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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.
7/23 and 5/25 Mortgages
Mortgages with a one time rate adjustment after seven years and five years respectively.
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)
A mortgage in which the interest rate is adjusted periodically based on a pre-selected index. Also sometimes known as a renegotiable rate mortgage, variable rate mortgage or Canadian rollover mortgage.
The cost of a property plus the value of any capital expenditures for improvements to the property minus any depreciation taken.
The date that the interest rate changes on an adjustable rate mortgage (ARM).
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.
The period elapsing between adjustment dates for an adjustable rate mortgage (ARM).
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 you plan to use, the area where you want to purchase a home, and the closing costs that are likely.
Loan payment divided into equal periodic payments calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance.
The length of time required to amortize the mortgage loan expressed as a number of months. For example, 360 months is the amortization term for a 30-year fixed rate mortgage.
Annual Percentage Rate (APR)
The 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 different loans.
Annual Percentage Yield (APY)
A precisely calculated measure of yield paid on a bank deposit account.
An estimate of the value of property made by a qualified professional called an “appraiser.”
opinion of a property’s fair market value, based on an appraiser’s knowledge, experience, and analysis of the property.
To grow in value. Usually a term used in relation to investments (stocks) or collectibles (old stamps, baseball cards, rare coins, etc.) that are now worth more than you originally paid for them.
A local tax levied against a property for a specific purpose, such as a sewer or street lights.
Any item of value that you own: house, property, jewelry, stocks, bonds, money in savings, etc.
The transfer of a mortgage from one person to another.
An assumable mortgage can be transferred from the seller to the new buyer. Generally requires a credit review of the new borrower and lenders may charge a fee for the assumption. If a mortgage contains a due on sale clause, it may not be assumed by a new buyer.
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.
The fee paid to a lender (usually by the purchaser of real property) when an assumption takes place.
Automatic Clearing House (ACH)
The ACH network is a nationwide electronic funds transfer system for participating depository financial institutions. The American Clearing House Association, Electronic Payments Network, Federal Reserve and Visa act as ACH Operators, central clearing facilities through which financial institutions transmit or receive ACH debits and credits. The ACH network serves 20,000 financial institutions, 3 million businesses, and 100 million individuals. The ACH Network is commonly used for direct deposit of payroll and government benefits such as Social Security, direct payment of consumer bills, business-to-business payments, federal tax payments, and, increasingly, e-commerce payments.
Automatic Teller Machine (ATM)
A computer terminal for user initiated banking transactions.
1) In talking about loans, the balance is the difference between the original amount owed and the amount paid on the loan to date. In other words, the money you still have to pay. 2) In talking about checkbooks, balancing means to account for all money that came into and went out of your account. 3) In talking about savings, your balance is what is left in your savings account after you deposit or withdraw money.
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 or seven year term. 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.
The final lump sum paid at the maturity date of a balloon mortgage.
A state of being in so much debt that you are legally declared unable to pay in full the people and companies you owe. In some states, declaring bankruptcy means you must sell all your possessions and pay off your debts as best you can.
A unit of measurement for interest rates or yields that is expressed as a percentage. One-hundredth of one percent. One hundred basis points equal one percent.
Biweekly Payment Mortgage
A plan to reduce the debt every two weeks (instead of the standard monthly payment schedule). The 26 (or possibly 27) biweekly payments are each equal to one half of the monthly payment required if the loan were a standard 30-year fixed rate mortgage. The result for the borrower is a substantial savings in interest.
A mortgage covering at least two pieces of real estate as security for the same mortgage.
One who applies for and receives a loan in the form of a mortgage with the intention of repaying the loan in full.
A short-term loan to enable the borrower to purchase an asset where the loan is to be repaid from the proceeds of the sale of an asset being replaced by the asset just purchased. In consumer loans bridge loans may be used to enable the consumer to buy a new house before selling her current house. Also commonly used investment banking for project finance, buyouts and other large transactions.
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.
A plan you create for controlling spending and encouraging saving.
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.
