A Glossary of Mortgage Terms
Learning the language of mortgages can help take the mystery out of the mortgage.
Shopping for a mortgage? If you are one of the tens of thousands of today's home shoppers, you probably have discovered that mortgage lending has a language all its own. For example, you've probably heard about "points", "margins" and "repayment penalties." Should you look for an "assumption?" What are "acceleration clauses?" For the unprepared, this new terminology can be quite confusing. As with any contract, before you sign your mortgage, you should know what you are signing.
TERMS YOU SHOULD KNOW: A to L
ACCELERATION CLAUSE - Allows the lender to speed up the rate at which your loan comes due or even to demand immediate payment of the entire outstanding balance of the loan should you default on you loan.
ADJUSTABLE RATE MORTGAGE (ARM) - Is a mortgage in which the interest rate is adjusted periodically based on a preselected index. Also sometimes known as the renegotiable rate mortgage, the variable rate mortgage or the Canadian rollover mortgage.
ADJUSTMENT INTERVAL - On an adjustable rate mortgage, the time between changes in the interest rate and/or monthly payment, typically one, three or five years, depending on the index.
AMORTIZATION - Means loan payment by 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) - An interest rate reflecting the cost of a mortgage as a yearly rate. This rate is likely to be higher than the stated note rate or advertised rate on the mortgage, because it takes into account points and other credit costs. The APR allows homebuyers to compare different types of mortgages based on the annual cost for each loan.
APPRAISAL - An estimate of the value of property, made by a qualified professional called an "appraiser."
ASSUMPTION - The agreement between buyer and seller where the buyer takes over the payments on an existing mortgage from the seller. Assuming a loan can usually save the buyer money since this is an existing mortgage debt, unlike a new mortgage where closing costs and new, possibly higher, market-rate interest charge will apply.
BALLOON (PAYMENT) MORTGAGE - Usually a short-term fixed-rate loan which involves small payments for a certain period of time and one large payment for the remaining amount of the principal at a time specified in the contract.
BROKER - An individual in the business of assisting in arranging funding or negotiating contracts for a client but who does not loan the money himself. Brokers usually charge a fee or receive a commission for their services.
BUY-DOWN - When the lender and/or the home builder subsidizes the mortgage by lowering the interest rate during the first few years of the loan. While the payments are initially low, they will increase when the subsidy expires.
CAPS (INTEREST) - Consumer safeguards which limit the amount the interest rate on an adjustable rate mortgage may change per year and/or the life of the loan.
CAPS (PAYMENT) - Consumer safeguards which limit the amount monthly payments on an adjustable rate mortgage may change.
CLOSING - The meeting between the buyer, seller and lender or their agents where the property and funds legally change hands. Also called settlement.
CLOSING COSTS - Usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement. The costs of closing usually are about 3 percent to 6 percent of the mortgage amount.
COMMITMENT - An agreement, often in writing, between a lender and a borrower to loan money at a future date subject to the completion of paperwork or compliance with stated conditions.
CONSTRUCTION LOAN - A short term interim loan for financing the cost of construction. The lender advances funds to the builder at periodic intervals as the work progresses.
CONVENTIONAL LOAN - A mortgage not insured by FHA or guarantee by the VA or Farmers Home Administration (FMHA).
CREDIT REPORT - The ratio, expresses as a percentage, which results when a borrower's monthly payment obligation on long term debts is divided by his or her net effective income (FHA/VA loans) or gross monthly income (conventional loans). See housing expenses-to-income ratio.
DEED OF TRUST - In many states, this document is used in place of a mortgage to secure the payment of a note.
DEFAULT - Failure to meet legal obligations in a contract, specifically, failure to make the monthly payments on a mortgage.
DEFERRED INTEREST - See negative AMORTIZATION.
DELINQUENCY - Failure to make payments on time. This can lead to foreclosure.
DEPARTMENT OF VETERANS AFFAIRS (VA) - An independent agency of the federal government which guarantees long-term, low- or no-down payment mortgages to eligible veterans.
DISCOUNT POINTS - See points.
DOWN PAYMENTS - Money paid to make up the difference between the purchase price and mortgage amount. Down payments usually are 10 percent to 20 percent of the sales price on conventional loans, and no money down up to 5 percent on FHA and VA loans.
