Adjustable Rate Mortgage (ARM)
A mortgage in which the interest rate is adjusted periodically based on a pre-selected index. Also, sometimes known as a renegotiable rate mortgage or variable rate mortgage.
Loan payment divided into 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)
The measurement of the full cost of a loan including interest and loan fees expressed as a yearly percentage rate.
Because all lenders apply the same rules in calculating the annual percentage rate, it provides consumers with a good basis for comparing the cost of different loans.
An estimate of the value of property is made by a qualified professional called an “appraiser” is based on an appraiser’s knowledge, experience, and analysis of the property.
A loan which is amortized for a longer period than the term of the loan. Usually this refers to a thirty year amortization and a five or seven year term. At the end of the term of the loan the remaining outstanding principal on the loan is due. This final payment is known as a balloon payment.
Certificate of Eligibility
The document given to qualified veterans which entitles them to VA guaranteed loans for a home based business and mobile homes. Certificates of eligibility may be obtained by sending form DADA (Separation Paper) to the local VA office with VA form 1880 (Request for Certificate of Eligibility).
Expenses over and above the price of the property that are incurred by buyers and sellers when transferring ownership of a property. Closing costs normally include an origination fee, property taxes, charges for title insurance and escrow costs, appraisal fees etc. Closing costs will vary between banks.
A five-page form, created by the Consumer Financial Protection Bureau (CFPB), that provides final details to a borrower about the mortgage loan selected. The form is completed by the lender and lists the loan terms, projected monthly payments, and closing costs. To avoid surprises, lenders are required to provide the borrower with a copy of the Closing Disclosure three days before closing. This three day window allows the borrower time to compare the final terms and costs in the Closing Disclosure with those included in the Loan Estimate, and to ask questions regarding the loan.
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 gross monthly income.
Money paid to make up the difference between the purchase price and the mortgage amount.
The difference between the fair market value and current indebtedness also referred to as the owner’s interest. The value an owner has in real estate over and above the obligation against the property.
An account held by the lender into which the home buyer pays money for tax or insurance payments. Also, earnest deposits held pending loan closing.
Fixed Rate Mortgage
The mortgage interest rate will remain the same on these mortgages throughout the term of the mortgage for the original borrower.
A form of insurance in which the insurance company protects the insured from specified losses such as fire, windstorm, and the like.
The sum of the published index plus the margin. For example, if the index is 4% and the margin is 2.75% the indexed rate would be 6.75%. Often lenders charge less than the indexed rate the first year of an adjustable rate mortgage.
A three-page form, created by the Consumer Financial Protection Bureau (CFPB), that provides a borrower with important details about their loan, including the estimated interest rate, monthly payment, total closing costs, estimated costs of taxes and insurance, and how the interest rates and payments may change in the future. If the loan has special features, such as early payment penalties or increases in mortgage loan balances, the form will also include these details. The lender is required to provide a borrower with this form within three business days after receipt of the loan application. All lenders are required to use the same Loan Estimate form, making it easier for borrowers to compare mortgage loans. The Loan Estimate is not an approval or denial of a loan application, but shows a borrower the terms the lender expects to offer if the borrower decides to move forward with the loan.
Loan to Value Ratio
The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage.
A lender’s guarantee that the mortgage rate quoted will be good for a specific number of days from the day of application.
A legal document that pledges a property to the lender as security for payment of a debt.
Money paid to insure the mortgage when the down payment is less than 20 percent.
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 home buyer ends up owing more than the original amount of the loan.
One Year Adjustable Rate Mortgage
Mortgage where the annual rate changes yearly. The rate is usually based on movements of a published index plus a specified margin chosen by the lender.
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 the face value of the loan.
Principle interest taxes and insurance. Also called monthly housing expense.
Points (Loan Discount 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).
The process of determining how much money you will be eligible to borrow before you apply for a loan.
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 assessments.
Money charged for an early repayment of debt. Prepayment penalties are allowed in some form (but not necessarily imposed) in many states.
Private Mortgage Insurance (PMI)
In the event that you do not have a 20 percent down payment, lenders will allow a smaller down payment – as low as 3 percent in some cases. Private mortgage insurance will usually require an initial premium payment and may require an additional monthly fee depending on your loan’s structure.
Calculations used to determine if a borrower can qualify for a mortgage. They consist of two separate calculations: a housing expense as a percent of income ratio and total debt obligations as a percent of income ratio.
A commitment issued by a lender to a borrower or another mortgage originator guaranteeing a specified interest rate and lender costs for a specified period of time.
Real Estate Settlement Procedures Act (RESPA)
A consumer protection law that requires lenders to give borrowers advance notice of closing costs.
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.
Obtaining a new mortgage loan on a property already owned often to replace existing loans on the property.
Secondary Mortgage Market
The place where primary mortgage lenders sell the mortgages they make to obtain more funds to originate more new loans. It provides liquidity for the lenders.
A policy usually issued by a title insurance company which insures a home buyer 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. Policies are also available to protect the lender’s interests.
Truth in Lending
A federal law requiring disclosure of the Annual Percentage Rate to home buyers shortly after they apply for the loan. Also known as Regulation Z.