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Glossary

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Glossary

Home Glossary

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7/23 and 5/25 Mortgages
Mortgages with a one time rate adjustment after seven years and five years respectively. Also known as balloon, or two-step mortgages.

3/1, 5/1, 7/1 and 10/1 ARMs
Adjustable-rate mortgages in which rate is fixed for three-year, five-year, seven-year and 10-year periods, respectively, but then adjust annually after that.

Adjustable rate mortgage (ARM)
A mortgage in which the interest rate is adjusted periodically based on a pre-selected index. Sometimes known as the variable rate mortgage.

Amortization
A loan payment by equal periodic payment calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance.

Annual percentage rate (A.P.R.)
Measurement of the full cost of a loan including interest and loan fees expressed as a yearly percentage rate.

Appraisal
A written analysis of the estimated value of a property prepared by a qualified appraiser.

Assessment
A local tax levied against a property for a specific purpose, such as a sewer or street lights.

Assignment
The transfer of a mortgage from one person to another.

Assumption
Agreement where the buyer takes over 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, probably higher, market-rate interest charges will apply.

Balloon Mortgage
A loan which is amortized for a longer period than the term of the loan. 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.

Basis Point
A basis point is 1/100th of a percentage point. For example, a fee calculated as 50 basis points of a loan amount of $100,000 would be 0.50% or $500.

Biweekly Payment Mortgage
A plan to reduce the debt every two weeks (instead of the standard monthly payment schedule). The 26 (or possibly 27) biweekly payments are each equal to one-half of the monthly payment required if the loan were a standard 30-year fixed-rate mortgage, resulting in substantial savings in interest. (Making 26 payments is equal to 13 monthly payments per year.)

Blanket Mortgage
One mortgage covering two or more pieces of real estate.

Borrower (Mortgagor)
One who applies for and receives a loan in the form of a mortgage with the intention of repaying the loan in full.

Broker
A professional who assists 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, whether from the borrower, or in most cases, from the lender.

Buydown Mortgage
A temporary buydown is a mortgage on which an initial lump sum payment is made by any party to reduce a borrower's monthly payments during the first few years of a mortgage. A permanent buydown (also referred to as points) reduces the interest rate over the entire life of a mortgage.

Cap:
A provision of an ARM limiting how much the interest rate or mortgage payments may increase or decrease.

Cash-out Refinance
A refinance transaction in which the borrower receives additional cash that can be used for any purpose.

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

Closing Costs
Expenses 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.

Combination Loan
You receive a first mortgage for 80 percent of the loan amount, and a second mortgage at the same time for the remainder of the balance. If avoiding PMI (mortgage insurance) is important to you, consider combination loans--known as 80/10/10 loans or 80/20's.

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

Conventional Financing:
Financing offered to well qualified buyers (2 years in line of work, excellent credit, and 3% or more to put down), often associated with private mortgage insurance if you put down less then 20%(there are exceptions). This is also considered a private type of financing as compared to FHA/VA loans which are considered government loans. Also known as an ‘A’ paper loan.

Cost of funds index (COFI)
An index that is used to determine interest rate changes for certain adjustable-rate mortgage (ARM) plans.

Conversion Clause
A provision in an ARM or Ballon allowing the loan to be converted to a fixed-rate at some point during the term. Usually conversion is allowed at the end of the first adjustment period.

Credit Risk Score
A credit risk score is a statistical summary of the information contained in a consumer's credit report. The most well known type of credit risk score is the Fair Isaac or FICO score. This form of credit scoring is a mathematical summary calculation that assigns numerical values to various pieces of information in the credit report. The overall credit risk score is highly relative in the credit underwriting process for a mortgage loan.

Debt-to-Income 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.

Deed
The legal document conveying title to a property.

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.

Down Payment
Money paid to make up the difference between the purchase price and the mortgage amount.

Earnest Money
A deposit made by the potential home buyer to show that he or she is serious about buying the house. This money applies towards the purchase and is typically not refundable unless financing is denied.

