A Glossary of Mortgage Terms (Continued)

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: M to Z

MARGIN - The amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate.

MARKET VALUE - The highest price that a buyer would pay and the lowest price a seller would accept on a property. Market value may be different from the price a property could actually be sold for at a given time.

MORTGAGE INSURANCE - Money paid to insure the mortgage when the down payment is less than 20 percent. See private mortgage insurance, FHA mortgage insurance.

MORTGAGEE - The lender.

MORTGAGOR - The borrower or homeowner.

NEGATIVE AMORTIZATION - Occurs 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 danger of negative amortization is that the homebuyer ends up owing more than the original amount of the loan.

NET EFFECTIVE INCOME - The borrower's gross income minus federal income tax.

NON-ASSUMPTION CLAUSE - A statement in a mortgage contract forbidding the assumption of the mortgage without the prior approval of the lender.

ORIGINATION FEE - 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 face value of the loan.

PITI - Principal, 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).

POWER OF ATTORNEY - A legal document authorizing one person to act on behalf of another.

PREPAIDS - Expenses 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.

PREPAYMENT - A privilege in a mortgage permitting the borrower to make payments in advance of their due date.

PRINCIPAL - The amount of debt, not counting interest, left on a loan.

PRIVATE MORTGAGE INSURANCE (PMI) - In the event that you do not have a 20 percent down payments, lenders will allow a smaller down payment-as low as 5 percent in some cases. With the smaller down payments loans, however, borrowers are usually required to carry private mortgage insurance. Private mortgage insurance will require an initial premium payment of 1.0 percent to 5.0 percent of your mortgage amount and may require an additional monthly fee depending on your loan's structure. On a $75,000 house with a 10 percent down payments, this would mean either an initial premium payment of $2,025 to $3,375, or an initial premium of $675 to $1,130 combined with a monthly payment of $25 to $30.

REALTOR - A real estate broker or an associate holding active membership in a local real estate board affiliated with the National Association of Realtors.

RECISION - 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.

RECORDING FEES - Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records.

RENEGOTIABLE RATE MORTGAGE (RRM) - A loan in which the interest rate is adjusted periodically. See adjustable rate mortgage.

RESPA - Short for the Real Estate Settlement Procedures Act. RESPA is a federal law that allows consumers to review information on known or estimated settlement costs once after application and once prior to or at settlement. The law requires lenders to furnish information after application only.

REVERSE ANNUITY MORTGAGE (RAM) - A form of mortgage in which the lender makes periodic payments to the borrower using the borrower's equity in the home as security.

SERVICING - All the steps and operations a lender perform to keep a loan in good standing, such as collection of payments, payment of taxes, insurance, property inspections and the like.

SETTLEMENT/SETTLEMENT COSTS - See closing/closing costs.

SHARED APPRECIATION MORTGAGE (SAM) - A mortgage in which a borrower receives a below-market interest rate in return for which a lender (or another investor such as a family member or other partner) receives a portion of the future appreciation in the value of the property. May also apply to mortgages where the borrower shares the monthly principal and interest payments with another party in exchange for a part of the appreciation.

SURVEY - A measurement of land, prepared by a registers land surveyor, showing the location of the land with reference to known points, its dimensions, and the location and dimensions of any building.

TERM MORTGAGE - See balloon payment mortgage.

TITLE - A document that gives evidence of an individual's ownership of property.

TITLE INSURANCE - A policy, usually issued by a title insurance company, which insures a homebuyer 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.

TITLE SEARCH - An examination of municipal records to determine the legal ownership of property. Usually is performed by a title company.

TRUTH-IN-LENDING - A federal law requiring disclosure of the Annual Percentage Rate to homebuyers shortly after they apply for the loan.

TWO-STEP MORTGAGE - A mortgage in which the borrower receives a below-market interest rate for a specified number of years (most often seven or 10 years), and then receives a new interest rate adjusted (within certain limits) to market conditions at that time, The lender sometimes has the option to call the loan, due within 30 days notice at the end of seven or 10 years. also called "Super Seven" or "Premier" mortgage.

UNDERWRITING - The decision whether to make a loan to a potential homebuyer based on credit, employment, assets, and other factors and the matching of this risk to an appropriate rate and term or loan amount.

VA LOAN - A long-term, low-or no-down payment loan guaranteed by the Department of Veterans Affairs. Restricted to individuals qualified by military service or other entitlements.

VA MORTGAGE FUNDING FEE - A premium of up to 1 7/9 percent (depending on the size of the down payments) paid on a VA backed loan. On a $75,000 30-year fixed-rate mortgage with no down payments, this would amount to $1,406 either paid at closing or added to the mount financed.

VARIABLE RATE MORTGAGE (VRM) - See adjustable rate mortgage.

VERIFICATION OF DEPOSIT (VOD) - A document signed by the borrower's financial institution verifying the status and balance of his/her financial accounts.

VERIFICATION OF EMPLOYMENT - A document signed by the borrower's employer verifying his/her position and salary.

WRAPAROUND - Results when an existing assumable loan is combined with a new loan, resulting in an interest rate somewhere between the old rate and the current market rate. The payments are made to a second lender or the previous homeowner, who then forwards the payments to the first lender after taking the additional amount off the top.

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