A
Adjustable Rate Mortgage (ARM)
Also known as a Variable Rate Mortgage, this is a mortgage loan where the interest rate can be adjusted on a periodic basis. The lender cannot adjust the interest rate randomly. The terms of the adjustment calculation are defined in your Note.
Annual Percentage Rate (APR)
The effective interest rate that you pay on your loan when accounting for the impact that up-front fees have on your lifetime borrowing costs.
B
Balloon Payment
A payment due at the end of a loan term when you have not fully amortized the principal balance. (You have not paid the loan down to a zero balance.)
Blended Interest Rate
The effective interest rate that you pay when you have two loans, each at a different interest rate from the other. Your blended interest rate is equivalent to what your interest rate would be if you had one loan with a principal balance equal to the sum of your current loans, and paid the annual interest on your one loan that you do now on two.
Bridge loan
A form of second trust that is collateralized by the borrower’s present home (which is usually for a sale) in a manger that allows the proceeds to be used for closing on a new house before the present home is sold
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
Buyer’s Market
Describes a market condition where there are more homes for sale than there are buyers. In a buyer’s market buyers tend to have more negotiating power than sellers.
C
Cash-Out Refinance
Refinance where the primary purpose is to access the equity in your home by pulling cash out. Your new loan amount will be higher than the loan you are paying off. Pulling cash out can also be achieved with an equity loan or equity line.
Certificate of Eligibility
Used to verify that you are eligible for a VA-back loan.
Closing
This is the last step before financing the home. You will receive the Closing Disclosure and then schedule a time with Escrow/Title to sign documents from the lender.
Closing costs
Expenses (over and above the price of the property) incurred by buyers and sellers in transferring ownership of a property.
Closing Disclosure
Like the Loan Estimate, except you receive this towards the end of your transaction. It should include your projected monthly payments and total closing costs. This is a time sensitive documents, you have a three-day window to compare to the Loan Estimate you received and ask your lender any questions before you close.
Compounding, Compound Interest
The principle that over time the interest earnings on an investment accelerate if you leave it in the investment. You earn interest on your initial investment, and then in the future you earn interest on your initial investment plus the interest you’ve earned.
Condominium
Individual ownership of a dwelling unit and an individual interest in the common areas and facilities, which serve the multi-unit project.
Conforming Loan
A mortgage loan which conforms to the underwriting standards published by Fannie Mae or Freddie Mac. These loans generally are sold to one of these two agencies.
Contingency
A condition that must be met before a contract is legally binding.
Conventional Mortgage
Any mortgage that is not insured or guaranteed by the federal government.
Consumer Financial Protection Bureau
A federal bureau that writes and enforces regulations having to do with consumer finance products of all types. See www.consumerfinance.gov.
D
Debt Consolidation Loan
A loan used to pay off more than one loan – to consolidate two existing loans into one new loan. These are usually sold using a lower monthly payment as an enticement but can end up costing more in interest over a lifetime.
Deed of Trust
The instrument used in many states in lieu of a mortgage with which you pledge your home as collateral for the loan. In a deed of trust you literally deed your home to a trustee, who can then sell your home without court action in the event of a default.
E
Equity
The Difference between market value of the property and the outstanding mortgage balance.
Equity Line
An open line of credit secured by your real estate. Equity lines are usually secured junior to a conventional mortgage.
Equity Loan
A loan of a fixed term used to pull cash out of your real estate. An equity loan is usually secur3ed junior to a conventional loan.
Escrow Account
An account set up by your lender to deposit monthly payments towards taxes and insurance that are included with your loan payment. When your tax and insurance bills come due the lender pays these bills out of your escrow account. These accounts are typically optional if you have more than 20% equity in your property. See also Impound Account.
Estimated Closing Statement
A statement of charges prepared by the escrow company in their own format. The actual itemization of charges should reflect those disclosed in the HUD1, but typically in a more readable format.
Estimated Settlement Statement
The HUD1 is an accounting of all the charges you will pay in escrow for the cost of the loan, title, escrow, recording fees, and all other fees associated with getting the loan, as well as ongoing fees (such as insurance and taxes) that are due on a recurring basis but some of which are due in escrow. You are given an estimated settlement statement before closing for review, and a final settlement statement after close of escrow to audit your actual charges.
F
Fannie Mae
Fannie Mae is a government-owned (as of this writing) organization that purchases pools of mortgages originated, underwritten and funded by mortgage brokers, mortgage bankers, banks or credit unions. By purchasing pools of mortgages Fannie Mae provides liquidity to the mortgage banks to fund more loans, thus making more money available to consumers to purchase homes.
Final Settlement Statement (HUD1)
The HUD1 is an accounting of all the charges you will pay in escrow for the cost of the loan, title, escrow, recording fees, and all other fees associated with getting the loan, as well as ongoing fees (such as insurance and taxes) that are due on a recurring basis but some of which are due in escrow. You are given an estimated settlement statement before closing for review, and a final settlement statement after close of escrow to audit your actual charges.
