Glossary of Terms

3/1, 5/1, 7/1 and 10/1 ARMs: Adjustable rate mortgages in which rate the first number represents the number of years that the interest rate is locked, but may adjust annually after that time passes.

Adjustable-rate mortgage (ARM):  Home loan in which the interest rate is changed periodically based on a standard financial index. 

Amortization: A loan payment plan in which the amount borrowed plus accrued interest is calculated over a fix period of time and scheduled to be paid off in equal payments.

APR Annual Percentage Rate: A yearly rate of interest that includes fees and costs paid to acquire the loan.  This amount is compounded over the term of the loan.

Appraisal:  An estimate of the value of property.  A qualified professional should make the estimated value.

Appraised Value: A professional opinion of a property's fair market value.

Application fee: What the lender charges to process the documents in which a prospective borrower must submit to qualify for a loan.

Bankruptcy: a legally declared inability or impairment of ability of an individual or organization to pay their creditors.
Chapter 7 Code providing for liquidation -- the sale of a debtor's nonexempt property and the distribution of the proceeds to creditors
Chapter 9 Code addressing the adjustments of debts of a municipality
Chapter 11 Code providing for reorganization bankruptcy, usually involving a corporation or partnership
Chapter 13 Code providing for adjustment of debts of an individual with regular income

Basis point: One one-hundredth of a percentage point. A common term used in calculating the cost of mortgage loans

Buy-down mortgage: A home loan in which the lender charges a below-market interest rate in exchange for discount/up-front points. Often referred to “buying down your mortgage.”

Cash-out refinance: Taking out a new mortgage loan on the same property in which cash is given to the borrower based on the amount of equity in the house.

Certificate of Eligibility: A document Veterans must provide the lender during the application process in order to prove entitlement to VA guaranteed loans.

Certificate of Reasonable Value: An appraisal showing the property’s current market value issued by the Veterans Administration.

Certificate of Veteran Status: The document given to veterans or reservists who have served 90 days of continuous active duty (including training time).

Certificate of title: A document provided by a title company or attorney stating that the current owner legally holds the title to the property.

Consumer Reporting Bureau: An organization that generates reports used by lenders to analyze a potential borrower's credit history.

Conversion Clause: A rider attached to an ARM allowing the loan to be converted to a fixed-rate at some point during the term.

Conventional mortgage: Usually refers to a fixed-rate, 30-year mortgage that is not insured by a government agency.

Credit score: A numerical value reflecting a borrowers credit worthiness detailed by a credit report. Lenders include this number in calculations they use to determine a loan’s rate and terms

Debt-to-Income Ratio: The ratio of a borrower’s monthly payment obligation on long-term debt divided by his or her gross monthly income.


Default: Failure to meet legal obligations in a contract.  In lending this typically means failure, by the borrower, to make payments in line with the terms of the loan agreement.

Delinquency: Failure to make loan payments on time.

Department of Veterans Affairs (VA): A federal government agency that guarantees mortgages to eligible veterans.

Down payment: An initial, onetime partial payment on a purchase. The financed amount is reduced by the down payment amount.

Equal Credit Opportunity Act: 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 a property’s “fair market value” and the unpaid principal balance of the mortgage and any liens against that property. ‘

Escrow: An account in which a neutral third party holds documents and money in a real-estate transfer until the sale is final.

Fair market value: In real estate it is the dollar amount property would sell for, assuming the buyer and seller both have reasonable knowledge of the current real-estate environment and are not under pressure to buy or sale.  This is also commonly referred to as true market value or current market value.


Federal Home Loan Mortgage Corporation "Freddie Mac": A government sponsored entity that purchases conventional mortgage from insured depository institutions and HUD-approved mortgage bankers.

Federal Housing Administration (FHA): A government agency that insures residential mortgage loans made by private lenders.

Federal National Mortgage Association "Fannie Mae":  a secondary mortgage institution sponsored by the federal government that buys VA, FHA, and conventional mortgages from primary lenders. Also known as "Fannie Mae."

Fixed-rate mortgage: A home loan in which the interest rate will remain the same through the life of the loan.