A lending and credit analysis term that describes a borrower’s or applicant’s ability to meet debt service obligations. One of the four Cs of credit used to establish a credit score.
Consumer safeguards which limit the amount of change to the interest rate for an adjustable rate mortgage.
The amount of cash derived over a certain period of time from an income producing property. The cash flow should be large enough to pay the expenses of the income producing property (mortgage payment, maintenance, utilities, etc…).
Certificate of Deposit (CD)
A type of investment that requires you to invest money for a certain length of time and guarantees the same rate of return (interest) for that entire period. CDs usually require a minimum deposit.
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 DADA (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.
The frequency (in months) of payment and/or interest rate changes in an adjustable rate mortgage (ARM).
To borrow money (from a store, service provider, or credit card company) to make a purchase. If you do not pay the debt off in full each month, you will pay interest on the amount you owe.
A booklet usually kept in your checkbook that you can use to keep track of all the deposits, withdrawals, and checks you write. After you record each transaction in your register, you subtract or add the amount to your checking account balance. If you keep your register updated, you will always know how much money you have in your checking account.
An account where you deposit money to fund the checks you write.
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.
Expenses over and above the price of the property that are 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 country and the lenders used.
An adjustable-rate mortgage with a rate that adjusts based on a cost-of-funds index, often the 11th District Cost of Funds.
(1) Property that a debtor has pledged, mortgaged, or assigned to a creditor. (2) Securities exchanges in a repo, reverse repo, buy/sellback, or sell/buyback. One of the four Cs of credit used to establish a credit score.
Community Reinvestment Act (CRA)
A federal statute enacted to require banks and savings and loan associations to meet the credit needs of their communities, including low- and moderate-income neighborhoods.
Interest on an investment that is calculated not only on the amount originally invested, but also on any interest the investment has already earned. For example, if you invest $100 dollars in a savings account and get 5% interest, after one period you will have $105. During the next period, you will earn interest on the $105 (not just on the $100 originally invested) and end up with $110.25.
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 or she progresses.
Consumer Reporting Agency (or Bureau)
An organization that handles the preparation of reports used by lenders to determine a potential borrower’s credit history. The agency gets data for these reports from a credit repository and other sources.
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.
A mortgage not insured by FHA or guaranteed by VA.
A provision in an ARM allowing the loan to be converted to a fixed-rate at some point during the term. Usually conversion is allowed at the end of the first adjustment period. The conversion feature may cost extra.
The most common form of organizing a business – the organization’s total worth is divided into shares of stock, and each share represents a unit of ownership and is sold to stockholders.
A loan that enables people to buy something now and to pay for it in the future. One of the four Cs of credit used to establish a credit score.
A record of your borrowing and paying habits. Credit reporting companies track your history and supply this information to credit card companies, financial institutions, and other lenders. One of the four Cs of credit used to establish a credit score.
The highest amount you may charge on a credit card. Your limit is set by your card company’s opinion of your ability to handle debt.
A “score” that a credit agency assigns you based on your ability to manage credit responsibility. Your credit rating depends upon factors such as on-time payments, age, and amount of debt accumulated.
A report documenting the credit history and current status of a borrower’s credit standing.
The risk to earnings or capital from the potential that a borrower or counterparty will fail to perform on an obligation. Usually, but not always, the obligation in question is a requirement to make interest or principal payments. Sometimes called default risk, the failure to make required payments reduces the value of equity securities, debt securities, and loans. In the extreme, credit defaults eliminate all or almost all of the value in loans or securities. Adverse consequences from credit risk are not restricted to default, the ultimate manifestation of credit risk. In addition, asset owners can suffer from reductions in value resulting from either real or perceived declines in the obligor’s financial strength. Both the Office of the Comptroller of the Currency (OCC) and the Federal Reserve list credit risk as one of their defined risk types for risk-based examinations. Credit risk exposure is found in all activities in which success depends on the performance of a counterparty, issuer, or borrower. Credit risk arises any time a financial institution extends, commits, invests, or otherwise exposes its funds through actual or implied contractual agreements, whether reflected on or off the balance sheet.
