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glossary
Adjustable Rate
An interest rate
that changes periodically in relation to an index. Payments may increase
or decrease accordingly.
amortization
A repayment method in which the amount you borrow is repaid gradually
though regular monthly payments of principal and interest. During the
first few years, most of each payment is applied toward the interest owed.
During the final years of the loan, payment amounts are applied almost
exclusively to the remaining principal.
Annual Membership
An amount that may be charged annually for having a line of credit available.
Often charged regardless of whether or not you use the line. Also referred
to as a "participation fee."
Annual Percentage
Rate (APR)
The cost of credit on a yearly basis, expressed as a percentage. Required
to be disclosed by the lender under the federal Truth in Lending Act,
Regulation Z. Includes up-front costs paid to obtain the loan, and is,
therefore, usually a higher amount than the interest rate stipulated in
the mortgage note. Does not include title insurance, appraisal, and credit
report.
Application
An initial STATEMENT of personal and financial information which is required
to approve your loan.
Application Fee
Fees that are paid upon application. An application fee may frequently
include charges for property appraisal ($200-$400) and a credit report
($30-50).
Appraisal
A fee charged by an appraiser to render an opinion of market value as
of a specific date. Required by most lenders to obtain a loan.
Assumption of
Mortgage
The agreement of a purchaser to become primarily liable for the payments
on a mortgage loan. Unless otherwise specified by the lender, the seller
may remain secondarily liable for payments.
Balloon Payment
A lump sum payment for the unpaid balance of the loan.
Cap
The maximum allowable increase, for either payment or interest rate, for
a specified amount of time on an adjustable rate mortgage.
Cash Out
Receiving money back when refinancing your present mortgage.
Ceiling
The maximum allowable interest rate over the life of the loan of an adjustable
rate mortgage.
Closing Costs
Any fees paid by the borrowers or sellers during the closing of the mortgage
loan. This normally includes an origination fee, discount points, attorney's
fees, title insurance, survey, and any items which must be prepaid, such
as taxes and insurance escrow payments.
Conforming Loan
Generally, a mortgage loan under $207,000. Qualifying ratios and underwriting
methods are standardized to a large degree.
Contract of Sale
The agreement between the buyer and seller on the purchase price, terms,
and conditions necessary to both parties to convey the title to the buyer.
Credit Limit
The maximum amount that you can borrow under a home equity plan.
Debt Service
The total amount of credit card, auto, mortgage or other debt upon which
you must pay.
Deed of Trust
Used in many western states, the agreement used to pledge your home or
other real estate as security for a loan. Similar to a mortgage.
Discount Points
(or Points)
The amount paid either to maintain or lower the interest rate charged.
Each point is equal to one percent (1%) of the loan amount (i.e., one
points on a $100,000 mortgage would equal $1,000).
Down Payment
The difference between the purchase price and that portion of the purchase
price being financed. Most lenders require the down payment to be paid
from the buyer's own funds. Gifts from related parties are sometimes acceptable,
and must be disclosed to the lender.
Due on Sale
A clause in a mortgage agreement providing that, if the mortgagor (the
borrower) sells, transfers, or, in some instances, encumbers the property,
the mortgagee (the lender) has the right to demand the outstanding balance
in full.
Effective Interest
Rate
The cost of credit on a yearly basis expressed as a percentage. Includes
up-front costs paid to obtain the loan, and is, therefore, usually a higher
amount than the interest rate stipulated in the mortgage note. Useful
in comparing loan programs with different rates and points.
Encumbrance
A claim against a property by another party which usually affects the
ability to transfer ownership of the property.
Equity
The difference between the fair market value (appraised value) of your
home and your outstanding mortgage balance.
First Mortgage
A mortgage which is in first lien position, taking priority over all other
liens (which are financial encumbrances).
Fixed Rate
An interest rate which is fixed for the term of the loan. Payments as
well are fixed at one amount.
fha Loan
More appropriately termed "fha Insured Loan." A loan for which
the Federal Housing Administration insures the lender against losses the
lender may incur due to your default.
Good Faith Estimate
A written estimate of closing costs which a lender must provide you within
three days of submitting an application.
Grace Period
A period of time during which a loan payment may be paid after its due
date but not incur a late penalty. Such late payments may be reported
on your credit report.
Gross Income
For qualifying purposes, the income of theborrower before taxes or expenses
are deducted.
Home Equity Line
of Credit
A loan providing you with the ability to borrow funds at the time and
in the amount you choose, up to a maximum credit limit for which you have
qualified. Repayment is secured by the equity in your home. Simple interest
(interest-only payments on the outstanding balance) is usually tax-deductible.
Often used for home improvements, major purchases or expenses, and debt
consolidation.
Home Equity Loan
A fixed or adjustable rate loan obtained for a variety of purposes, secured
by the equity in your home. Interest paid is usually tax -deductible.
Often used for home improvement or freeing of equity for investment in
other real estate or investment. Recommended by many to replace or substitute
for consumer loans whose interest is not tax-deductible, such as auto
or boat loans, credit card debt, medical debt, and education loans.
