Mortgage Glossary

A mortgage with an interest rate that fluctuates over the life of the loan according to movements in an index rates. These can also be called adjustable mortgage loans (AML) or variable-rate mortgages (VRM).

A payment plan that allows you to gradually reply your loan and reduce your debt through monthly payments of principal and interest.

The length of time required to amortize the mortgage as expressed in months. For example, 360 months is the amortization term for a 30-year fixed-rate mortgage.

The truest cost of a home loan. This is a measure of the cost of credit expressed an yearly rate that includes interest and other charges. By federal law, all lenders must follow the same rules to ensure consistently accurate APRs, so these are a good way for you to compare the cost of loans. Your APR is going to be higher than the simple interest rate of your mortgage because it includes additional charges.

An estimate of a property’s fair market value that is based on a written analysis (also called an appraisal) prepared by a qualified and licensed appraiser.

Anything a borrower owns that is of monetary value (including real property, personal property, enforceable claims, bank accounts, stocks, mutual funds, etc).

A mortgage with level monthly payments that amortizes over a stated term but that also requires a lump sum payment (balloon payment) at the end of an earlier specified term.

Income before taxes are deducted.

A document issued by the federal government that ceritifies a verteran’s eligibility for a VA loan through the Department of Veteran’s Affairs.

A meeting held to finalize the sale or transfer or a property. At this meeting, the buyer signs the mortgage documents and pays their closing costs. This is sometimes called a “settlement.”

Expenses (over and above property price) that are incurred by buyers and sellers when transferring ownership of a property. Closing costs normally include items like an origination fee, property taxes, charges for title insurance and escrow costs, appraisal fees, etc. Closing costs will vary according to the area country and the lenders used.

A form that provides final details about the mortgage you have selected. It includes items like loan terms, projected monthly payments, and the sum of fees involved in your mortgage. Lenders are required to issue disclosures at least three business days before you close on your loan.

A detailed report of an individual’s credit history that is prepared by a credit reporting bureau. These are used by lenders to determine a borrower’s creditworthiness. In the United States, the major reporting bureaus are Equifax, Experian, and TransUnion. Each will provide a unique credit report that reflects similar information with often small differences.

The comparison of debt payment expenses to overall income. DTI is calculated by dividing monthly debt by gross monthly income and is expressed as a percentage. It’s one way that lenders measure your ability to manage payments and repay debts. For FHA loans, the-monthly mortgage payment should be no more than 29% of monthly gross income (before taxes) and the mortgage payment combined with non-housing debts should not exceed 41% of income.

The failure to make mortgage payments on a timely basis or to comply with other requirements and terms of a mortgage.

The portion of the purchase price that is paid in cash and not financed with your mortgage.

The normal annual income for a borrower, including overtime that is regular or guaranteed. The usual principal source of income is salary, but other income may qualify if it is significant and stable.

Introduces by the Fair Housing Amendments Act of 1988, these are banks insured by the Federal Deposit Insurance Corporation (FDIC) who is prohibited from discriminating on the basis of race, color, religion, national origin, sex, handicap, or familial status.

The difference between how much a property is worth and how much you owe on it. It’s calculated by subtracting the amount you owe on a mortgage from the property’s fair market value.

An asset or financial instrument held by a third party on behalf of two other parties who are in the process of completing a transaction. In real estate, these allow buyers to proceed with the necessary steps of acquisition while assuring the seller of the capacity to complete the purchase. For example, funds deposited in an escrow account can be disbursed upon the closing of a sale of real estate.

The use of escrow funds in the payment of real estate taxes, homeowners insurance, mortgage insurance, and other property expenses as they become due.

The portion of monthly mortgage payment that is held by the servicer for the purposes of paying taxes, homeowners insurance, mortgage insurance, lease payments, and other items as they become due.

A congressionally chartered, shareholder-owned company that is the nation’s largest supplier of home mortgage funds.

The most widely used credit score in mortgage loan underwriting and is a way that lenders assess your credit risk when determining how much credit to extend. This 3-digit number (from 300 to 850) is calculated by looking at payment history, accounts owed, age of credit, and credit mix. Higher FICO® scores (650 and up) represent lower credit risks and typically equate to better loan terms.

A mortgage where the interest rate is set throughout the life of the loan and is not subject to any fluctuations due to changes in the market.

