Adjustable Rate Mortgage (ARM)
A type of mortgage loan in which the interest rate can be adjusted up or down in accordance with a certain economic index.
The initial interest rate is typically lower than the interest rate for a fixed-rate mortgage, so the monthly repayment amount will also be lower. However, the monthly payment can go up or down at intervals, usually annually, as specified in the ARM agreement. The interest rate is adjusted according to the current interest rate of the economic index that the ARM is tied to. Most adjustable-rate mortgage loans offer rate cap protection, which limits the amount the rate can be increased each year, and also limits the total amount the rate can be increased over the life of the loan.
ARMs are often designated with figures such as 1-3, 3-1 or 5-1. The first number refers to the initial period of the loan, when the interest rate remains at the initial rate. The second number refers to the adjustment period. A 1-3 ARM has a one-year initial period, and after the first year, the interest rate can be adjusted every 3 years.
Because of the lower initial interest rate, and lower monthly payments, of an adjustable rate mortgage, an ARM can enable a buyer to purchase a more expensive home than would be affordable with a fixed-rate mortgage. But buyers should be aware that the interest rate can increase in future years, making future monthly payments higher.
Adjustment Date
The date the interest rate can change for an adjustable-rate mortgage. If an ARM permits the borrower to convert to a fixed-rate mortgage or other type of loan, the borroower should contact the lender at least 3 months before the adjustment date. Not all ARMs offer an option to convert to another type of loan.
Adjustment Period
The period of time between adjustment dates for an adjustable-rate mortgage. The interest rate for a six-month ARM, for example can be adjusted up or down, or stay the same, once every six months.
Amortization
Paying off a loan over time by making periodic payments. Out of each monthly loan payment, a portion goes to the principal and a portion goes to the interest. An amortization schedule shows the remaining principal balance after each payment.
Amortization Term
The amount of time that a buyer has to repay, or amortize, a loan in full. The amortization term is usually specified as a number of months. For example, the amortization term for a 30-year mortgage is 360 months (30 years x 12 months).
Back to top
Annual percentage rate (APR)
The yearly cost of a mortgage, expressed as an annual interest rate. The APR includes the interest charged, mortgage insurance and origination fee (points), if any. When shopping for a mortgage loan, the APR provides an overall basis for comparing the cost of different loan terms.
Application
The process of requesting a mortgage loan that involves providing the lender with personal financial information such as income, assets, and debts or other financial obligations. The lender verifies and evaluates the borrower's financial situation to determine whether the lender will approve the loan.
Appraisal
A formal, written opinion by a professional and impartial third party of the market value of a property. The estimate value is based on the property's quality of construction, location, style and appearance, usefulness, and the selling price of similar properties nearby that have recently have been sold. An appraisal is NOT a guarantee of the property's value and does not indicate that the property meets any particular standards of construction or other factors.
Appreciation
An increase in a property's value as a result of changing market conditions. Real estate generally appreciates over time, but market conditions can also cause depreciation in a property.
Asset
Anything of financial value owned by a borrower, including real estate, personal possessions, bank accounts, stocks, bonds, and mutual funds. Lenders review the borrower's assets as a standard part of the mortgage application process.
Back to top
Balloon Mortgage
A short-term, fixed-rate mortgage loan with a fairly short period of fixed monthly payments, often 5 to 7 years, followed by one large final payment that pays off the loan balance. The final payment is the "balloon."
The mortgage is amortized over a 30-year loan repayment period, which results in lower monthly payments, but at the end of the loan term the balance of the principal is due.
For example, with a 7-year balloon mortgage, a borrower would make monthly payments for seven years. The payments are calculated based on a 30-year mortgage payment. At the end of the seven years, the remaining principal balance must be paid in full.
Balloon Payment
The final large payment made at the end (maturity date) of a balloon mortgage. A borrower may be able to refinance the loan when the balloon payment is due, and should check with the lender to ask about refinancing.
Borrower
The person applying for a mortgage loan who will be responsible for repaying the loan. There may be more than one borrower on a loan. The credit history, income, assets, and debts of all borrowers are considered by the lender when reviewing the application.
Bridge loan
A mortgage loan that enables a borrower to obtain financing for a new house before their present house is sold. The present home is used as collateral. Also called a swing loan.