Credit Risk Score
A credit risk score is a statistical summary of the information contained in a consumer’s credit report. The most well known type of credit risk score is the Fair Isaac or FICO score. This form of credit scoring is a mathematical summary calculation that assigns numerical values to various pieces of information in the credit report. The overall credit risk score is highly relative in the credit underwriting process for a mortgage loan.
A card like a credit card that you can use to pay for things directly from your bank account without the paying interest. You have to have the funds in your account at the bank in order to spend them with your debit card.
Money or goods you owe.
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.
Deed of Trust
In many states, this document is used in place of a mortgage to secure the payment of a note.
(1) noun — A condition in which a loan or investment is not performing as expected because of the debtor’s failure to act or refrain from acting in ways contractually agreed upon. As in “the loan is in default” or “an event of default.” (2) verb — A debtor’s failure to act or refrain from acting in ways contractually agreed upon in the loan documents. Most often, default is the debtor’s failure to pay.
Failure to meet legal obligations in a contract, specifically, failure to make the monthly payments on a mortgage.
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.
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.
To put money into a checking, savings, or other investment account.
A system wherein amounts are transferred from a payor’s checking account to the accounts of payees no matter where they bank. The transfers are made electronically and do not require a paper check or draft.
A payment made by a company to a stockholder to share in the company’s profits.
Money paid to make up the difference between the purchase price and the mortgage amount.
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.
Wages paid in exchange for work.
Money given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment.
Electronic Funds Transfer (EFT)
An electronically based rather than paper-based system of transferring funds to and from accounts. Two main EFT remittance methods are wire transfers and automated clearing house (ACH).
A written statement on a document, usually on the back of the document, in which the owner assigns his rights to an individual or entity named in the endorsement.
The VA home loan benefit is called an entitlement (i.e. entitlement for a VA guaranteed home loan). This is also known as eligibility.
Equal Credit Opportunity Act (ECOA)
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.
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.
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.
The use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, and other property expenses as they become due.
The part of a mortgagor’s monthly payment that is held by the servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due.
Things you pay money for – both needs and wants.
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 Deposit Insurance Corporation (FDIC)
A federally sponsored corporation that insures accounts in national banks and other qualified institutions.
Federal Home Loan Bank Board (FHLBB)
The former name for the regulatory and supervisory agency for federally chartered savings institutions. The agency is now called the Office of Thrift Supervision.
Federal Home Loan Mortgage Corporation (FHLMC) also called “Freddie Mac”
A government sponsored entity 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.
A government sponsored entity that purchases and sells conventional residential mortgages as well as those insured by FHA or guaranteed by VA.
Federal Housing Administration. A government agency whose primary purpose is to insure residential mortgage loans.
A loan insured by the Federal Housing Administration open to all qualified home purchasers. While there are limits to the size of FHA loans, 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.
The Federal Home Loan Mortgage Corporation provides a secondary market for savings and loans by purchasing their conventional loans. Also known as “Freddie Mac.”
The fee you pay when you do not pay off the entire credit card debt within a single payment period, usually about 25-28 days.
A promise by FHA to insure a mortgage loan for a specified property and borrower. A promise from a lender to make a mortgage loan.
The primary lien against a property.
Expenses that stay basically the same from month to month, such as rent, transportation, and tuition.
The monthly payment due on a mortgage loan including payment of both principal and interest.
Fixed Rate Mortgage
The mortgage interest rate will remain the same on these mortgages throughout the term of the mortgage for the original borrower.
See Federal National Mortgage Association.
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.
See Federal Home Loan Mortgage Corporation.
Fully Amortized ARM
An adjustable rate mortgage (ARM) with a monthly payment that is sufficient to amortize the remaining balance, at the interest accrual rate, over the amortization term.
See Government National Mortgage Association.
