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- Allows the lender to speed up the rate at which your
loan comes due or even to demand immediate payment of
the entire outstanding balance of the loan should your
default on you loan.
Rate Mortgage (ARM) - Is a mortgage in which
the interest rate is adjusted periodically based on
a preselected index. Also sometimes known as the renegotiable
rate mortgage, the variable rate mortgage or the Canadian
- 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.
Amortization - Means
loan payment by equal periodic payments 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 annual cost for each
Appraisal - An estimate
of the value of property, made by a qualified professional
called an "appraiser."
Assumption - 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 costs and new, possibly higher, market-rate
interest charge will apply.
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(Payment) Mortgage - Usually a short-term fixed-rate
loan which involves small payments for a certain period
of time and one large payment for the remaining amount
of the principal at a time specified in the contract.
Broker - An individual
in the business of assisting in arranging funding or
negotiating contracts for a client but who does not
loan the money himself. Brokers usually charge a fee
or receive a commission for their services.
Buydown - When the
lender and/or the home builder subsidizes 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.
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Caps (Interest) -
Consumer safeguards which limit the amount the interest
rate on an adjustable rate mortgage may change per year
and/or the life of the loan.
Caps (Payment) -
Consumer safeguards which limit the amount monthly payments
on an adjustable rate mortgage may change.
- The meeting between the buyer, seller and lender or
their agents where the property and funds legally change
hands. Also called settlement.
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 costs of
closing usually are about 3 percent to 6 percent of
the mortgage amount.
Commitment - An agreement,
often in writing, between a lender and a borrower to
loan money at a future date subject to the completion
of paperwork or compliance with stated conditions.
- A short term interim loan for financing the cost of
construction. The lender advances funds to the builder
at periodic intervals as the work progresses.
- A mortgage not insured by FHA or guarantee by the
VA or Farmers Home Administration (FmHA).
Credit Ratio - 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 net effective income
(FHA/VA loans) or gross monthly income (Conventional
loans). See Housing Expenses-to-Income Ratio.
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Deed of Trust - In
many states, this document is used in place of a mortgage
to secure the payment of a note.
Default - Failure
to meet legal obligations in a contract, specifically,
failure to make the monthly payments on a mortgage.
- See Negative Amortization.
Delinquency - 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.
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 up to 5 percent on FHA and
- 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.
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Earnest Money - Money
given by a buyer to a seller as part of the purchase
price to bind a transaction or assure payment.
Equal Credit Opportunity Act
(ECOA) - Is 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.
Equity - The difference
between the fair market value and current indebtedness,
also referred to as the owner's interest.
Escrow - Refers to
a neutral third party who carries out the instructions
of both the buyer and seller to handle all the paperwork
of settlement or "closing." Escrow may also
refer to an account held by the lender into which the
homebuyers pays money for tax or insurance payments.
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Fannie Mae - See
Federal National Mortgage Association.
Farmers Home Administration
(FmHA) - Provides financing to farmers and
other qualified borrowers who are unable to obtain loans
Home Loan Mortgage Corporation (FHLMC) - Also
called Freddie Mac, is a quasi-governmental agency that
purchases conventional mortgages 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 standard for underwriting mortgages.
National Mortgage Association (FNMA) - Also
known as Fannie Mae. A tax-paying 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.
FHA Loan - 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 moderate-priced homes almost anywhere in the
FHA Mortgage Insurance
- Requires a small fee (up to 3 percent of the loan
amount) paid at closing or a portion of this fee added
to each monthly payment of an FHA loan to insure the
loan with FHA. On a 9.5 percent $75,000 30-year fixed-rate
FHA loan, this fee would amount t o either $2,250 at
closing or an extra $31 a month for the life of the
loan. In addition, FHA mortgage insurance requires an
annual fee of 0.5 percent of the current loan amount,
the more years the fee must be paid.
- A mortgage on which the interest rate is set for the
term of the loan.
Foreclosure - A legal
procedure in which property securing debt is sold by
the lender to pay a defaulting borrower's debt .
Freddie Mac - See
Federal Home Loan Mortgage Corporation.
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Ginnie Mae - See
Government National Mortgage Association.
National Mortgage Association (GNMA) - Also
known as Ginnie Mae, provides sources of funds for residential
mortgages, insured or guaranteed by FHA or VA.