Cap (Interest Rate)
A limit on how much the interest rate on an adjustable rate mortgage can increase. A periodic cap limits the amount the rate can increase in a single adjustment period, and an overall cap limits the total permitted increase over the life of the loan. For example, with an adjustment cap of 1% and a current interest rate of 6%, the interest rate can go no higher than 7% on the next adjustment date. A lender will provide information on caps for its adjustable rate mortgages.
Back to top
Cap (Payment)
A limit on how much monthly payments on an ARM can change on each adjustment date. Because this type of cap does not limit the amount of interest, it can result in negative amortization, which means that the payments do not cover the cost of the interest.
Cash-Out Refinance
A refinance loan in which the borrower receives a new loan that is greater than the remaining balance of all current mortgages, which results in the borrower receiving cash in addition to refinancing the current mortgage(s). Homeowners sometimes use this type of refinancing to cover home improvements or renovations or consolidate other debts.
Closing
Closing is the process of concluding a real estate transaction. Most closings include both the closing on the real estate transaction and the closing on the mortgage loan that is used to buy the property. Both seller and buyer sign many documents that transfer legal ownership of the property, and each party in the transaction pays his own closing costs at this time. Also called settlement.
Closing Costs
The expenses and fees involved in transferring ownership of a property and closing on a mortgage loan. Some closing costs are traditionally paid by the seller, while others are paid by the buyer. Closing costs can include title insurance and survey fees, an origination fee, attorney's fee, and taxes. Closing costs vary according to local government fees and requirements.
Closing Statement
A formal disclosure prepared by the closing agent that itemizes all charges imposed upon the buyer and seller in a real estate closing. The closing statement lists escrow deposits for taxes, homeowner's insurance, and mortgage insurance. Also referred to as the HUD-1.
Back to top
Co-Borrower
If two or more individuals apply for and will be responsible for repaying a loan, they are Co-Borrowers.
Co-op or Cooperative
A legal form of ownership in which a corporation or other business entity owns a property (often an apartment building). The residents are shareholders in the corporation and are tenants in the building.
Commitment Fee
The fee a lender charges for promising to make a loan. Usually stated as a percentage of the loan amount.
Commitment Letter
A formal statement by a lender detailing the loan terms and provisions under which it agrees to lend money to a borrower. Also known as a loan commitment.
Community Property
In "community property states," any property, including real estate, acquired during a marriage is considered jointly owned by both spouse. Only property that was acquired as separate property by either spouse prior to the marriage, or acquired by gift or inheritance, is considered to be owned by the individual spouse. Details of community property laws vary from state to state. Florida is not a community property state.
Back to top
Comparables
Recently sold properties with similar characteristics to the property being appraised. Comparables help the appraiser determine the approximate fair market value of the subject property. They have reasonably the same size, location, and amenities.
Condominium
A legal form of home ownership, generally in multi-family structures, in which the owner owns the interior of an individual residential unit, while the exterior and common areas are jointly owned by all the unit owners. Specific details of ownership can vary; if you're considering purchasing a condo, you should be sure you understand exactly how the ownership is legally structured.
Conforming loan
A mortgage loan that is eligible for purchase by federal agencies such as Fannie Mae and Freddie Mac. These agencies set a limit each year on the size of a conforming loan. The maximum conforming loan amount is $359,650 in 2005 for a one-unit property.
Construction loan
An interim loan used to finance the construction of a home or other building. The lender makes payments directly to the builder or contractors during construction.
Consumer Credit Reporting Agency (or Credit Bureau)
A credit bureau maintains financialinformation about the credit, debt, and payment records of individuals. During the mortgage application process, a lender obtains the borrower's credit report from a credit bureau and uses the information it contains in evaluating the borrower's credit risk.
Back to top
Contingency
A clause in a contract that sets out a condition that must be met. For example, when making an offer to buy a home, the buyer can stipulate that a home inspection report from a qualified home inspector must be satisfactory. If the inspection reveals problems with the home, the buyer can back out of the contract or re-open negotiations with the seller.
Conventional Mortgage
A mortgage loan obtained through a bank or other mortgage lender that is not part of a government housing program and is not insured or guaranteed by the federal government.