Freddie Mac
Freddie Mac is a government-owned (as of this writing) organization that purchases pools of mortgages originated, underwritten and funded by mortgage brokers, mortgage bankers, banks or credit unions. By purchasing pools of mortgages Freddie Mac provides liquidity to the mortgage banks to fund more loans, thus making more money available to consumers to purchase homes.
Fully-indexed rate
When the interest rate on your adjustable-rate loan is ready to be adjusted, the lender takes the value of the then-current index and adds the margin to determine your fully-indexed rate. This is your new interest rate for the next period. (Usually one year.)
G
Government-Sponsored Entities (GSEs)
GSE refers to organizations that purchase loans from mortgage banks that assemble large portfolios. These entities are part of, or are backed by the U.S. government. They are known as Fannie Mae, Freddie Mac, and their lesser-known cousin, Ginnie Mae.
Great Recession
History will inform us more thoroughly about exact dates, but is technically recognized as a period of contraction (or negative economic growth) from December of 2007 through mid-2010. Experientially, however, most people would agree the effects have lasted much longer than that.
H
I
Impound Account
An account set up by your lender to deposit monthly payments towards taxes and insurance that are included with your loan payment. When your tax and insurance bills come due the lender pays these bills out of your escrow account. These accounts are typically optional if you have more than 20% equity in your property. See also Escrow Account.
Initial Adjustment Cap
The maximum (in terms of percentage) that the interest rate on your adjustable-rate mortgage can increase on the very first periodic adjustment. Most commonly the initial adjustment cap today is 2%, meaning that your interest rate cannot adjust – down or up – more than 2% from the initial start rate on the first adjustment.
Interest-Only Mortgage
A mortgage where your minimum payment is only the interest which accrues each month. If you make only the minimum payment you will be paying no principal on the loan, and thus your principal balance will remain the same. Interest-only mortgages have a specified time period during which you make interest-only payments, and then you must make fully-amortized payments.
Interest Rate Floor
Defined in your Note, the interest rate floor is an interest rate that your adjustable-rate loan cannot go below. This is most often found in equity lines.
J
K
L
Lender-Paid Mortgage Insurance
Mortgage insurance where the premiums are not visible to you, as they are paid by the lender rather than by you. However, the lender charges a premium in the interest rate in order to pay for the insurance, so you pay for it but in a different way than you are used to.
Leverage
The principal that increases your return on the money you’ve invested in your home. Since you own maybe 20% of your home when you buy it but 100% of the home is appreciating, you are making money on the bank’s investment too.
Lifetime Adjustment Cap
The maximum (in terms of percentage) that the interest rate on your adjustable-rate mortgage can increase over the life of your loan. Most commonly today the lifetime cap is 5%, meaning that the interest rate can never exceed your initial interest rate plus 5%.
Loan Estimate
This must be provided by the lender within 3 days of receiving your application. The estimate will provide you with information regarding your loan, including estimated monthly payment, closing costs and interest rate. This is just an estimate, you will receive a Closing Disclosure before you close.
Loan-to-value ratio
Literally, the ratio of the loan amount to the appraised value of the property. This is one of the key measures of the quality of a loan from the lender’s perspective because, in the event that you are unable to make payments and default on the loan, they will foreclose on your home and sell it at auction to recover the money. The more equity you have in your home, the more likely they are to recover all of their money when they foreclose.
Lock, Locking, Interest-Rate Lock
The process whereby you lock in an interest rate at a set price for a given period of time.
M
Margin
The amount the lender adds to the index when determining your fully-indexed rate when your adjustable-rate mortgage comes up for adjustment.
Mortgage Banker
- A company that uses funds on hand to fund loans at closing. These companies might have retail loan officers, or they may work with mortgage brokers who originate loans and submit them to the mortgage banker for underwriting and funding. A mortgage banker might have their own internal funds, but more likely carries a line of credit from a major financial institution and draws on that line of credit to fund loans. A mortgage banker then packages these loans together and sells them to a pre-determined investor. The underwriting guidelines used by the mortgage banker are developed by this investor.
- A person who originates loans and works for the company above.
Mortgage Broker
- A company that originates mortgage loans but does not underwrite or fund the loans. A mortgage broker takes a loan application, qualifies the borrower, gathers and verifies documentation of income, assets and credit, and then assembles a loan file and submits it to a mortgage banker for underwriting and, once approved, funding.
- A person who originates loans and works for the company above.
Mortgage Limit
The maximum amount you may access on a reverse mortgage, or Home Equity Conversion Mortgage
N
Negative amortization loan, or Neg-Am (Same as Option ARM)
An adjustable-rate mortgage where the initial minimum payment is very low; so low, in fact, that it doesn’t cover the accruing interest. The loan negatively amortizes, meaning that the principal balance of the loan increases rather than decreases over time (at least for a while.) This loan was more commonly called an Option ARM during the Mortgage Financing Boom and is not available today.
