Mortgage Terms: Acceleration The right of the mortgagee (lender) to demand the immediate repayment of the mortgage loan balance upon the default of the mortgagor (borrower), or by using the right vested in the Due-on-Sale clause. Adjustable rate mortgage (ARM) A mortgage in which the interest rate is adjusted periodically and based on a pre-selected index, such as Treasury securities. 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 Where loan amount is calculated to pay off the debt at the end of a fixed term, including accrued interest on the outstanding balance, by making equal periodic payments. Annual percentage rate (A.P.R.) 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 home buyers 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. Assessment A local tax levied against a property for a specific purpose, such as a sewer, or street lights. Assumption The agreement between buyer and seller where the buyer takes over the payments on an existing mortgage from the seller. By assuming a loan the buyer can usually save money, since this is an existing mortgage debt, unlike a new mortgage where closing costs and new, possibly higher, market-rate interest charges 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. Blanket Mortgage A mortgage secured by two or more parcels of real estate. Borrower (Mortgagor) One who applies for and receives a loan with the intention of repaying the loan in full. Break-even Analysis Finding the Break-even Point, at which the cost of something equals the benefit obtained. For example, a home refinanced with a new first mortgage with total out of pocket expenses of $3600, saves $100 each month over the previous payments. The Break-even Point for the loan will be 3 years ($3600 divided by $100/month = 36 months or 3 years). Broker An individual who, for a fee, acts as the agent of another, assisting in arranging funding or negotiating contracts for a client's purchase of real estate. Cash Flow The amount of cash derived over a certain period of time from an income-producing property. A positive cash flow is large enough to pay the expenses of the income producing property (mortgage payment, maintenance, utilities, etc.), whereas a negative cash flow does not cover all operating costs, requiring the input of extra money from the owner. 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. 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 The costs associated with the closing of the loan. 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 loan amount. Commitment A promise by a lender to make a loan on specific terms or conditions to a borrower. Construction loan A short term interim loan for financing the cost of construction. The lender advance funds to the builder at periodic intervals as the work progresses. Conventional loan A mortgage not insured by the FHA or guaranteed by the VA. Credit Something entrusted to another, for example, a loan; or a) the balance in a person's favor in an account; or b) an amount or sum placed at a person's disposal by a lending or financial institution; or c) time given for payment of goods or services sold on trust (ex. long-term credit). Credit Report A report documenting the credit and payment history, and current status of a borrower's credit standing. Debt-to-Income Ratio The ratio, expressed as a percentage, between a borrower's monthly payment obligation on long-term debts, and his gross monthly income (conventional) or Net Effective Income (FHA). See Housing Expenses-to-Income Ratio. Deed of trust In some 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. Delinquency Failure to make payments on time; 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 Payment Money paid to make up the difference between the purchase price and the mortgage amount. Depending upon the loan type, down payments are usually 5 to 20 percent of the sales price. Due-On-Sale A clause included in the mortgage that allows the lender to call the loan due and payable at its option, if the borrower sells the property. Earnest Money Money given by a buyer to a seller (or his agent) as part of the purchase price to bind a transaction. Equal Credit Opportunity Act (ECOA) 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 value an owner has in real estate over and above the obligation against the property. Escrow Funds or something of value set aside and held in trust by a third party, to be delivered or paid upon the fulfillment of agreed upon terms or conditions. Usually for payment of taxes and insurance on real property, or earnest money deposits held pending loan closing. Fannie Mae seeFederal 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 Bank Board (FHLBB) A regulatory and supervisory agency for federally chartered savings institutions. Federal Home Loan Mortgage Corporation (FHLMC) A quasi-governmental agency that purchases conventional mortgages from insured depository institutions and HUD-approved mortgage bankers. Also known as, "Freddie Mac." Federal Housing Administration (FHA) A division of the Department of Housing and Urban Development whose 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) 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. Also know as "Fannie Mae." 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, they are generous enough to handle moderately-priced homes almost anywhere in the country. FHA mortgage insurance Requires a fee paid at closing or a portion of this fee added to each monthly payment of an FHA loan to insure the loan with FHA. FHLMC The Federal Home Loan Mortgage Corporation provides a secondary market for saving and loans by purchasing their conventional loans. Also known as "Freddie Mac." Fixed Rate Mortgage A mortgage for which the interest rate is set (fixed) for the term of the loan. FNMA The Federal National Mortgage Association is a secondary mortgage institution which is the largest single holder of home mortgages in the United States. FNMA buys VA, FHA, and conventional mortgages from primary lenders. Also known as "Fannie Mae." 