Hazard Insurance
A contract between purchaser and an insurer, to compensate the insured
for loss of property due to hazards (fire, hail damage, etc.), for a premium.
HUD I Settlement
STATEMENT
A form utilized at loan closing to itemize the costs associated with purchasing
the home. Used universally by mandate of HUD, the Department of Housing
and Urban Development.
Index
A number, usually a percentage, upon which future interest rates for adjustable
rate mortgages are based. Common indexes include the Cost of Funds for
the Eleventh Federal District of banks or the average rate of a one year
Government Treasury Security.
Interest Rate
The periodic charge, expressed as a percentage, for use of credit.
Jumbo Loan
Mortgage loans over $203,150. Terms and underwriting requirements may
vary from conforming loans.
Loan to value
Ratio (LTV)
A ratio determined by dividing the sales price or appraised value into
the loan amount, expressed as a percentage. For example, with a sales
price of $100,000 and a mortgage loan of $80,000, your loan to value ratio
would be 80%. Loans with an LTV over 80% may require private Mortgage
Insurance, defined below.
Lock or Lock In
A commitment you obtain from a lender assuring you a particular interest
rate or feature for a definite time period. Provides protection should
interest rates rise between the time you apply for a loan, acquire loan
approval, and, subsequently, close the loan and receive the funds you
have borrowed.
Margin
An amount, usually a percentage, which is added to the index to determine
the interest rate for adjustable rate mortgages.
Minimum Payment
The minimum amount that you must pay, usually monthly, on a home equity
loan or line of credit. In some plans, the minimum payment may be "interest
only," (simple interest). In other plans, the minimum payment may include
principal and interest (amortized).
Mortgage Banker
Originates mortgage loans, loaning you their funds and closing the loan
in their name.
Mortgage Broker
As do mortgage bankers, takes loan application and processes the necessary
paperwork. Unlike a mortgage banker, brokers do not fund the loan with
their own money, but work on behalf of several investors, such as mortgage
bankers, S and L's, banks, or investment bankers.
Mortgage Insurance
(MIP or PMI)
Insurance purchased by theborrower to insure the lender or the government
against loss should you default. MIP, or Mortgage Insurance Premium, is
paid on government-insured loans (fha or va loans) regardless of your
LTV (loan-to-value). Should you pay off a government-insured loan in advance
of maturity, you may be entitled to a small refund of MIP. PMI, or private
Mortgage Insurance, is paid on those loans which are not government-insured
and whose LTV is greater than 80%. When you have accumulated 20% of your
home's value as equity, your lender may waive PMI at your request. Please
note that such insurance does not constitute a form of life insurance
which pays off the loan in case of death.
Mortgage Loan
A loan which utilizes real estate as security or collateral to provide
for repayment should you default on the terms of your loan. The mortgage
or Deed of Trust is your agreement to pledge your home or other real estate
as security.
Mortgagee
The lender in a mortgage loan transaction.
Mortgagor
Theborrower in a mortgage loan transaction.
Negative amortization
amortization in which the payment made is insufficient to fund complete
repayment of the loan at its termination. Usually occurs when the increase
in the monthly payment is limited by a ceiling. The portion of the payment
which should be paid is added to the remaining balance owed. The balance
owed may increase, rather than decrease over the life of the loan.
PITI
Principal, interest, taxes and insurance, which comprise your monthly
mortgage payment.
Points
The amount paid either to maintain or lower the interest rate charged.
Each point is equal to one percent (1%) of the loan amount (i.e., two
points on a $100,000 mortgage would equal $2,000).
Prepayment Penalty
A fee paid to the lending institution for paying a loan prior to the scheduled
maturity date.
Qualifying Ratios
Comparisons of aborrower's debts and gross monthly income.
Right to Rescission
The legal right to void or cancel your mortgage contract in such a way
as to treat the contract as if it never existed. Right of rescission is
not applicable to mortgages made to purchase a home, but may be applicable
to other mortgages, such as home equity loans.
Security Interest
An interest that a lender takes in theborrower's property to assure repayment
of a debt. See Mortgage and Deed of Trust above.
Servicing a Loan
The ongoing process of collecting your monthly mortgage payment, including
accounting for and payment of your yearly tax and/or homeowners insurance
bills.
title
The written evidence that proves the right of ownership of a specific
piece of property.
title Insurance
Protection for lenders or homeowners against financial loss resulting
from legal defects in the title.
Transaction Fee
A fee which may be charged each time you draw on a home equity credit
line.
Underwriting
The process of verifying data and approving a loan.
variable Rate
An interest rate that changes periodically in relation to an index. Payments
may increase or decrease accordingly.
va Loan
More appropriately termed "va Insured Loan." A loan for which the
Veteran's Administration insures the lender against losses the lender
may incur due to your default. Available only to veterans possessing a
Certificate of Eligibility.
Note:
The above definitions are excerpts from "Mortgage Banking Terms," published
by the Mortgage Bankers' Association of America.
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