Good Faith Estimate
A list of the fees and costs you will have to pay when you close on your home loan. It is required by the Real Estate Settlement Procedures Act, and a lender must provide it within three days of the date you apply for a mortgage. A good faith estimate doesn’t obligate you to any particular lender. It does give you good information with which you can “go shopping” for the best loan with the most reasonable settlement costs. Costs typically included in a Good Faith Estimate are: • Appraisal fee • Title search and insurance fees • Taxes • Inspections fees • Survey fees • Loan application fees • Costs of obtaining your credit report • Points and origination fees • Recording fees
Government National Mortgage Association (GNMA)
Also known as “Ginnie Mae.” Provides sources of funds for residential mortgages, insured or guaranteed by FHA or VA.
The time, usually about 25-28 days, which you have to pay a bill or a loan in full. If you pay within the grace period, you do not have to pay a finance charge.
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.
Growing Equity Mortgage (GEM)
A fixed rate mortgage that provides scheduled payment increases over an established period of time. The increased amount of the monthly payment is applied directly toward reducing the remaining balance of the mortgage.
A mortgage that is guaranteed by a third party.
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.
A form of insurance in which the insurance company protects the insured from specified losses, such as fire, windstorm and the like.
Home Equity Line of Credit (HELOC)
A credit line secured by a second deed of trust on a house. Equity lines of credit are revolving accounts that work like a credit card; they can be paid down or charged up for the term of the loan. The minimum payment due each month is interest only.
Home Mortgage Disclosure Act (HMDA)
A Federal statute that requires most lenders in metropolitan areas to collect data about their housing-related lending activity. Lenders must file annual reports with their Federal supervisory agencies and make disclosures available to the public regarding their origination of housing-related loans. The reports cover loan originations, applications that are declined or withdrawn, and loan purchases. The data is used to evaluate possible discrimination in loan approvals. The Federal Reserve Board of Governors has adopted Regulation C to implement this statute. The information collection requirements were expanded in 2004.
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.
A document that provides an itemized listing of the funds that are payable at closing. Items that appear on the statement include real estate commissions, loan fees, points and initial escrow amounts. Each item on the statement is represented by a separate number within a standardized numbering system. The totals at the bottom of the HUD-1 statement define the seller’s net proceeds and the buyer’s net payment at closing.
The 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.
Money that wage earners pay the government each year. The amount of the tax depends upon how much income you earn.
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.
The sum of the published index plus the margin. For example if the index is 4% and the margin is 2.75%, the indexed rate would be 6.75%. Often, lenders charge less than the indexed rate the first year of an adjustable rate mortgage.
Individual Retirement Account (IRA)
A retirement plan that allows you to contribute a limited yearly sum toward your retirement. Taxes on the interest earned in the account are deferred.
Initial Interest Rate
This refers to the original interest rate of the mortgage at the time of closing. This rate changes for an adjustable rate mortgage (ARM). It’s also known as “start rate” or “teaser.”
A home inspection is a visual inspection of the structure and components of a home to find items that are not performing correctly or items that are unsafe. If a problem or a symptom of a problem is found the home inspector will include a description of the problem in a written report and may recommend further evaluation. Mortgage approval is typically contingent upon the results of a home inspection. A home inspector’s report will review the condition of the home’s heating system, central air conditioning system (temperature permitting), interior plumbing and electrical systems; the roof, attic, and visible insulation; walls, ceilings, floors, windows and doors; the foundation, basement, and visible structure. Many inspectors will also offer additional services not included in a typical home inspection, such as mold, radon and water testing.
The regular periodic payment that a borrower agrees to make to a lender.
Insufficient Funds (NSF)
A phrase that means you did not have enough money to cover an expense. Usually checks that bounce are returned stamped with the phrase “insufficient funds.” The amount of the check was larger than the balance in the checking account.
A mortgage that is protected by the Federal Housing Administration (FHA) or by private mortgage insurance (MI).
The amount paid by a borrower to a lender for the privilege of borrowing the money.
Interest Accrual Rate
The percentage rate at which interest accrues on the mortgage. In most cases, it is also the rate used to calculate the monthly payments.
The price paid for borrowing money, expressed as an annual percentage rate, such as 8.5%.