DUE-ON-SALE-CLAUSE - A provision in a mortgage or deed of trust that allows the lender to demand immediate payment of the balance of the mortgage if the mortgage holder sells the home.
EARNEST MONEY - Money given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment.
EQUAL CREDIT OPPORTUNITY ACT (ECOA) - Is 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 the fair market value and current indebtedness, also referred to as the owner's interest.
ESCROW - Refers to a neutral third party who carries out the instructions of both the buyer and seller to handle all the paperwork of settlement or "closing." Escrow may also refer to an account held by the lender into which the homebuyer pays money for tax or insurance payments.
FANNIE MAE - See Federal National Mortgage Association
FARMERS HOME ADMINISTRATION (fMha) - Provides financing to farmers and other qualified borrowers who are unable to obtain loans elsewhere.
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC) - Also called "Freddie Mac," is a quasi-governmental agency that purchases conventional mortgage form insured depository institutions and
HUD-approved mortgage bankers.
FEDERAL HOUSING ADMINISTRATION (FHA) - A division of the Department of Housing and Urban Development. Its main activity is the insuring of residential mortgage loans made by private lenders. FHA also sets standards for underwriting mortgages.
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) - Also known as "Fannie Mae." A tax-paying corporation created by Congress that purchases and sells conventional residential mortgages as well as those insured by FHA or guaranteed by VA. This institution, which provides funds for one in seven mortgages, makes mortgage money more available and more affordable.
FHA LOAN - A loan insured by the Federal Housing Administration open to all qualified home purchasers. While there are limits to the size of FHA loans ($124,875), they are generous enough to handle moderate-priced homes almost anywhere in the country.
FHA MORTGAGE INSURANCE - Requires a small fee (up to 3.8 percent of the loan amount) paid at closing or a portion of this fee added to each monthly payment of an FHA loan to insure the loan with FHA. On a 9.5 percent $75,000 30-year fixed-rate FHA loan, this fee would amount to either $2,850 at closing or an extra $31 a month for the life of the loan. In addition, FHA mortgage insurance requires an annual fee of 0.5 percent of the current loan amount, the more years the fee must be paid.
FIXED-RATE MORTGAGE - A mortgage on which the interest rate is set for the term of the loan.
FORECLOSURE - A legal procedure in which property securing debt is sold by the lender to pay the defaulting borrower's debt .
FREDDIE MAC - See Federal Home Loan Mortgage Corporation.
GINNIE MAE - See Government National Mortgage Association.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) - Also known as "Ginnie Mae," provides sources of funds for residential mortgages, insured or guaranteed by FHA or VA.
GRADUATED PAYMENT MORTGAGE (gpm) - A type of flexible-payment mortgage where the payments increase for a specified period of time and then level off. this type of mortgage has negative amortization built into it.
GROSS MONTHLY INCOME - The total amount the borrower earns per month, before any expenses are deducted.
GUARANTEE - A promise by one party to pay a debt or perform an obligation contracted by another if the original party fails to pay or perform according to a contract.
HAZARD INSURANCE - A form of insurance in which the insurance company protects the insured from specified losses, such as fire, windstorm and the like.
HOUSING EXPENSES-TO-INCOME RATIO - The ratio, expressed as a percentage, which results when a borrower's housing expenses are divided by his/her net effective income (FHA/VAloans) or gross monthly income (conventional loans). See debt-to-income ratio.
IMPOUND - That portion of a borrower's monthly payments held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also known as reserves.
INDEX - A published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments (such as one- three-, and five-year U.S. Treasury security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average costs-of-funds incurred by savings and loans), which is then used to adjust the interest rate on an adjustable mortgage up or down.
INVESTOR - Money source for a lender.
JUMBO LOAN - A loan which is larger (more than $191,250) than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.
LIEN - A claim upon a piece of property for the payment of satisfaction of a debt or obligation.
LOAN-TO-VALUE RATIO - The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage.
This glossary of terms provided by the Mortgage Bankers Association
of America. For more information, contact the Mortgage Bankers Association
of America, Consumer Affairs Division, 1125 15th Street, N.W., Washington,
D.C. 20005