Conversion Clause
A provision in some adjustable rate mortgages (a convertible ARM) that permits the borrower to change, or convert, the ARM to a fixed-rate mortgage. This option would typically be exercised by the buyer if current interest rates drop substantially, because converting permits the buyer to lock in the lower, fixed rate for the remainder of the loan term. Conversion clauses often specify that the conversion may take place only with a certain period of time after the mortgage begins, or under certain other conditions.
Convertible ARM
An ARM, or adjustable-rate mortgage, that contains a conversion clause, which allows the borrower to convert the loan to a fixed-rate mortgage under certain conditions.
Corporate Relocation
An employer may pay all or a portion of an employee's moving and mortgage related expense when the employer transfers the employee to another part of the country.
Back to top
Credit
An arrangement that provides for a loan (usually of money) in exchange for a promise of repayment at a later date. The loan terms typically include the interest charged and the amount of time the borrower has to repay the loan.
Credit History
The compiled records of a person's credit, debt, and repayment history.
Credit Report
A report from a credit bureau that verifies an individual's credit, debt, and repayment history.
Debt
An amount owed by one person or entity to another. Debt is one of the factors that lenders consider during the mortgage application process. Debt is also referred to as liability.
Debt
An amount owed by one person or entity to another. Debt is one of the factors that lenders consider during the mortgage application process. Debt is also referred to as liability.
Back to top
Debt
An amount owed by one person or entity to another. Debt is one of the factors that lenders consider during the mortgage application process. Debt is also referred to as liability.
Debt
An amount owed by one person or entity to another. Debt is one of the factors that lenders consider during the mortgage application process. Debt is also referred to as liability.
Debt-to-Income ratio
A borrower's total monthly minimum debt payments divided by gross monthly income, expressed as a percentage. For example: If a borrower's monthly minimum debt payments total $1,000 and his gross monthly income is $5,000, then the Debt-to-Income Ratio would be 20% ($1,000 divided by $5,000). Total monthly debt includes monthly mortgage payments, car loans, credit card payments, personal loans, student loans, and any other debt payments. Also called the back-end ratio or total debt ratio.
Debt-to-Income ratio
A borrower's total monthly minimum debt payments divided by gross monthly income, expressed as a percentage. For example: If a borrower's monthly minimum debt payments total $1,000 and his gross monthly income is $5,000, then the Debt-to-Income Ratio would be 20% ($1,000 divided by $5,000). Total monthly debt includes monthly mortgage payments, car loans, credit card payments, personal loans, student loans, and any other debt payments. Also called the back-end ratio or total debt ratio.
Debt-to-Income ratio
A borrower's total monthly minimum debt payments divided by gross monthly income, expressed as a percentage. For example: If a borrower's monthly minimum debt payments total $1,000 and his gross monthly income is $5,000, then the Debt-to-Income Ratio would be 20% ($1,000 divided by $5,000). Total monthly debt includes monthly mortgage payments, car loans, credit card payments, personal loans, student loans, and any other debt payments. Also called the back-end ratio or total debt ratio.
Back to top
Debt-to-Income ratio
A borrower's total monthly minimum debt payments divided by gross monthly income, expressed as a percentage. For example: If a borrower's monthly minimum debt payments total $1,000 and his gross monthly income is $5,000, then the Debt-to-Income Ratio would be 20% ($1,000 divided by $5,000). Total monthly debt includes monthly mortgage payments, car loans, credit card payments, personal loans, student loans, and any other debt payments. Also called the back-end ratio or total debt ratio.
Default
A borrower's failure to make repay a loan according to the terms of the loan, including not paying on time or in the amount specified.
Default
A borrower's failure to make repay a loan according to the terms of the loan, including not paying on time or in the amount specified.
Default
A borrower's failure to make repay a loan according to the terms of the loan, including not paying on time or in the amount specified.
Depreciation
A decrease in a property's value due to market conditions or any other causes.
Back to top
Depreciation
A decrease in a property's value due to market conditions or any other causes.
Discount points
Points are a fee paid to the lender at closing to reduce the interest rate. A point is equal to one percent of the loan amount: on a $150,000 loan amount, 1 point = 1 percent, or $1,500. Your lender can tell you how much your interest rate would be reduced by points.