Interest Rate Buydown Plan
An arrangement that allows the property seller 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.
Interest Rate Ceiling
For an adjustable rate mortgage (ARM), the maximum interest rate, as specified in the mortgage note.
Interest Rate Floor
For an adjustable rate mortgage (ARM), the minimum interest rate, as specified in the mortgage note.
A construction loan made during completion of a building or a project. A permanent loan usually replaces this loan after completion.
To put your money into CDs, money market accounts, mutual funds, savings accounts, bonds, stocks or objects that you hope will grow in value and earn a profit.
A money source for a lender.
Individual Retirement Account. A tax-deferred retirement account for an individual that permits individuals to set aside money each year, with earnings tax-deferred until withdrawals begin at age 59 1/2 or later (or earlier, with a 10% penalty). The exact amount depends on the year and your age. IRAs can be established at a bank, mutual fund, or brokerage. Only those who do not participate in a pension plan at work or who do participate and meet certain income guidelines can make deductible contributions to an IRA. All others can make contributions to an IRA on a non-deductible basis. Such contributions qualify as a deduction against income earned in that year and interest accumulates tax-deferred until the funds are withdrawn. A participant is able to roll over a distribution to another IRA or withdraw funds using a special schedule of early payments made over the participant’s life expectancy.
A loan which is larger 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.
The penalty a borrower must pay when a payment is made a stated number of days after the due date.
Lease-Purchase Mortgage Loan
An alternative financing option that allows low and moderate income home buyers to lease a home with an option to buy. Each month’s rent payment consists of principal, interest, taxes and insurance (PITI) payments on the first mortgage plus an extra amount that accumulates in a savings account for a down payment.
A person’s financial obligations. Liabilities include long term and short term debt.
An interest or encumbrance held by a creditor in a debtor’s real or personal property for the satisfaction of a debt. The lien may arise as a result of a consensual contract between the debtor and the creditor such as a security agreement or a mortgage. Alternatively, liens may be established by courts or by statutes.
Lifetime Payment Cap
For an adjustable rate mortgage (ARM), a limit on the amount that payments can increase or decrease over the life of the mortgage.
Lifetime Rate Cap
For an adjustable rate mortgage (ARM), a limit on the amount that the interest rate can increase or decrease over the life of the loan. See cap.
Limited Liability Company (LLC)
A type of investment structure where shareholders cannot lose more than the amount they invested in the organization. Therefore, shareholders are not personally responsible for the debts and obligations of the company in the event that those debts are not fulfilled. For example, every time SKB completes a new acquisition, the property is purchased via an LLC formed by the investors (but managed by SKB) in order to legally protect one another from losing more money than the amount they personally invested in the property should default occur.
Limited Liability Partnership (LLP)
A General Partnership, but each partner is not to liable for certain acts of other partners. State registration is required and some states require proof that the partnership has obtained adequate liability insurance or has adequate assets to satisfy potential claims. State law typically limits LLPs to formation by accountants, lawyers, architects and/or similar professionals. An LLP also limits the personal liability of a partner for the errors, omissions, incompetence, or negligence of the partnership’s employees or other agents. State laws vary regarding LLPs.
Line of Credit
A type of credit facility. The specific meaning of the term varies from bank to bank. Since the various uses often cause confusion, two definitions are presented here. In this book, the second definition is used. (1) A type of loan that permits a borrower to draw funds, up to a specified maximum, for a defined period of time. Sometimes called a nonrevolving line of credit. (2) Any loan that permits the borrower to borrow funds up to a specified maximum, make repayments in any amount at any time, and obtain any number of readvances so long as the maximum is not exceeded. Sometimes called a revolving line of credit. The distinguishing feature of a line of credit is that it rebounds, which means that the amount borrowed can be paid down and reborrowed, or readvanced, as the borrower’s needs change.
Money or an object that is lent with the understanding that the loan will be paid back, usually with interest.
Loan to Value Ratio
The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage.
A lender’s guarantee that the mortgage rate quoted will be good for a specific number of days from the day of application.
The amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate.
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.
The date on which the principal balance of a loan becomes due and payable.
The smallest payment you are required to make each month on a debt.
Money Market Deposit Account (MMDA)
A bank deposit account designed to pay a higher rate of interest to depositors than might otherwise be earned in checking or savings accounts. Money market deposit accounts do not have specified maturities. Their rates are administered by the bank although they are influenced by prevailing rates for money market instruments traded in capital markets. Some banks index the rates that they pay on MMDAs to rates paid for traded money market instruments such as U.S. Treasury bill rates. Federal regulations limit the number of transactions that can be made from these accounts.
Monthly Fixed Installment
The portion of the total monthly payment that is applied toward principal and interest. When a mortgage negatively amortizes, the monthly fixed installment does not include any amount for principal reduction and doesn’t cover all of the interest. The loan balance therefore increases instead of decreasing.
(1) noun — A legal instrument that creates a lien upon real estate for the purpose of securing a debt. The instrument is executed by a lender and a borrower or guarantor as collateral for the payment of a debt that creates a lien on real estate owned by the borrower or guarantor. The borrower or guarantor is called the mortgagor and the lender is called the mortgagee. In some states, a different legal instrument called a deed of trust fulfills a similar function even though it is not legally the same. (2) verb — The action of granting a lien to pledge real property as security for the repayment of a debt.
A company that originates mortgages for resale in the secondary mortgage market.
An individual or company that charges a service fee to bring borrowers and lenders together for the purpose of loan origination.
Money paid to insure the mortgage when the down payment is less than 20 percent. See private mortgage insurance, FHA mortgage insurance.
Mortgage Insurance Premium (MIP)
Insurance from FHA to the lender against incurring a loss on account of the borrower’s default.
Mortgage Life Insurance
A type of term life insurance. In the event that the borrower dies while the policy is in force, the mortgage debt is automatically paid by insurance proceeds.
The borrower or homeowner.
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 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.
A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.
The regulatory and supervisory agency for federally chartered savings institutions. Formally known as Federal Home Loan Bank Board.
One Year Adjustable Rate Mortgage
Mortgage where the annual rate changes yearly. The rate is usually based on movements of a published index plus a specified margin, chosen by the lender.
The next best alternative that is given up when a choice is made.
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.
A property purchase transaction in which the party selling the property provides all or part of the financing.
The date when a new monthly payment amount takes effect on an adjustable rate mortgage (ARM) or a graduated-payment mortgage (GPM). Generally, the payment change date occurs in the month immediately after the adjustment date.
Periodic Payment Cap
A limit on the amount that payments can increase or decrease during any one adjustment period.
Periodic Rate Cap
A limit on the amount that the interest rate can increase or decrease during any one adjustment period, regardless of how high or low the index might be.
A long term mortgage, usually ten years or more. Also called an “end loan.”
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.
The process of determining how much money you will be eligible to borrow before you apply for a loan.
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.
A privilege in a mortgage permitting the borrower to make payments in advance of their due date.
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, such as savings and loan associations, commercial banks, and mortgage companies, who make mortgage loans directly to borrowers. These lenders sometimes sell their mortgages to the secondary mortgage markets such as FNMA or GNMA, etc…
The remaining balance owed on a loan by a borrower or on a security by its issuer, exclusive of any accrued interest.
The outstanding balance of principal on a mortgage not including interest or any other charges.
Principal, Interest, Taxes, and Insurance (PITI)
The four components of a monthly mortgage payment. Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the monthly cost of property taxes and homeowners insurance, whether these amounts are paid into an escrow account each month or not.
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 3 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 your loan’s structure.
The money you’ve earned after you subtract a) any money you had to spend to make the product or perform the service. B) any taxes that had to be paid on your earnings.
A written contract between a borrower/debtor and a lender/creditor in which the borrower agrees to repay a loan granted by the lender. The contract specifies the amount of the loan and the terms of repayment.
Calculations used to determine if a borrower can qualify for a mortgage. They consist of two separate calculations: a housing expense as a percent of income ratio and total debt obligations as a percent of income ratio.