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
A homeowner's financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on its mortgage.

Escrow
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.

Fannie Mae
A congressionally chartered, shareholder-owned company that is the nation's largest supplier of home mortgage funds. See Federal National Mortgage Association

Fannie Mae's Community Home Buyer's Program
An income-based community lending model, under which mortgage insurers and Fannie Mae offer flexible underwriting guidelines to increase a low- or moderate-income family's buying power and to decrease the total amount of cash needed to purchase a home. Borrowers who participate in this model are required to attend pre-purchase home-buyer education sessions.

Federal Home Loan Mortgage Corporation(FHLMC) also called "Freddie Mac"
Is a quasi-governmental agency that purchases conventional mortgage from 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 and setting standards for underwriting mortgages.

Federal National Mortgage Association (FNMA) also know 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. Also known as a government mortgage. 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.

First Mortgage
The primary lien against a property.

Fixed-rate Mortgage (FRM)
A mortgage in which the interest rate does not change during the entire term of the loan.

Fully Amortized ARM
An adjustable-rate mortgage (ARM) with a monthly payment that is sufficient to amortize the remaining balance, at the interest accrual rate, over the amortization term.

Freddie Mac
see Federal Home Loan Mortgage Corporation

Ginnie Mae
see Government National Mortgage Association.

Good Faith Estimate
An estimate of charges which a borrower is likely to incur in connection with a settlement.

Government National Mortgage Association (GNMA)
Also known as "Ginnie Mae," provides sources of funds for residential mortgages, insured or guaranteed by FHA or VA.

Home Equity Line of Credit
A credit line that is secured by using your home as collateral. Equity lines of credit are revolving accounts that work like a credit card, which can be paid down or charged up for the term of the loan. The minimum payment due each month is interest only.

Housing Ratio
The ratio of the monthly housing payment in total (PITI - Principal, Interest, Taxes, and Insurance) divided by the gross monthly income.

HUD
The U.S. Department of Housing and Urban Development.

HUD-1 statement
A document that provides an itemized listing of the funds that are payable at closing. Items that appear on the statement include real estate commissions, loan fees, points, and initial escrow amounts. Each item on the statement is represented by a separate number within a standardized numbering system. The totals at the bottom of the HUD-1 statement define the seller's net proceeds and the buyer's net payment at closing. Also referred to as the Settlement Statement.

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, which is then used to adjust the interest rate on an adjustable mortgage up or down.

Interest-only loan option
Loan payments have two components, principal and interest. An interest-only loan has no principal component for a specified period of time. These special loans minimize your monthly payments by eliminating the need to pay down your balance during the interest-only period, giving you greater cash flow control and/or increased purchasing power.

Jumbo Loan
A loan which is larger 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 or satisfaction of a debt or obligation.

Lifetime Payment Cap
For an adjustable-rate mortgage (ARM), a limit on the amount that payments can increase or decrease over the life of the mortgage.

Lifetime Rate Cap
For an adjustable-rate mortgage (ARM), a limit on the amount that the interest rate can increase or decrease over the life of the loan. See cap.

Loan-to-Value Ratio
The unpaid principal balance of the mortgage on a property divided by the property's appraised value. The LTV will affect programs available to the borrower and generally, the lower the LTV the more favorable the terms of the programs offered by lenders.

Margin
The number of percentage points a lender adds to the index value to calculate the ARM interest rate at each adjustment period

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

Mortgage Broker
An individual or company not limited to any one lender allowing them to shop a variety of programs and rates. Most brokers are paid by the lender that they bring the loan to. (See Yield Spread).

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 home buyer ends up owing more than the original amount of the loan.

Non-conforming Loan
A loan that doesn’t meet conventional, FHA or VA guidelines. Examples of non-conforming loans are jumbo loans, those with less than perfect credit (also known as ‘B’, ‘C’, or ‘D’ paper) or excessive debt to income. This type of credit usually carries higher interest rates and a larger required down payment as well as often subject to prepayment penalties.