Discount points
Points are a fee paid to the lender at closing to reduce the interest rate. A point is equal to one percent of the loan amount: on a $150,000 loan amount, 1 point = 1 percent, or $1,500. Your lender can tell you how much your interest rate would be reduced by points.
Down payment
The portion of the purchase price that is paid in cash and not financed with a mortgage.
Down payment
The portion of the purchase price that is paid in cash and not financed with a mortgage.
Back to top
Earnest money
A deposit made in good faith, to accompany an offer made on a home. Typically, earnest money is not refundable, unless the terms of the contract are not met.
Earnest money
A deposit made in good faith, to accompany an offer made on a home. Typically, earnest money is not refundable, unless the terms of the contract are not met.
Equal Credit Opportunity Act (ECOA)
A federal law that requires lenders to make credit equally available to all applicants without discriminating based on race, color, religion, national origin, age, sex, marital status, or that the applicant's income is derived from public assistance programs or has in good faith exercised any right under the Consumer Credit Protection Act.
Equal Credit Opportunity Act (ECOA)
A federal law that requires lenders to make credit equally available to all applicants without discriminating based on race, color, religion, national origin, age, sex, marital status, or that the applicant's income is derived from public assistance programs or has in good faith exercised any right under the Consumer Credit Protection Act.
Equity
The difference between the fair market value of the property and the principal amounts of all loans owed on the property. On a new mortgage loan, the down payment represents the initial equity in the property.
Back to top
Equity
The difference between the fair market value of the property and the principal amounts of all loans owed on the property. On a new mortgage loan, the down payment represents the initial equity in the property.
Equity Line of Credit
A form of revolving credit which permits homeowners to obtain cash for which their home serves as collateral. Usually recorded as a second mortgage.
Equity Line of Credit
A form of revolving credit which permits homeowners to obtain cash for which their home serves as collateral. Usually recorded as a second mortgage.
Escrow
A process by which a trusted third party holds money for a seller or buyer, or for a borrower and lender, until the transaction is complete.
Escrow
A process by which a trusted third party holds money for a seller or buyer, or for a borrower and lender, until the transaction is complete.
Back to top
Escrow account
An account created by a trusted third party to hold money. A mortgage escrow account is an account established by the mortgage lender to hold money to pay the borrower's taxes and insurance on the property. Monthly mortgage payments may include 1/12 of annual property taxes and insurance. When the insurance and tax bills are due, the lender uses the money from the escrow account to pay the bills.
Escrow account
An account created by a trusted third party to hold money. A mortgage escrow account is an account established by the mortgage lender to hold money to pay the borrower's taxes and insurance on the property. Monthly mortgage payments may include 1/12 of annual property taxes and insurance. When the insurance and tax bills are due, the lender uses the money from the escrow account to pay the bills.
Escrow analysis
The regular examination of escrow accounts to determine if the current monthly deposits are appropriate and sufficient to pay taxes, insurance, and other bills when due. Lenders are required to review escrow accounts annually, and provide the borrower with the analysis. If your monthly mortgage payment includes amounts for taxes and insurance that go into an escrow account, your payment may be adjusted upward or downward following the escrow analysis to ensure that the escrow account will have sufficient funds to pay the necessary bills.
Escrow analysis
The regular examination of escrow accounts to determine if the current monthly deposits are appropriate and sufficient to pay taxes, insurance, and other bills when due. Lenders are required to review escrow accounts annually, and provide the borrower with the analysis. If your monthly mortgage payment includes amounts for taxes and insurance that go into an escrow account, your payment may be adjusted upward or downward following the escrow analysis to ensure that the escrow account will have sufficient funds to pay the necessary bills.
Escrow payment
The part of a monthly mortgage payment that is deposited into an escrow account to pay for taxes and homeowner's insurance. Also called impounds or reserves in some states.
Back to top
Escrow payment
The part of a monthly mortgage payment that is deposited into an escrow account to pay for taxes and homeowner's insurance. Also called impounds or reserves in some states.
Estimated Gross Costs of Buying
The total principal and interest payments over the total number of years that you plan to own your home.
Estimated Gross Costs of Buying
The total principal and interest payments over the total number of years that you plan to own your home.
Estimated Increase in Equity
The approximate amount a property is expected to appreciate, calculated by a formula based on the property's value, increased by the expected rate of appreciation for a specific number of years.