The cost of debt service paid by a borrower or issuer to a lender or investor. The rate is expressed as an annual percentage of the amount borrowed. For some notes and bonds that pay interest semiannually, the semiannual interest due to the investor used to be evidenced by a coupon that could be detached and sent for collection. Thus the cost to the issuer for notes and bonds paying semiannual interest is often called the coupon rate. Lenders or investors may receive a yield that is higher or lower than the rate.
A commitment issued by a lender to a borrower or another mortgage originator guaranteeing a specified interest rate and lender costs for a specified period of time.
Rate of Compounding
When an account compounds interest it does so in regular intervals. Compounding can take place annually, semi-annually, quarterly, monthly, or daily. The more often interest is compounded the faster your money will grow.
Real Estate Agent
A person licensed to negotiate and transact the sale of real estate on behalf of the property owner.
Real Estate Settlement Procedures Act (RESPA)
A consumer protection law that requires lenders to give borrowers advance notice of closing costs.
A real estate broker or an associate holding active membership in a local real estate board affiliated with the National Association of Realtors.
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.
Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records.
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.
Short for the Real Estate Settlement Procedures Act. RESPA is a federal law that allows consumers to review information on known or estimated settlement costs once after application and once prior to or at settlement. The law requires lenders to furnish the information after application only.
The amount of money you receive from a savings account or fund. The return is usually expressed as a percentage, such as “This account returns 6.3%.”
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 collateral for and repayment of the loan.
A credit arrangement, such as a credit card, that allows a customer to borrow against a pre-approved line of credit when purchasing goods and services.
The likelihood that you will lose money on an investment.
Satisfaction of Mortgage
The document issued by the mortgagee when the mortgage loan is paid in full. Also called a “release of mortgage.”
Holding onto your money for a future goal instead of spending it now. Saving is the opposite of spending.
A bank account that pays you interest for keeping your money in it.
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.
The property that will be pledged as collateral for a loan.
Seller Carry Back
An agreement in which the owner of a property provides financing, often in combination with an assumable mortgage. See owner financing.
An organization that collects principal and interest payments from borrowers and manages borrower escrow accounts. The servicer often services mortgages that have been purchased by an investor in the secondary mortgage market.
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.
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.
Interest which is computed only on the principle balance.
A business owned by a single person.
Standard Payment Calculation
The method used to determine the monthly payment required to repay the remaining balance of a mortgage in substantially equal installments over the remaining term of the mortgage at the current interest rate.
Step Rate Mortgage
A mortgage that allows for the interest rate to increase according to a specified schedule (i.e., seven years), resulting in increased payments as well. At the end of the specified period, the rate and payments will remain constant for the remainder of the loan.
A measurement of land, prepared by a registered land surveyor, showing the location of the land with reference to known points, its dimensions, and the location and dimensions of any buildings.
Equity created by a purchaser performing work on a property being purchased.
Third Party Origination
When a lender uses another party to completely or partially originate, process, underwrite, close, fund, or package the mortgages it plans to deliver to the secondary mortgage market.
A document that gives evidence of an individual’s ownership of property.
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.
An examination of municipal records to determine the legal ownership of property. Usually is performed by a title company.
Total Expense Ratio
Total obligations as a percentage of gross monthly income including monthly housing expenses plus other monthly debts.
A Federal statute that governs a number of practices related to bank loans – especially, but not only, consumer loans. The regulation also includes very detailed requirements for calculating and disclosing annual percentage rates for many loans.
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.
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.
Income that is not the result of your labor, such as interest from a savings account or other kind of investment.
Interest charged excess of the legal rate established by law.
A premium of up to 1-7/8 percent (depending on the size of the down payment) paid on a fixed rate 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)
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.
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.
One of the two major methods of electronic funds transfer. Only the payer can originate the remittance. A wire transfer’s information format is completely flexible, but this flexibility adds significantly to the bank’s labor costs and results in much higher fees.
To take money out of an account. 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.
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.