Acceleration Clause — A clause in your mortgage which allows the lender to demand payment of the outstanding loan balance for various reasons. The most common reasons for accelerating a loan are if the borrower defaults on the loan or transfers title to another individual without informing the lender.
Adjustable Rate (ARM) — A mortgage in which the interest changes periodically, according to corresponding fluctuations in the market index. As the interest rate changes, your loan payments may increase or decrease.
Amortization — When you take out a loan on a new home, you will make monthly payments to pay down your mortgage. The loan payment consists of a portion which will be applied to pay the accruing interest on a loan, with the remainder being applied to the principal. Over time, the interest portion decreases as the loan balance decreases, and the amount applied to principal increases so that the loan is paid off (amortized) in the specified time.
Annual Percentage Rate (APR) — This is a value created according to a government formula intended to reflect the true annual cost of borrowing, expressed as a percentage. It is also defined as the cost of credit on a yearly basis (expressed as a percentage) and it includes any up-front costs paid to obtain your mortgage. The APR is usually higher than the interest rate named in your mortgage note, and does not include the cost for obtaining title insurance, an appraisal, or your credit report.
Application — In order to approve your mortgage, you must first complete a statement that contains your personal and financial information. The application will include information about your income, savings, assets, debts, and more.
Application Fee — Upon filing an application to acquire your mortgage, you will have to pay an application fee. The amount of the fee usually includes the cost of a property appraisal (approximately $200-400) and the cost of your credit report (approx. $30-50). Both the appraisal and credit report are required to obtain a mortgage.
Appraisal — An appraisal is a written justification of the price paid for a property, based on an analysis of comparable sales of similar homes in nearby areas. Most lenders will require you, the borrower, to hire an appraiser in order to provide them with information on the value of the home. The appraisal will allow the mortgage company to decide how much money you'll need from them to purchase the home.
Appraised Value — An opinion of a property's fair market value, based on an appraiser's knowledge, experience, and analysis of the property.
Appraiser — An individual or firm qualified by education, training, and experience to estimate the value of real property and personal property. Most appraisers are independent, although some appraisers work directly for mortgage lenders.
Appreciation — The increase in the value of a property due to changes in market conditions, inflation, or other causes.
Assessed Value — The valuation placed on property by a public tax assessor for purposes of taxation.
Assessment — The placing of a value on property for the purpose of taxation.
Assessor — A public official who establishes the value of a property for taxation purposes.
Asset — Items of value owned by an individual. Assets that can be quickly converted into cash are considered "liquid assets." These include bank accounts, stocks, bonds, mutual funds, and so on. Other assets include real estate, personal property, and debts owed to an individual by others.
Balloon Mortgage — A balloon loan requires you to pay a lump sum of the unpaid balance, known as a balloon payment, at the end of the loan's terms (usually 5-7 years).
Cap — Adjustable Rate Mortgages have fluctuating interest rates, but those fluctuations are usually limited to a certain amount. In other words, for a specified amount of time, your lender is not allowed to raise your interest or require payments above a certain amount regardless of interest rate fluctuations.
Ceiling — If you take out an ARM, it will most likely have a ceiling, which is defined as the maximum allowable interest rate over the entire life of the loan.
Closing Costs — The closing is a meeting where all documents are signed and the money changes hands. There are several costs associated with the closing. The fees may be paid by both the buyers or sellers and usually include an origination fee, discount points, attorney fees, title insurance, survey and other required items, such as personal property taxes and escrow payments.
Collateral — In a home loan, the property is the collateral. The borrower risks losing the property, if the loan is not repaid according to the terms of the mortgage or deed of trust.
Condominium — A type of ownership in real property where all of the owners own the property, common areas and buildings together, with the exception of the interior of the unit to which they have title. Often mistakenly referred to as a type of construction or development, it actually refers to the type of ownership.
Conforming Loan — Mortgage loans under $203,150.
Contingency — A condition that must be met before a contract is legally binding. For example, home purchasers often include a contingency that specifies that the contract is not binding until the purchaser obtains a satisfactory home inspection report from a qualified home inspector.
Convertible ARM — An adjustable-rate mortgage that allows the borrower to change the ARM to a fixed-rate mortgage within a specific time.
Contract of Sale (Purchase and Sale, P&S) — When your new home is purchased, you will sign an agreement known as a contract of sale. This contract documents the details of the transaction, including the cost of the home, specific terms and conditions that were agreed upon, and the transfer of the homes title from the seller to the buyer.
Debt Service — Your debt service refers to the amount of outstanding debt that you pay per month, including monthly credit card, car, student loan and mortgage payments.
Depreciation — A decline in the value of property; the opposite of appreciation.
Discount Points (Points) — In order to maintain or lower the amount of interest rate on your loan, you will have to pay a certain amount of money, which are referred to as discount points. Each point is equal to 1 percent of the amount of your loan. So, if you were to pay five discount points on a $100,000 mortgage, the cost to you would be $4,000.
Down Payment — When you take out a mortgage, your down payment is the part of the purchase price of a property that you will pay upfront in cash. Most lenders require the buyer to pay the down payment using their own funds, however some lenders will accept gifts from related parties. Be sure to notify the lender if a related party wants to finance any part of your down payment.
Due on Sale — If you decide to sell your property before you completely pay off your mortgage, your lender may require you to pay the difference upon the sale of the property. This provision is known as due on sale.
Effective Interest Rate — The annual cost of credit expressed as a percentage (this includes the up front costs required to obtain the mortgage). This rate is usually higher than the interest rate in your mortgage note and be helpful when comparing loan programs.