Estimated Net Cost of Buying
The estimated gross costs of buying minus the estimated tax savings and the estimated increase in equity.
Back to top
Estimated Tax Savings
The approximate amount of tax a renter would save by owning his own home, based on income tax deductions of property taxes and mortgage interest.
Estimated Total Savings
The estimated net costs of renting minus the estimated net cost of buying.
Fair Credit Reporting Act
A consumer protection law that regulates the disclosure of individuals' credit reports by credit bureaus. The act also establishes a procedure to correct mistakes on the individual's credit record.
Fannie Mae (Federal National Mortgage Association)
A private, shareholder-owned company, chartered by the U.S. Congress, Fannie Mae is the nation's largest supplier of home mortgage funds. Fannie Mae operates by buying mortgages from lenders on the secondary market.
Federal Housing Administration (FHA)
FHA is an agency of the U.S. Department of Housing and Urban Development (HUD) that insures residential mortgage loans made by private lenders. The FHA sets out standards for construction and loan underwriting but does not lend money or build houses itself.
Back to top
FHA mortgage
An FHA mortgage is a mortgage that is insured and guaranteed by the Federal Housing Administration (FHA). FHA mortgages, which require little or no down payment, can make a home purchase more affordable than with a conventional loan, especially for first-time homebuyers. The FHA limits the amount of money that can be borrowed with an FHA mortgage. The limit varies from state to state.
First mortgage
A first mortgage is the primary lien against a property and takes priority over all other liens.
Fixed-rate mortgage (FRM)
A mortgage which has the same interest rate for the entire term of the loan. This means that the monthly payments for principal and interest are also fixed for the life of the loan.
Float Rate
(See Rate Float)
Flood Insurance
Special hazard insurance coverage from a flood insurance provider. Recommended for all properties and required if a property is located in a designated flood zone.
Back to top
Freddie Mac (Federal Home Loan Mortgage Corporation)
A stockholder-owned corporation created by Congress, Freddie Mac supports the secondary market in mortgages on residential and multi-family properties through mortgage purchase and other programs.
Fund a Loan
Funding is the date on which funds are actually disbursed to the seller of a property or to a borrower on a refinance. In some cases this happens simultaneous with closing.
Good Faith Estimate
A Good Faith Estimate is a written list, required by federal law, of the estimated closing costs associated with a real estate transaction, including the lender's charges and the closing agent's charges and fees. It also includes estimated amounts for real estate property tax and homeowner's insurance. The Good Faith Estimate is just an estimate, and your actual closing costs may be higher.
Gross Monthly Rental Income
Money received each month as a rent payment on property that is owned for investment purposes. If considered as income for the purpose of applying for a mortgage, this income will need to be verified by a lease or through the borrower's tax returns.
Homeowner's Insurance or Hazard Insurance
Insurance that protects against loss to real estate caused by fire, theft, vandalism, etc., according to the terms of the policy. Lenders require this insurance as a condition of making a mortgage loan. This insurance may not cover flood or wind damage.
Back to top
Housing Ratio
A person's total monthly housing payment (PITI - Principal, Interest, Taxes, and Insurance) divided by his gross monthly income, expressed as a percentage. For example, if the total payment (PITI) is $1,000, and the gross monthly income is $8,000, then the housing ratio would be 12.5 percent ($1,000 divided by $8,000). Also called the front ratio.
HUD
U.S. Department of Housing and Urban Development oversees federal housing and community development programs, as well as the Federal Housing Administration.
HUD-1 Uniform Settlement Statement
See Closing Statement.
Income
Includes sources of income such as salary, bonuses, rental income, interest, and investment income. Lenders consider income as one of the factors they review during the mortgage application procedure.
Index
A published rate that lenders use as the basis for determining interest rates on adjustable rate mortgage loans. Lenders may use an index such as the 1-year Treasury Bill, 6 Month LIBOR, or 11th District Cost of Funds (COFI).
Back to top
Interest Rate
The fee paid by a borrower to a lender in payment for the loan, expressed as a percentage.
Jumbo Loan
A mortgage loan for an amount higher than the conforming loan amount. Jumbo loans usually command higher interest rates.