One-year adjustable
Mortgage whose rate changes yearly. The rate is usually based on movements of a published index plus a specified margin, chosen by 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 the face value of the loan.

Points (loan discount points)
Also referred to as discount points, are monies paid to buy down or lower your rate. Best way to think of it is as prepaid interest. In many cases points are deductible (check with your accountant). If you're thinking about paying points to lower your rate, you may want to consider how long you will have to be in that loan before you make back the cost and begin saving money.

Pre-Approval
At MainStream, this means you actually apply for and get approved for your loan in advance of buying a property (not true for all mortgage companies). This process includes verification of your credit, income, assets and liabilities.

Pre-paids
Those property expenses which are paid in advance of their due date and will usually be prorated upon sale, such as taxes, insurance, rent, etc.

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

Pre-payment Penalty
A charge imposed by a mortgage lender on a borrower who wants to pay off part or all of a mortgage loan in advance of schedule.

Pre-Qualification
The process of determining how much money you will be eligible to borrow before you apply for a loan. This is a “ballpark” range of your buying power vs. a loan approval from the mortgage company. Can be done over the phone in a few minutes and doesn’t cost anything.

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

Principal, Interest, Taxes, and Insurance (PITI)
The four components of a monthly mortgage payment. Principal refers to the part of the payment that reduces the 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.

Private Mortgage Insurance (PMI)
Mortgage insurance on conventional loans. In the event that you do not have a 20% down payment, lenders will allow a smaller down payment - as low as 3% in some cases. However, borrowers are usually required to carry private mortgage insurance (PMI). PMI will usually require an initial premium payment and additional monthly fee depending on your loan's structure. NOT required if you put down 20% or more. There are programs available that avoid PMI with less than 20% down.

Qualifying Ratios
The ratio of your fixed monthly expenses to your gross monthly income, used to determine how much you can afford to borrow.

Rate Lock
A written agreement in which the lender guarantees the borrower a specified interest rate, provided the loan closes within a set period of time.

Refinancing
The process of paying off one loan with the proceeds from a new loan using the same property as security.

Residential Mortgage Credit Report (RMCR)
A report requested by your lender that utilizes information from at least two of the three national credit bureaus and information provided on your loan application.

Second Mortgage
A mortgage made subsequent to another mortgage and subordinate to the first one.

Survey
A measurement of land, prepared by a registered land surveyor, showing the location of the land with reference to known points, its dimensions, and the location and dimensions of any buildings.

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

Title Insurance
Insurance protecting the buyer and/or seller of the fact that the title is free and clear of liens or defects. If there are any title problems in the future, the title insurance will pay legal fees, pay off the mortgage, and in some cases even refund lost equity. This is a one time fee paid at closing. If title insurance is required for the lender, the borrower may purchase an owners policy at a reduced rate.

Title Search
An investigation into the history of ownership of a property to check for liens, unpaid claims, restrictions or problems, to prove that the seller can transfer free and clear ownership. Usually performed by a title company.

Total debt ratio
Monthly debt and housing payments divided by gross monthly income.

Truth-in-Lending Act
A federal law requiring a disclosure of credit terms using a standard format. This is intended to facilitate comparisons between the lending terms of different financial institutions.

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

VA Funding Fee
VA's version of mortgage insurance. It is a one-time fee and is financed in most cases.

Veterans Administration (VA) Loan
A government agency guaranteeing mortgage loans with no down payment to qualified veterans. If you are prior service or active duty and have the required time in service, VA offers 100% financing or zero money down.

Yield Spread:
Income paid to a Mortgage Company by an investor for the purchase of a loan. This must be shown on the closing statement when closing with a broker. This income does not need to be disclosed by the bank or mortgage banker.

If you would like to learn more about the home buying and lending process, access helpful tools or find additional resources, go to Resources & Tools

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