Adjustable Rate Mortgage (ARM)
A mortgage in which the interest rate is adjusted periodically based on a preselected index. Sometimes known as the re-negotiable rate mortgage or the variable rate mortgage.
The monthly loan payment calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance.
Annual Percentage Rate (APR)
An interest rate reflecting the cost of a mortgage as a yearly rate. This rate is likely to be higher than the stated note rate or advertised rate on the mortgage, because it takes into account points and other credit costs. The APR allows homebuyers to compare different types of mortgages based on the total cost for each loan.
An estimate of the value of the property. To comply with lending requirements, lenders/loan originators must order the appraisal and the appraiser must be licensed in the same state as the property.
Closing (Escrow)
The meeting between the buyer, seller, and lender where the property and funds legally change hands. Sometimes called a settlement meeting or escrow closing.
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.
Conventional Loans
A mortgage not insured by FHA or guaranteed by the VA or Rural Economic Community (RECD) - formerly the Farmers Home Administration (FMHA).
Deed of Trust
A voluntary lien to secure a debt deeding the property to Trustees who foreclose and sell the property at public auction, in the event of default on the note the Deed of Trust secures.
Failure to meet legal obligations in a contract; specifically, failure to make the monthly payments on a mortgage.
Failure to make payments on time, which can lead to foreclosure.
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).
Down Payment
Money paid to make up the difference between the purchase price and mortgage amount. Down payments usually are 10 percent to 20 percent of the sales price on conventional loans, and no money down to up to 5 percent of FHA and VA loans.
Earnest Money
Money given by a buyer to a seller as part of the purchase price to bind a transaction. In many cases, this money reassures the seller that the buyer is serious about purchasing the property and is then applied to closing costs.
Federal Housing Administration (FHA)
A division of the Department of Housing and Urban Development. Its main activity is the insuring of residential mortgage loans made by private lenders. FHA also sets standards for underwriting mortgages.
Federal National Mortgage Association (FNMA)
Also known as Fannie Mae. A taxpaying corporation created by Congress that purchases and sells conventional residential mortgages as well as those insured by FHA or guaranteed by VA. This institution, which provides funds for one in seven mortgages, makes mortgage money more available and more affordable.
Fixed-Rate Mortgage
A mortgage on which the interest rate is set for the term of the loan.
Housing Expenses-to-Income Ratio
The ratio, expressed as a percentage, which results when a borrower's housing expenses are divided by his/her net effective income (VA loans) or gross monthly income (conventional loans).
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.
Jumbo Loan
A loan which is larger than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. These loans usually carry a slightly higher interest rate.
Loan Application
The source of information on which the lender bases a decision to make the loan. It defines the term of the loan; gives the name(s) of the borrowers(s), place of employment, salary, bank accounts and credit references; and describes the real estate that is to be mortgaged. It also stipulates the amount of the loan being applied for and the repayment terms.
Loan Originator
A person that assists in arranging the funding or negotiating contracts for a client, but does not actually loan the money himself. You, the consumer, typically pay no additional costs for this service.
Loan To-Value Ratio (LTV)
The relationship between the amount of the mortgage loan and the appraised value of the property, expressed as a percentage.
A voluntary lien filed against property to secure a debt, usually a loan. To foreclose, the lender must often institute a court action and the borrower may have the right to reclaim the property after foreclosure.
Mortgage Insurance
Money paid to insure the mortgage when the down payment is less than 20 percent. Also see Private Mortgage Insurance.
A written promise to pay a certain sum of money at a certain time. A negotiable note starts "Pay to the order of" and is transferable by endorsement similar to a check.
Origination Fee
The fee charged by a lender to prepare loan documents, make credit checks, inspect and sometimes appraise a property. It's usually computed as a percentage of face value of the loan.
An acronym that stands for principal, interest, taxes, and insurance. Also called monthly housing expenses.
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).
Expenses necessary to create an escrow account or to adjust the seller's existing escrow account. Can include taxes, hazard insurance, private mortgage insurance and special assessments.
The amount of debt, not counting interest, left on a loan.
Private Mortgage Insurance (PMI)
In the event that you do not have a 20 percent (set to adjust periodically) down payment, lenders will allow a smaller down payment - as low as 5 percent in some cases. With the smaller down payment loans, however, borrowers are usually required to carry private mortgage insurance. Private mortgage insurance will require an initial premium payment, and additional monthly fees of from 0.3 to 0.5 percent, depending on your loan's structure.
In mortgage refinancing, this refers to 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.
Title Insurance
A policy, usually issued by a Title Insurance company, which insures a homebuyer against errors in the title search. The cost of the policy is usually a function of the value of the property, and is often paid by the purchaser and/or seller.
The decision whether to make a loan to a potential homebuyer based on credit, employment, assets, and other factors and the matching of this risk to an appropriate rate and term or loan amount.
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.