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Mortgage Terms

Adjustable Rate Mortgage (ARM): A mortgage in which the loan rate changes during the life of the loan. Changes are governed by the movement of an index – such as the treasury bill, treasury securities index, or London Inter-Bank Offered Rate (LIBOR) – and the margin and caps of the particular ARM program.

Amortization: The gradual repayment of a mortgage by scheduled installments.

Annual Percentage Rate (APR): The actual interest rate, annualized, that a borrower pays when certain costs of financing are included.

Appraisal: A professional estimate of a property’s market value.

Assessed Valuation: The value placed on a property to determine property taxes.

Assumable Mortgage: A mortgage that can be taken over (“assumed”) by the buyer when a home is sold.

Balloon Mortgage: A mortgage that has level monthly payments that will amortize it over a stated term but that provides for a lump sum payment to be due at the end of an earlier specified term.

Balloon Payment: The final lump sum payment that is made at the maturity date of a balloon mortgage.

Cap: A limit placed on the upward movement of the payments and interest rates of a loan.

Closing: The meeting to finalize your financing by signing all documents and making the appropriate payments, including closing costs.

Closing Costs: Costs, in addition to the property price or loan payoff, that are due at the closing. Closing costs often include: origination fees; discount points; attorney’s fees; costs for title insurance; survey and recording documents; and prepayments of real estate taxes and insurance premiums. Closing costs may include other fees, such as an appraisal, credit report cost and underwriting fees.

Closing Disclosure: A disclosure of all applicable financial details of the transaction.

Collateral: Property pledged as security for a debt, such as real estate securing a mortgage.

Comparables: An abbreviation for “comparable properties,” used for comparative purposes in the appraisal process. Comparables are properties like the property under consideration; they have reasonably the same size, location and amenities and have recently been sold. Comparables help an appraiser determine the approximate fair market value of the subject property.

Conventional Mortgage: A mortgage that is not insured or guaranteed by the federal government.

Credit History: A record of an individual’s open and fully repaid debts. A credit history helps a lender determine whether a potential borrower has a history of repaying debts in a timely manner.

Down Payment: The portion of the purchase price that the buyer pays and does not finance with a mortgage.

Escrow Account: An account held by the servicer to which the borrower pays monthly installments for property taxes and insurance. The servicer disburses funds as they become due.

Escrow Payment: The portion of a mortgagor’s monthly payment that is held by the servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments and other items as they become due. Also known as “impounds” or “reserves” in some states.

Fannie Mae (Federal National Mortgage Association): A private, shareholder-owned corporation created by Congress to support the secondary mortgage market by purchasing and selling residential mortgages insured by the Federal Housing Administration (FHA) or guaranteed by the Veterans Administration (VA), as well as conventional home mortgages.

Fixed Rate Mortgage: A mortgage in which the interest rate does not change throughout the loan term.

Foreclosure: A legal process by which a borrower in default under a mortgage is deprived of his or her interest in the mortgage property. This usually involves a forced sale of the property at public auction with the proceeds of the sale being applied to the mortgage debt.

Freddie Mac (Federal Home Loan Mortgage Corporation): A stockholder-owned corporation chartered by Congress to increase the supply of funds that mortgage lenders can make available to homebuyers and multifamily investors.

Federal Housing Administration (FHA): An agency of the U.S. Department of Housing and Urban Development (HUD). Its main activity is the insuring of residential mortgage loans made by private lenders. The FHA sets standards for construction and underwriting but does not lend money or plan or construct housing.

Gift Letter: A letter or form verifying the part of the down payment supplied by someone other than the borrower as a gift that does not have to be repaid.

Hazard Insurance or Homeowners Insurance: A broad form of real estate casualty insurance coverage that includes protection against loss from fire, certain natural causes and vandalism.

HUD: An abbreviation for the Department of Housing and Urban Development, which is a U.S. government agency responsible for regulating mortgage closings and administration of federal housing and urban development programs.

Lock-In: A written agreement in which the lender guarantees a specific interest rate if a mortgage goes to closing in a set amount of time. The Lock-In usually specifies the amount of points to be paid at closing.