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.
Gross Monthly Income
- The total amount the borrower earns per month, before
any expenses are deducted.
Guarantee - 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.
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- A form of insurance in which the insurance company
protects the insured from specified losses, such as
fire, windstorm and the like.
Ratio - The ratio, expressed as a percentage,
which results when a borrower's housing expenses are
divided by his/her net effective income (FHA/VA loans)
or gross monthly income (Conventional loans).
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Impound - That 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.
Index - 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.
Investor - Money
source for a lender.
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Jumbo Loan - A loan
which is larger (more than $240,000) 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.
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Lien - A claim upon
a piece of property for the payment or satisfaction
of a debt or obligation.
- The relationship between the amount of the mortgage
loan and the appraised value of the property expressed
as a percentage.
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Margin - The amount
a lender adds to the index on an adjustable rate mortgage
to establish the adjusted interest rate.
Market Value - 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.
- Money paid to insure the mortgage when the down payment
is less than 20 percent. See Private Mortgage Insurance
or FHA Mortgage Insurance.
Mortgagee - The lender.
Mortgagor - The borrower
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Amortization - Occurs 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 danger of negative amortization
is that the homebuyers ends up owing more than the original
amount of the loan.
Net Effective Income
- The borrower's gross income minus federal income tax.
- A statement in a mortgage contract forbidding the
assumption of the mortgage without the prior approval
of the lender.
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Origination Fee -
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 face value
of the loan.
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PITI - Principal,
interest, taxes, and insurance. Also called monthly
Points - See Discount
Power of Attorney
- A legal document authorizing one person to act on
behalf of another.
Prepaids - 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
Prepayment - 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 36 states and the District of Columbia.
Principal - 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 down payments, lenders will allow a smaller
down payment-as low as 5 percent in some cases. With
the smaller down payments loans, however, borrowers
are usually required to carry private mortgage insurance.
Private mortgage insurance will require an initial premium
payment of 1.0 percent to 5.0 percent of your mortgage
amount and may require an additional monthly fee depending
on your loan's structure. On a $75,000 house with a
10 percent down payments, this would mean either an
initial premium payment of $2,025 to $3,375, or an initial
premium of $675 to $1,130 combined with a monthly payment
of $25 to $30.
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Realtor - A real
estate broker or an associate holding active membership
in a local real estate board affiliated with the National
Association of Realtors.
Recision - 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.
Recording Fees -
Money paid to the lender for recording a home sale with
the local authorities, thereby making it part of the
Renegotiable Rate Mortgage
(RRM) - A loan in which the interest rate is
adjusted periodically. See Adjustable Rate Mortgage.
Real Estate Settlement Procedures
Act (RESPA) - 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
information after application only.
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 security.
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Servicing - All the
steps and operations a lender perform to keep a loan
in good standing, such as collection of payments, payment
of taxes, insurance, property inspections and the like.
Settlement - See
- See Closing Costs.
Shared Appreciation Mortgage
(SAM) - A mortgage in which a borrower receives
a below-market interest rate in return for which a 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 mortgages
where the borrower shares the monthly principal and
interest payments with another party in exchange for
a part of the appreciation.
Survey - 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
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Term Mortgage - See
Balloon Payment Mortgage
Title - A document
that gives evidence of an individual's ownership of
Title Insurance -
A policy, usually issued by a Title Insurance company,
which insures a homebuyers 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.
Title Search - An
examination of municipal records to determine the legal
ownership of property. Usually is performed by a title
- A federal law requiring disclosure of the Annual Percentage
Rate to homebuyers shortly after they apply for the
- A mortgage in which the borrower receives a below-market
interest rate for a specified number of years (most
often seven or 10 years), 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 within 30 days notice at the end
of seven or 10 years. Also called "Super Seven"
or "Premier" mortgage.
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Underwriting - The
decision whether to make a loan to a potential homebuyers
based on credit, employment, assets, and other factors
and the matching of this risk to an appropriate rate
and term or loan amount.
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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.
VA Mortgage Funding Fee
- A premium of up to 2 percent (depending on the size
of the down payment) paid on a VA-backed loan. On a
$75,000 30-year 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
Verification of Employment
- A document signed by the borrower's employer verifying
his/her position and salary.
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Wraparound - 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.
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