LIBOR (London Interbank Offered Rate)
The interest rate used by banks in the foreign market to lend money to one another. The LIBOR is one index that may be used for setting interest rates for ARM loans.
Lien
A legal claim against a property.
Lifetime cap
A clause in an adjustable rate mortgage that sets a limit on the highest interest rate that can occur over the life of the loan. The cap varies with each ARM and with different lenders, and should be taken into consideration when shopping for a loan.
Back to top
Loan Amount
The actual amount of money a person borrows from a lender, not counting interest or other fees.
Loan Programs
The types of loan offered by lenders, as defined by their terms and repayment requirements. Examples include 30-year fixed-rate or 3-1 ARM.
Loan-to-Value Ratio (LTV)
The loan amount expressed as a percentage of the lower of a property's appraised value or purchase price (whichever is lower). For example, a loan with a 90% LTV ratio represents a 10 percent down payment, with the borrower financing 90 percent of the sales price or appraised value of the property. Different types of mortgage loans may have different LTV requirements.
Lock Rate
See Rate Lock.
Manufactured Housing
Factory-built or prefabricated housing, including mobile homes.
Back to top
Manufactured Housing
Factory-built or prefabricated housing, including mobile homes.
Mortgage
A legal document that places a lien against a property as collateral for repayment of a loan.
Mortgage
A legal document that places a lien against a property as collateral for repayment of a loan.
Mortgage Insurance (MI)
Insurance paid for by the borrower that protects the lender in case the borrower defaults on a loan. Mortgage insurance is generally required with conventional loans if the down payment is less than 20 percent. Also called private mortgage insurance, or PMI.
Mortgage Insurance (MI)
Insurance paid for by the borrower that protects the lender in case the borrower defaults on a loan. Mortgage insurance is generally required with conventional loans if the down payment is less than 20 percent. Also called private mortgage insurance, or PMI.
Back to top
Mortgage Insurance Premium (MIP)
The insurance premium a borrower pays upfront with an FHA loan. The insurance helps cover the cost of reselling the home if the buyer defaults on the loan.
Mortgage Insurance Premium (MIP)
The insurance premium a borrower pays upfront with an FHA loan. The insurance helps cover the cost of reselling the home if the buyer defaults on the loan.
Mortgage Note
A formal legal document that obligates the borrower to repay a loan at a specified interest rate, over a specified period of time.
Mortgage Note
A formal legal document that obligates the borrower to repay a loan at a specified interest rate, over a specified period of time.
Mortgagee
The bank or other lender in a mortgage loan that makes that loan and holds the mortgage note as a pledge for repayment of the loan.
Back to top
Mortgagee
The bank or other lender in a mortgage loan that makes that loan and holds the mortgage note as a pledge for repayment of the loan.
Mortgagor
The borrower in a mortgage loan transaction.
Mortgagor
The borrower in a mortgage loan transaction.
Multi-family
In Florida, a building with more than one residential rental unit. The legal definition of multi-family varies from state to state.
Multi-family
In Florida, a building with more than one residential rental unit. The legal definition of multi-family varies from state to state.
Back to top
Negative Amortization
When the monthly mortgage payment is lower than the interest due, the balance on the loan increases rather than decreases.
Nonconforming Mortgage Loan
See Jumbo Loan.
Origination Fee
A fee charged by a lender in connection with making a mortgage loan. Usually expressed a percentage of the loan amount.
P & I
See Principal and Interest.
Payment Cap
See Rate Cap.
Back to top
PITI
PITI stands for Principal, Interest, Taxes and Insurance.
Planned Unit Development (PUD)
A subdivision having individually owned lots as well as areas owned in common and reserved for the use of some or all of the owners of the individual lots. Also, a comprehensive development plan for a large land area. A Planned Unit Development typically includes a residential area, roads, schools, recreational facilities, and commercial, office and industrial areas.
Points
See Discount points.
Pre-qualification
A preliminary evaluation by a lender of a borrowers financial situation to estimate the amount and type of loans that may be available. The evaluation does not include a credit report, and the lender does not formally commit to making a loan.
Prepayment
Paying off the entire balance of a mortgage before it is due. Many mortgage loans permit prepayment without any penalty fee.