Non-Conforming Loan
A mortgage loan which does not conform to the underwriting standards published by Fannie Mae or Freddie Mac. These loans generally are not sold to one of these two agencies.
Note
The legal agreement between you and your lender, in which the lender promises to lend you the money and you promise to pay it back under very specific terms.
Note Rate
The interest rate defined in your Note. This is the actual interest rate that you pay on your loan, without accounting for the impact of fees on your lifetime loan costs.
O
Option ARM (Same as Negative Amortization Loan)
An adjustable-rate mortgage where the initial minimum payment is very low; so low, in fact, that it doesn’t cover the accruing interest. The loan negatively amortizes, meaning that the principal balance of the loan increases rather than decreases over time (at least for a while.) This loan was originally called a negative amortization loan, or neg-am, and is not available today.
P
Periodic Adjustment Cap
The maximum (in terms of percentage) that the interest rate on your adjustable-rate mortgage can increase on periodic adjustment dates after your initial interest rate adjustment. Most commonly the periodic adjustment cap today is 2% if your loan adjusts annually, or 1% if it adjusts every six months.
Pre-Paid Interest
Interest charges paid in advance when you close escrow on your new loan to “cycle you up” to the first of the upcoming month. If you pay pre-paid interest you will not have to make a payment the first full month that you have your new loan.
Principal, Interest, PITI
Refers to your monthly payment when used this way. The principal is the amount of your monthly payment that goes to reduce principal each month. Interest is the amount that goes to the accrued interest that is now due. PITI stands for Principal, Interest, Taxes and Insurance, and is often used as shorthand for “Your mortgage payment plus impounds.”
Point(s)
The price you pay to the lender to “buy” a lower interest rate. These are also known as “discount points” as they compensate the lender for discounting the interest rate to you. One point is equal to 1% of the loan amount.
Pre-payment penalty
A term in a note that protects the lender against the loss of anticipated interest resulting when you pay the loan off early. Today on a primary residence a pre-payment penalty cannot be effective for more than five years, and the maximum allowable penalty by law is a penalty equal to six month’s interest.
Principal / Principal Balance
The amount that you owe the bank; the current balance of your loan.
Processing Fee
A fee charged by the loan origination company (bank, mortgage banker or broker) to “process” the paperwork needed to complete the loan application. It is becoming more common for this fee to be built into the origination or discount fee and left off your closing statement as a separate line item.
Q
R
Rate and Term Refinance
Refinancing your mortgage in order to either reduce your interest rate, or to change the terms of your loan to accomplish a specific goal.
Reverse Mortgage
A mortgage product for seniors with which you may access the equity in your home via a lump-sum payment, scheduled payments, or an equity line without having to make payments on the loan. The principal balance grows until you pay the loan off, typically when you no longer live in the home.
S
Settlement Charges
All of the charges in escrow charged in escrow or before for all lender and bona fide third party charges such as appraisal, title insurance, escrow fees, notary fees, etc.
Stated-Income Loan
A loan where you do not have to document your income to the lender in order to qualify for the loan. Once common, this is a rare product today and is becoming harder to do while staying compliant with current regulations.
T
Teaser Rate
Also known as an introductory rate, a teaser rate is an initial interest rate on adjustable-rate loans that is meant to entice you to take the loan. This rate is usually only valid for a short period of time, after which your Note rate, or permanent rate becomes effective.
U
Underwrite
The process used by a mortgage banker, bank or credit union to determine if your loan application meets the criterion set for a specific loan program. The underwriting process yields one of our possible results:
- An approval of the loan,
- A conditional approval – meaning the loan is approved subject to certain conditions being met,
- A suspense, meaning that the underwriter believes the loan does not qualify for the program but is willing to review more documentation to review it, or
- A denial.
Underwriting Guidelines
Investors, Fannie Mae, Freddie Mac, or Wall Street investment banks develop underwriting criterion and solicit Mortgage Bankers to find the loans that meet the criterion for the program they have in mind.
V
Veterans Affairs (VA) Loan
A Loan Program for those with a Certificate of Eligibility from the U.S Department of Veterans Affair. These loans are available with low or zero down payments and do not require monthly mortgage insurance.
W
Wholesale Lender
A wholesale lender is any lender that works with brokers to offer its products to consumers. Brokers originate the loans and submit a complete loan package to the wholesale lender, who underwrites, approves, and funds the loan, and then pools many mortgages together and sells the pool to raise funds. A wholesale lender might be purely a wholesale lender with no retail loan officers of its own, or it may be a mortgage banker who both works with brokers and who has a retail loan origination staff, or could even be a bank or a credit union, with or without its own retail loan officers.