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) Provides sources of funds for residential mortgage, insured or guaranteed by FHA or VA. Also known as "Ginnie Mae." Hazard Insurance A form of insurance in which the insurance company protects the insured from specified losses, such as fire, certain kinds of weather, theft, and the like. Housing Expenses-to-Income Ratio The ratio, expressed as a percentage, between a borrower's monthly housing expenses, and his gross monthly income (conventional) or Net Effective Income (FHA). See Debt-to-Income Ratio. Impound That portion of a borrower's monthly payments held by the lender or loan servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also known as reserves. Investor A money source for a lender. Jumbo Loan A loan amount that is over $227,150. Lien A legal claim placed upon a piece of property to secure the payment or satisfaction of a debt or obligation. Loan-to-Value Ratio The ratio, expressed as a percentage, between the amount of the mortgage loan, and the appraised value of the property. 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 differ according to such factors as time, location, and demand. MIP (Mortgage Insurance Premium) The premium paid by the borrower on the insurance policy from FHA to the lender, against incurring a loss due to the borrower's default. Mortgage Insurance See Private 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 home buyer 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. Note The signed obligation to pay a debt, such as a mortgage note. 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. 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. Prepaid 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. Prepayment Penalty Money charged for an early repayment of debt. Primary Mortgage Market Lenders making mortgage loans directly to borrower's, such as savings and loan association, commercial banks, and mortgage companies. These lenders sometimes sell their mortgages into the secondary mortgage markets such as to FNMA or GNMA, etc. Principal The amount of debt, not counting interest, left on a loan. Private Mortgage Insurance (PMI) The mortgage insurance policy lenders require a borrower to purchase on a conventional loan when the down payment will be less than 20% of the purchase price of a property. It insures the lender's exposure for the loan amount that is over the 80% Loan-to-Value Ratio. REALTORŪ A real estate broker or an associate holding active membership in a local real estate board affiliated with the National Association of Realtors. Being a real estate agent does not make you a REALTOR, which designates membership in a professional trade organization. All REALTORS (whether practicing or not) are real estate agents, but not all real estate agents are REALTORS. Recision The cancellation of a contract. With respect to mortgage refinancing, the law that gives the homeowner three days (the recision period) 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. Refinance Obtaining a new mortgage loan on a property already owned. Often to replace existing loans on the property. RESPA Acronym 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 a settlement. The law requires lenders to furnish the information after application only. Second Mortgage A mortgage made subsequent to another mortgage and subordinate to the first one. Secondary Mortgage Market The market where primary mortgage lenders sell the mortgages they make to obtain more funds to originate more new loans. It provides liquidity for the lenders security. Servicing The steps and operations a lender performs 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 Simple Interest Interest which is computed only on the principle balance. Survey A measurement of land, prepared by a registered land surveyor, showing the location of the land with reference to know points, its dimensions, and the location and dimensions of any buildings. Sweat Equity Equity created by a purchaser performing work on a property being purchased. Title The document that gives legal evidence of an individual's ownership of property. Title Insurance A policy, usually issued by a title insurance company, which insures a lender or home buyer against errors in the title search. The cost of the policy is usually based on the value of the property, and is often paid by the purchaser and/or seller. Lenders require policies covering the lender's interest, while purchasing coverage for the homeowner is usually optional. Title Search The examination of municipal records to determine the legal ownership of property. Usually performed by a title company. Truth-In-Lending The federal law requiring disclosure of the Annual Percentage Rate (APR) to home buyers shortly after they apply for the loan. 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. Usury Interest charged in excess of the legal rate established by law. 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. Verification of Deposit (VOD) A document signed by the borrower's financial institution verifying the status and balance of his financial accounts. Most lenders require that the funds used for a real estate purchase be "seasoned," or on deposit in the account for at least 60 days. Verification of Employment (VOE) a document signed by the borrower's employer verifying his position and salary. Most lenders require a minimum two-year history of stable and constant employment. Warehouse Fee Many mortgage firms must borrow funds on a short term basis in order to originate loans which are to be sold later in the secondary mortgage market (or to investors). When the prime rate of interest is higher on short term loans than on mortgage loans, the mortgage firm has an economic loss which is offset by charging a warehouse fee.