Mortgage glossary
Scroll down the page to find explanations for commonly
used financial terms.
ADJUSTABLE-RATE MORTGAGE (ARM) A mortgage with an interest rate
that changes periodically, according to an index that is selected
when the mortgage is issued. The initial interest rate is lower
than that for fixed-rate mortgages, but monthly payments can go
up or down when the rate is adjusted.
ADJUSTMENT INTERVAL The period of time between changes in
the interest rate for an adjustable-rate mortgage. Typical adjustment
intervals are one year, three and five years.
ANNUAL PERCENTAGE RATE (APR) A stated interest rate that
reflects all the financing costs of a mortgage. The APR includes
points, origination fees and other finance charges in addition to
the interest on the mortgage, and includes them all in a yearly
interest rate. As a result, the APR is usually higher than the interest
rate alone. It also provides a benchmark for comparing different
types of mortgages based on the annual cost for each loan.
APPRAISAL An estimate of the value of a property, made by
a qualified professional called an appraiser.
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.
BIWEEKLY MORTGAGE A type of fixed-rate mortgage with payments
for half the usual monthly amount scheduled every two weeks. Because
you make the equivalent of 13 months of payments every year, the
loan term is shortened from 30 years to 18 or 19 years, and total
interest cost are substantially lower.
CAPS Consumer safeguards for adjustable-rate mortgages that
limit the amount monthly payments can increase. An interest rate
cap limits the amount the interest can change, while a payment cap
limits the increase in monthly payment to a specific dollar amount.
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 and fees associated with the official
change in ownership of the property and with obtaining your mortgage
that are assessed at the closing or settlement. Closing costs include
required certifications, insurance, taxes and other fees, and typically
total between 3 and 6 percent of the mortgage amount.
CREDIT REPORT A report that documents borrower's credit history
and current status. Borrowers can examine their own credit reports,
although most credit reporting companies charge a fee to provide
a copy.
DEBT-TO-INCOME RATIO The ratio, expressed 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).
DOWN PAYMENT An amount paid in cash to the seller when a
home is purchased. The down payment is the difference between the
purchase price and the mortgage amount, and is traditionally 10
to 20 percent of the purchase price, although many loans are now
available with smaller down payments.
EQUITY The difference
between the fair market value and current indebtedness, also referred
to as the owner's interest.
ESCROW A special
account set up by the lender in which money is held to pay for taxes
and insurance. "Escrow" can also refer to a third party
who carries out the instructions of both the buyer and seller to
handle the paperwork at the settlement.
FHA (FEDERAL HOUSING ADMINISTRATION) MORTGAGE
A loan insured by the Federal Housing Administration. FHA mortgages
require lower down payments than conventional mortgages, and also
feature less stringent income and financial requirements.
FIXED-RATE MORTGAGE
A mortgage with an interest rate that remains constant for the life
of the loan. The most common fixed-rate mortgage is repaid over
a period of 30 years; 15 year fixed-rate mortgages are also available.
INDEX ARM An
economic indicator, usually a published interest rate, that determines
changes in the interest rate of an ARM. ARM rates are adjusted to
reflect changes in the index. The margin is the amount a lender
adds to the index to establish the actual interest rate on an adjustable
mortgage up or down.
INTEREST The
sum paid for borrowing money, which pays the lender's costs of doing
business.
LENDER BUY-DOWN MORTGAGE
A convertible mortgage offering a discounted interest rate at the
beginning of the loan that gradually increases to an agreed-upon
fixed-rate over the first few years of the loan. It provides lower
initial payments and a stable final monthly rate, but the final
rate may be somewhat higher than on a standard fixed-rate mortgage.
LOAN ORIGINATION FEE
The fee charged by a lender to prepare all the documents associated
with your mortgage.
LOAN-TO-VALUE RATIO
The relationship between the amount of the mortgage loan and the
appraised value of the property expressed as a percentage.
MORTGAGE INSURANCE
An insurance policy the borrower buys to protect the lender from
non-payment of the loan. Private mortgage insurance policies are
usually required if you make a down payment that is below 20% of
the appraised value of the home.
PITI (PRINCIPAL, INTEREST, TAXES AND INSURANCE)
The four components that (for most homeowners) are included in the
monthly mortgage payment. Principal and interest are the portions
of the payment assigned to repay the mortgage itself; taxes and
insurance are paid by your lender into a special escrow account
to pay for homeowners insurance and property taxes.
POINTS (LOAN DISCOUNT POINTS)
Prepaid interest on a mortgage that is usually paid at the time
of closing. Each point is equal to one percent of the total amount
of a mortgage (one point on an $80,000 mortgage is $800, or 1 percent
of 80,000). Most lenders offer mortgages with several combinations
of points and interest rates; generally, the lower the interest
rate, the more points you will pay at settlement.
PRINCIPAL The
amount of debt, not including interest, left on a loan; also the
face amount of the mortgage.
TITLE INSURANCE
An insurance policy which insures you against errors in the title
search, essentially guaranteeing you and your lender's financial
interest in the property.
UNDERWRITING FACTORS
The process of deciding whether to make a loan based on credit,
employment, assets and other factors and the matching of this risk
to an appropriate rate and term or loan amount.
VA (DEPARTMENT OF VETERANS AFFAIRS) MORTGAGE
Government insured loans guaranteed by the Department of Veterans
Affairs, requiring very low or no down payments and with generous
requirements for qualification. They are available only to veterans
of the armed services, those currently on active duty or in the
reserves, and their spouses. This information compiled from sources
including the Mortgage Bankers Association of America. |