Back to top
Prepayment Penalty
A fee charged by a lender when the borrower wants to pay off a mortgage loan in advance of the payment schedule. Not all loan programs have a prepayment penalty, and if you do not plan to keep the home for the entire term of the loan, you should be aware of any prepayment penalty that may apply.
Principal
The total amount of money borrowed or lent, or the outstanding balance of a loan, not counting interest.
Principal & Interest (P&I)
Principal is the part of the monthly mortgage payment that goes to reduce the outstanding balance of the loan. Interest is the portion of the payment that pays the finance charge on the remaining balance of the loan.
Private Mortgage Insurance (PMI)
See Mortgage insurance.
Property Type
See Condominium, Co-op, Manufactured Housing, Planned Unit Development, Multi-family, Single Family Attached Home, or Single Family Detached Home.
Back to top
Purchase Price
The actual sales price paid to purchase a home.
Qualify
When a borrower meets a loan program's requirements relating to income, assets, debts, and credit history.
Qualifying Ratios
The figures that a lender will review to determine whether a borrower qualifies for a particular loan. Qualifying ratios include the debt-to-income ratio and the housing ratio.
Rate
See Interest Rate.
Rate Cap
See Cap.
Back to top
Rate Float
If the interest rate on a mortgage loan has not been locked in, it will fluctuate with the market conditions until protected by a rate lock or rate protection.
Rate Lock
A lender's commitment to make a loan at a particular interest rate as long as the loan closes by a specified date. The lock protects against interest rate increases before the closing date.
Rate Protection
A lender places a cap to the interest rate, which represents the maximum interest rate of the loan as long as the loan closes by a specified date, even if interest rates increase. If rates drop, the borrower has a one-time option to lock the rate in at a lower rate.
Refinancing
Paying off one loan using the money from a new loan, with the same property used as security. Homeowners may refinance to acquire a lower interest rate, shorten the term of the loan, or to get cash out of the equity they have in the property.
Second Mortgage
A second mortgage is a mortgage that is subordinate to a first mortgage. Also called second trust. The first mortgage has first claim on the property in case of default.
Back to top
Settlement Statement
See Closing Statement.
Single Family Attached Home
A home that shares common walls with another structure. The owner owns the dwelling and lot.
Single Family Detached Home
A free-standing home that sits on its own lot and doesn't share any common walls with other homes.
Subject Property
The property to be secured by the mortgage loan.
Survey
A measurement of land taken by a licensed surveyor that indicates a property's boundaries, elevations, improvements, and relationship to surrounding tracts. The buyer usually pays for the property survey.
Back to top
Term of Loan
The amount of time a borrower has to repay a mortgage loan. Usually expressed as a number of months: The term for a 30-year fixed-rate mortgage is 360 months (30 years X 12 months).
Title
Formal document that provides evidence of ownership of a property.
Title Insurance
Insurance that protects the lender or buyer against disputes over the title to a property. Lender Title Insurance is required to close a loan and is typically paid for by the buyer. Buyers must purchase their own separate title insurance policy to protect their interests.
Title Search
A thorough examination of public records, laws, and court decisions to verify that the seller, and no one else, has a valid claim to the property. A title search is required by the lender and is a standard part of closing costs paid for by the buyer.
Total Monthly Payment
The sum of the loan principal, interest, taxes and insurance (PITI) that a borrower pay the lender on a monthly basis for the duration of a mortgage loan.
Back to top
Transfer Tax
Tax imposed by a state or local government when property is transferred from one owner to another.
Truth-in-Lending Act
A federal law that requires the disclosure of credit terms in a standard format called the truth-in-lending statement. TIL statements help borrowers compare the loan terms of different financial institutions.
Underwriting
In mortgage lending, an evaluation of the risk in making a mortgage loan to determine whether the level of risk is acceptable to the lender. Underwriting involves evaluating the property as described in the appraisal report, and the borrower's ability and willingness to repay the loan.
VA Mortgage
A mortgage guaranteed by the Department of Veteran Affairs and available only for military personnel, veterans, or spouses of veterans who died of service-related injuries. The loan is guaranteed by the VA and requires little or no down payment.
Veterans Administration (VA)
A government agency that administers benefit programs to help veterans return to civilian life, including guaranteed mortgage loans with little or no down payment.
Back to top