Index: For an adjustable rate loan, a measure of current market interest rates is used to determine a new interest rate at the time of adjustment. If the index increases, the interest rate increases until an adjustment rate cap is reached. An index must be readily verifiable by the borrower and beyond to control the lender.

Loan-To-Value Ratio: The ratio of a loan amount to the value or selling price of real property, usually expressed as a percentage.

Margin: The amount added to the index to determine the rate on an adjustable rate mortgage.

Market Value: An estimate of the price a property would sell for within a reasonable period of time on the open market under normal conditions.

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

Points: A point equals one percent of the mortgage amount and is a one-time charge by the lender at closing. A borrower can pay points to reduce the interest rate of a loan.

Pre-Approval: The process used to determine how much money a homebuyer is eligible to borrow. Generally, the borrower’s credit report is obtained.

Pre-Qualification: Compared to a pre-approval, a less formal process used to estimate how much money a borrower may be eligible to borrow.

Prime Rate: The interest rates that banks charge to their preferred customers. Changes in the prime rate influence changes in other rates, including mortgage interest rates.

Principal, Interest, Taxes and Insurance (PITI)

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 amounts that are paid into an escrow account each month for property taxes and mortgage and hazard insurance.

Private Mortgage Insurance (PMI): Insurance written by an independent mortgage insurance company protecting the mortgage lender against loss if a borrower does not pay the loan.

Origination Fee: A fee paid to a lender for processing a loan application. The origination fee is stated in the form of points. One point is one percent of the mortgage amount.

Principal: The amount borrowed or remaining unpaid. The part of the monthly payment that reduces the remaining balance of a mortgage.

Rate Lock: A written agreement that guarantees the borrower a specified interest rate as long as the loan is closed within a set period of time.

Secondary Market: The financial market where mortgages are bought and sold.

Servicer: The institution that collects loan payments and administers the loan after closing. This may or may not be the same company as the initial lender.

Title Insurance – Lender’s: Insurance protecting the lender against loss arising from disputes over lien priority and ownership.

Title Insurance – Owner’s: Insurance protecting the buyer against loss from disputes over rights to the property and ownership.

Title Search: A check of the title records to ensure that the seller is the legal owner of the property and that there are no liens or other claims outstanding.

Transfer Tax: State or local tax paid when real estate passes from one owner to another.

Underwriting: The process of reviewing a loan, including an evaluation of the property and a review of the applicant’s creditworthiness and compliance with program guidelines.

VA Mortgage: A mortgage that is guaranteed by the Department of Veterans Affairs (VA). Also known as a government mortgage.

Real Estate Terms

Bill of Sale: A written document that transfers title to personal property.

Broker: A person who, for a commission or a fee, brings parties together and assists in negotiating contracts between them.

Chain of Title: The history of all the documents that transfer title to a parcel of real property, starting with the earliest existing document and ending with the most recent.

Clear Title: A title that is free of liens or legal questions as to ownership of the property.

Closing: A meeting at which a sale of property is finalized by the buyer signing the mortgage documents and paying closing costs. Also called “settlement.”

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 that purchaser obtains a satisfactory home inspection report from a qualified home inspector.

Deed: The legal document conveying title to a property.

Down Payment: The part of the purchase price of a property that the buyer pays in cash and does not finance with a mortgage.

Earnest Money Deposit: A deposit made by the potential homebuyer to show that he or she is serious about buying the house.

Examination of Title: The report on the title of a property from the public records or an abstract of title.

Home Inspection: A thorough inspection that evaluates the structural and mechanical condition of a property. A satisfactory home inspection is often included as a contingency by the purchaser.

Homeowners Association: A nonprofit association that manages the common areas of a planned unit development (PUD) or condominium project. In a condominium project, it has no ownership interest in the common elements. In a PUD project, it holds title to the common elements.

Lien: A legal claim against a property that must be paid off when the property is sold.

Power of Attorney: A legal document that authorizes another person to act on one’s behalf. A power of attorney can grant complete legal authority or can be limited to certain acts and/or certain periods of time.

Purchase and Sale Agreement: A written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold.

Quitclaim Deed: A deed that transfers without warranty whatever interest or title a grantor may have at the time the conveyance is made.

Title: A legal document evidencing a person’s right to ownership of a property