Mortgage Insurance (MIP or PMI):  Insurance purchased by the buyer that covers the lender against losses incurred as a result of a default on a home loan.  This is generally required on all loans that have a loan-to-value higher the 80%.  Also, FHA loans and some first-time buyer programs require mortgage insurance regardless of the LTV.  Whe you have accumulated 20% of you home's value as equity, you can ask your lender to waive the PMI.

Negative Amortization:  A gradual increase in mortgage principal that occurs when the monthly payment is not large enough to cover the entire principal and interest due.  This shortfall is added to the outstanding balance to create "negative" amortization.

Non-Conforming Mortgage:   A mortgage that does not meet the purchase requirements of the two Federal agencies, Fannie Mae and Freddie Mac, because it is too large or for other reasons such as poor credit or inadequate documentation.

No Asset Loan:  A documentation requirement where the applicant's assets are not disclosed.

No Income Loan:  A documentation requirement wher ethe applicant's incomem is not disclosed.

Non-Warrantable Condo:  A condominium that does not meet lender requirements.

No-Ratio Loan:  A documentation requirement where the applicant's income is disclosed and verified but not used in qualifying the borrower.  The conventional maximum ratios of expense to income are not applied.

Option ARM:  An adjustable rate mortgage with flexible payment options, monthly interest rate adjustments, and very low minimum payments in the early years.  They carry a risk of very large payments in later years.

Origination Fee:  The fee that a lender charges you for processing a loan.  It is usually expressed as a percentage of the loan amount.  Unlike points, the origination fee doesn't impact the interest rate.  It doesn't usually include fees for appraisals, credit reports, inspections or loan document preparation.

Per Diem Interest:  Interest from the day of closing to the first day of the following month.  In some cases, however, the borrower can get a credit at closing by making the first payment a month earlier.

Piggyback Mortgage:  A combination of a first mortgage for 80% of property value, and a second for 5%, 10%, 15%, or 20% of value.  These combinations are designated 80/5/15, 80/10/10, 80/15/5, and 80/20/0, respectively.  Piggybacks are a substitute for mortgage insurance for borrowers who cannot put 20% down.

PITI:  Stands for principal, interest, taxes and insurance which are the four components of your monthly mortgage payment.  The payments of principal and interest go directly towards repaying the loan while the taxes and insurance (homeowner's and PMI) goes into an escrow account to be paid on your behalf when they are due.

PMI:  Private mortgage insurance, as distinguished from insurance provided by the government under FHA and VA.

Pre-approval:  A commitment by a lender to make a mortgage loan to a specified borrower prior to the identification of a specific property.  It is designed to make it easier to shop for a house.  Unlike pre-qualification, the lender checks the applicant's credit.

Prepayment Penalty:  A fee charged by a mortgage lender to a borrower who wants to pay off part or all of a mortgage loan in advance of schedule.  The charge is generally expressed as a percent of the loan balance at the time of prepayment, or it can be a specified number of months interest.  It is not allowed for FHA or VA loans.

Pre-qualification:  The process of determining whether a prospective borrower has the ability, meaning sufficient assets and income, to repay loan.  Qualification is short of approval because  it does not take account of the credit history of the borrower.  Qualified borrowers may ultimately be turned down because, they have demonstrated the capacity to repay, a poor credit history suggests that they may be unwilling to pay.

Qualification Requirement:  Standards imposed by lenders as conditions for granting loans, including maximum ratios of housing expense and total expense to income, maximum loan amounts, maximum loan-to-value ratios, and so on.  Less comprehensive than underwriting requirements, which take account of the borrowers record.

Refinance:  Paying off a new loan while simultaneously taking a new one.  This may be done to reduce borrowing costs under conditions where the borrower can obtain a new loan at an interest rate below the rate on the existing loan.  This may be done to raise cash, as an alternative to a home equity loan.  Or it may be done to reduce the monthly payment.

RESPA:  The Real Estate Settlement Procedures Act, a Federal consumer protection statute first enacted in 1974.  RESPA was designed to protect home purchasers and owners shopping for settlement services by mandating certain disclosures, and prohibiting referral fees and kickbacks.

Reverse Mortgage:  A loan that enables elderly homeowners, to use their home's equity without selling their home or moving from it.  A lending institution makes a check out to the homeowners each month.  This payment is really a loan against the value of a home.  Because the payment is a loan, it's tax-free when the homeowners receive it.  These loans are non-recourse.

Second Mortgage:  A loan with a second-priority claim against a property in the event that the borrower defaults.  The lender who holds the second mortgage gets paid only after the lender holding the first mortgage is paid.

Seller Contribution:  A contribution to a borrower's down payment or settlement cost made by the home seller, as an alternative to a price reduction.

Settlement Costs:  Costs that the borrower must pay at the time of closing, in addition to the down payment.

Short Sale:  An agreement between a mortgage borrower in distress and the lender that allows the borrower to sell the house and remit the proceeds to the lender. It is an alternative to foreclosure, or a deed in lieu of forclosure.

Stated Assets:  A documentation requirement where the borrower discloses her or his assets but they ae not verified by the lender.

Stated Income:  A documentation requirement where the lender verifies the source of the income but not the amount.

Subordinate Financing:  A second mortgage on the property which is not paid off when a new loan is taken out.  The second mortgage lender must allow subordination of the second to the new first mortgage.

Subordination Policy:  The policy of a second mortgage lender for allowing a borrower to refinance the first mortgage while leaving the second in place.

Term:  The period used to calculate the monthly mortgage payment.  the term is usually but not always the same as the maturity.  On a 7-year balloon loan for example, the maturity is 7 years but the term in most cases is 30 years.

Title Insurance:  Insurance that protects lenders and homeowners against financial loss in a property because of legal disputes over the ownership of a property.

Total Expense Ratio:  The ratio of housing expense plus current debt service payments to borrower's income, which is used (along with the housing ratio and other factors in qualifying borrowers.

Truth-in-Lending (TIL):  The Federal law that specifies the information that must be provided to borrowers on different types of loans.  It is also the form used to disclose this information.

Underwriting:  The process of analyzing a loan application to determine the amount of risk for the lender making the loan.  Underwriting involves evaluating the borrower's creditworthiness and the property itself and then selecting the appropriate loan term and interest rate.

Underwriting Requirements:  The standard imposed by lenders in determining whether a borrower qualifies for a loan.  These standards are more comprehensive than qualification requirements in that they include an evaluation of the borrower's creditworthiness.

Variable Rate:  In a variable interest loan, the interest rate changes periodically in relocation to an index.  For example, the interest rate might be linked to the cost of US Treasury Bills and be updated monthly, quarterly, semi-annually, or annually.

VA Loan:  A loan backed by the U.S. Department of Veterans Affairs (VA).  VA loans are made to honorably discharged veterans to their unmarried widows or widowers.  These loans require low or no down payment and offer low interest rates.

100% Loan:  A loan with no down payment.  The loan amount equals the property value.