Equity — Your financial interest in a property, as the homeowner. Equity is the difference between the fair market value of the property and the amount still owed on your mortgage and other liens. Because the fair market value of your home may change as a property appreciates, the amount of equity you have in your home may also change.
Fair Market Value — The highest price that a buyer, willing but not compelled to buy, would pay. Also the lowest a seller, willing but not compelled to sell, would accept.
First Mortgage — A property can have more than one loan against it, however the first one registered with your state or county takes priority over all other loans.
Fixed-Rate Mortgage — A mortgage in which the interest rate does not change during the entire term of the loan. All payments made on this type of mortgage will stay the same for the entire term of the loan.
Good Faith Estimate — Lenders are required to give you a written estimate that stipulates all of the costs associated with the closing of the sale of a property. This estimate is to be in your hands within 3 days of your submitted application.
Home Equity Line of Credit — You are able to use your home equity to obtain a loan for something else. This is way home equity is very important. Home equity line of credit allows you to borrow money up to a certain amount, and payments on the simple interest are usually tax deductible. Home equity lines of credit are often used for home improvements or for debt consolidation.
Home Equity Loan — Like a home equity line of the credit, a home equity loan is obtained by leveraging the equity in your home and is most often tax deductible. This loan rate can be fixed or adjustable and can be used for a range of reasons. These loans are recommended in place of higher-interest consumer loans that are not tax deductible, such as loans for big purchases (like a new car), paying off debt or student loans.
Home Inspection — Typically before the Purchase and Sale Agreement is executed, a thorough inspection by a professional will evaluate the structural and mechanical condition of a property. A satisfactory home inspection is often included as a contingency by the purchaser.
HUD I Settlement — This form itemizes all costs associated with the sale of a property and is used at the closing. It is required by the Department of Housing and Urban Development (HUD)
Index — Future mortgage rates are determined by certain numbers and percentages. These are referred to as indexes. Indexes fluctuate depending on the market.
Interest Rate — The periodic charge a borrower pays to a lender in exchange for borrowing money.
Jumbo Loan — Mortgage loans over $203,150 (high-value mortgage loans).
Loan to Value Ratio (LTV) — The LTV is determined by dividing the sale price (or market value of a property) with the loan amount. Expressed as a percentage, the resulting number is the LTV. As an example, if a property costs $100,000 and the mortgage loan is $80,000, the LTV is 80% because the loan is equivalent to 80% of the value of the property.
Lock — Regardless of market fluctuation, if you lock in an interest then you and your lender have agreed upon an interest rate that will not change for a designated period of time.
Margin — The difference between the interest rate and the index on an adjustable rate mortgage. The margin remains stable over the life of the loan. It is the index which moves up and down.
Mortgage — A legal document that pledges a property to the lender as security for payment of a debt. Instead of mortgages, some states use First Trust Deeds.
Mortgage Banker — The person or company who loans you the funds and closes the loan in their name.
Mortgage Broker — The middleman between the mortgage banker and the buyer. The mortgage broker will process your application, do all of the paperwork, and process all of the forms for the loan, but they do not lend their own money.
Mortgage Insurance or Private Mortgage Insurance (MIP or PMI) — Your lender wants to be protected from losses, in the case that you default on your loan payments. Mortgage Insurance Premium (MIP) is generally paid on government loans regardless of the LTV ratio. Private Mortgage Insurance works similarly, and is usually required on all loans that have a loan-to-value higher than eighty percent. Mortgages above 80% LTV that call themselves "No MI" are usually a made at a higher interest rate. Instead of the borrower paying the mortgage insurance premiums directly, they pay a higher interest rate to the lender, which then pays the mortgage insurance themselves. Once you accumulate 20% of your home's value in equity, our lender may allow you to waive PMI.
Negative Amortization — The opposite of amortization (in which an owner gains principal), this is the process through which a property owner loses principal. Negative amortization can occur for a number of reasons but usually happens when a ceiling limits the monthly loan payments. If a ceiling is in place and all the combined payments do not cover the total amount of the loan and interest, the balance owed might increase, leaving the mortgage holder with a balance owed at the end of the term of the loan.
PITI — Your monthly mortgage payment is made up of several different components: principal, interest, taxes, and insurance (PITI). Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the amounts that are paid into an escrow account each month for property taxes and mortgage and hazard insurance.
Pre-approval — A loosely used term which is generally taken to mean that a borrower has completed a loan application and provided debt, income, and savings documentation which an underwriter has reviewed and approved. A pre-approval applies only to the borrower.
Prepayment Penalty — Lending institutions often charge borrowers a fee if they pay off a loan before it matures.
Pre-qualification — This usually refers to the loan officer's written opinion of the ability of a borrower to qualify for a home loan, after the loan officer has made inquiries about debt, income, and savings. The information provided to the loan officer may have been presented verbally or in the form of documentation, and the loan officer may or may not have reviewed a credit report on the borrower.
Qualifying Ratios — Calculations that are used in determining whether a borrower can qualify for a mortgage.
Realtor ® — A real estate agent, broker or an associate who holds active membership in a local real estate board that is affiliated with the National Association of Realtors. Not all real estate agents are Realtors.
Servicing a Loan — This is another term for the process of collecting your monthly mortgage payment. Loan service includes accounting for and paying yearly personal property taxes on your real estate and homeowners' insurance.
Title — A legal document indicating a person's right to or ownership of a property.
Title Insurance — This insurance protects lenders and homeowners against potential financial losses through legal problems with a title.
Underwriting — This is the process you mortgage company goes through in order to approve your loan. They will verify such data as your gross income and credit history.