A form of property insurance that protects an individual’s home against damages to the home itself and/or possessions located in the home as well as liability coverage against accidents in the home or on the property.

The measure of interest rate changes a lender uses to decide the amount the interest rate on an ARM will change over time. The index is generally a published number or percentage, such as the average interest or yield on Treasury bills. Some index rates are higher than others while some are more volatile.

The regular periodic payment that a borrower agrees to make to a lender.

The fee charged to a borrower for borrowing money expressed as a percentage of the principal. These rates can be fixed or variable over the life of the loan.

The penalty paid by a borrower when a payment is made a stated number of days after the payment due date.

An individual’s financial obligations, including long-term and short-term debt.

A lien is a notice attached to your property signifying that a creditor claims that you owe them money for it. Liens are typically filed as public records and is a way creditors collect on what they are owed.

An agreement made by a commercial bank or other financial institution to extend credit up to a certain amount for a certain time.

A form provided to you by the lender within three days of your application that includes the estimated monthly payment, interest rate, and closing costs for the loan. Details related to your taxes, insurance, and potential interest fluctuations are also be included on a loan estimate.

The relationship between the principal balance of a loan and the appraised value (or sales price, if lower) or a property. For example, a $200,000 home with a $160,000 mortgage has an LTV of 80 percent.

The specified period of time a lender guarantees an interest rate, including loan terms and points, if any, to be paid at closing. Short term locks are those under 21 days. However, lenders may permit a borrower to lock a loan for 30 days or more.

The date on which the principal balance of a loan becomes due and payable.

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

A company that originates mortgages exclusively for resale in the secondary mortgage market.

An insurance policy on government or conventional mortgages that covers lenders or investors if a borrower defaults on their loan. The terms of mortgage insurance vary based on loan type and may be issued by a private company or government agency.

The borrower in a mortgage agreement.

The lender in a mortgage agreement.

The value of an individual’s assets, including cash.

A fee paid to a lender for processing a loan application. Stated in the form of points. One point is the equivalent of one percent of the mortgage amount.

The amount of cash a borrower must have on hand after a down payment and all closing costs for the purchase of a home have been paid. The principal, interest, taxes, and insurance (PITI) reserves must equal the amount that the borrower would have to pay for PITI for a predefined number of months (usually three).

One point is equal to one percent of the principal amount of your mortgage. For example, one point would be valued at $2,000 in a mortgage of $200,000. Points are usually collected at closing and may be paid by the borrower, seller, or a combination of the two.

A fee that may be charged by the lender if a borrower pays off the loan before it is due.

The process of determining how much money you will be eligible to borrow before applying for a loan.

The interest rate that banks charge preferred customers. Changes in the prime rate can influence changes in other rates, including mortgage interest rates.

The amount borrowed and/or still owed on a loan. This amount does not include any interest owed. Principal payments reduce the remaining balance of the mortgage. For example, if you mortgaged $200,000 dollars and have repaid $50,000, the remaining $150,000 is called your principal.

The four components of a monthly mortgage payment. 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 monthly cost of property taxes and homeowners insurance, whether these amounts that are paid into an escrow account each month or not.

A policy provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults. Most lenders generally require you to carry PMI for a loan with a loan-to-value (LTV) percentage in excess of 80 percent.

The commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specific interest rate and lender costs for a certain period of time.

Paying off one loan with the proceeds from a new loan using the same property as security.

A credit arrangement, such as a credit card, that allows a customer to borrow against a preapproved line of credit when purchasing goods and services.

Where existing mortgages are bought and sold.

An organization that collects principal and interest payments from borrowers and manages borrowers’ escrow accounts. The servicer often services mortgages that have been purchased by an investor in the secondary mortgage market.

The method used to determine the monthly payment required to repay the remaining balance of a mortgage in substantially equal installments over the remaining term of the mortgage at the current interest rate.

An index used to determine interest rate changes for certain adjustable-rate mortgages (ARMs). It is based on the results of auctions the U.S. Treasury holds for its bills and securities or derived from the U.S. Treasury’s daily yield curve.

A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the annual percentage rate (APR) and other charges.

The process of evaluating a loan application to determine the risk involved for the lender. Underwriting involves an analysis of the borrower’s creditworthiness and the quality of the property itself.

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