Foreclosure: A legal process by which the lender forces the sale of a mortgaged property because the borrower has not met the terms of the mortgage loan.

Good faith estimate: A written estimate of expected closing costs provided by a lender to a prospective borrower within three days of the potential borrower submitting a mortgage loan application.

Government National Mortgage Association "Ginnie Mae”:  Provides sources of funds for residential mortgages, insured or guaranteed by FHA or VA.

HELOC: An acronym for home equity line of credit.

Home equity: The part of a home's value that the mortgage borrower owns outright.

Homeowners insurance: An insurance policy that includes hazard coverage, covering loss or damage to property, as well as coverage for personal liability and theft.

Interest Cap: Borrower safeguard that limits the amount of change to the interest rate for an adjustable rate mortgage.

Initial Interest Rate: This is the original interest rate of the mortgage at the time of closing. This rate changes for an adjustable rate mortgage (ARM).

Interest-only loan: An advance of money in which the installments only pay the accumulated interest and not the actual the loan balance.  The interest-only payment period typically only last for a short period of time in relation to the actual loan term.

Interest Rate Floor: For an adjustable rate mortgage (ARM), this is the minimum interest rate to be charged

Jumbo Loan: A loan that is larger than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation.

Late Charge: The penalty a borrower must pay when a payment is made one time or with in a pre-determined grace period.

Liabilities: A borrower’s financial obligations.

Lien: A legal claim against property for payment of a debt or for services rendered.

Loan: A sum of borrowed money (principal) that is generally repaid with interest.

Loan-to-value ratio (LTV): The percentage of the home's price that is paid for by a mortgage.

Lock: A lender's guarantee that a quoted mortgage rate will be good for a specific number of days.

Market Value: The highest price that a buyer would pay and the lowest price a seller would accept on a property.

Mortgage: A legal document that pledges a property to the lender as security for payment of a debt.

Note: A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.
 
Origination fee: The charge to process a loan, which usually includes the cost to prepare essential documents, check a borrower's credit history, inspect the property and sometimes conduct an appraisal.

Private mortgage insurance (PMI): An insurance policy that protects the lender by paying the costs of foreclosing on a house if the borrower stops paying the loan. PMI is usually required if the down payment is less than 20 percent of the sale price and is paid for by the borrower.

Points A point equals 1 percent of a mortgage or other loan.  Typically points are paid be the borrower to either cover the lenders cost of originating the loan or to “buy down” the interest rate.

Power of Attorney: A legal document authorizing one person to act on behalf of another.


Prepayment Penalty: A borrower fee for early repayment of debt.

Principal: The amount borrowed or unpaid.

Principal, Interest, Taxes, and Insurance (PITI): The four components of a monthly mortgage payment.

Refinancing: The repayment of a mortgage with a newer mortgage. Homeowners typically refinance to take advantage of lower interest rates or to get cash out of their equity.

Reverse mortgage: A loan that allows a homeowner to convert built-up equity into cash. The loan comes due when the owner dies, sells the house or moves out.  Older homeowners are typically the only consumers that use this financial instrument

Secured debt: Debt that is secured by a lien on debtor's property. The lender may take possession of the property if the debtor fails to make payment.
 
Sub-prime mortgage: A mortgage loan made to person with a less-than-perfect credit report.  Lenders charge a higher interest rate to compensate for potential losses associated with sub-prime lending.

Tax deduction: An Amount of money that the IRS allows a taxpayer to subtract from their income before computing their income tax return. Typical itemized deductions include mortgage interest, some loan points, and property taxes and state income taxes.

Tax lien: A claim to the sale of property because of unpaid taxes.

Title: A document that gives evidence of an individual's ownership of property.

Title Insurance: A policy that insures a homebuyer against errors in the title search as well as the lender.

Truth in Lending: A federal law requiring full disclosure of the Annual Percentage Rate and other fees associated with taking out a mortgage loan.

Underwriting: The process in determining whether to make a loan to a potential borrower, and if so at what rate, based on their credit worthiness, assets, employment, and other factors.

Unsecured loan An advance of money that is not secured by collateral

VA Loan: A loan guaranteed by the Department of Veterans Affairs to certain eligible Veterans.