A 

Adjustable Rate Mortgage (ARM)

A mortgage in which the interest rate is adjusted periodically based on a preselected index. So, interest rate and payments rise and fall with the market.

 

Agreement of Sale

Contract signed by buyer and seller stating the terms and conditions under which a property will be sold.

 

Amortization

A monthly repayment schedule according to which a loan is repaid in fixed payments of principal and interest. For the first few years, most of each payment is applied toward interest. During the final years of the loan, payment amounts are applied almost exclusively to the remaining principal.

 

Annual Percentage Rate (APR)

The cost of a mortgage expressed as a yearly rate. This percentage takes into account interest, points, origination fees, and mortgage insurance, so it will be slightly higher than the interest rate on the loan.

 

Appraisal

A written estimate of a property's current market value, based on recent sales information for similar properties, the condition of the property, and how the neighborhood might affect future property value.

 

Appraisal Fee

A fee charged by a licensed, certified appraiser to render an opinion of market value as of a specific date.

B

A short-term fixed-rate loan with low payments for a set number of years and one large final balloon payment of the remainder of the principal.

 

Borrower (Mortgagor)

An individual who applies for and receives a loan in the form of a mortgage with the intention of repaying the loan in full.

 

Broker

An individual who assists in arranging funding or negotiating contracts for a client but does not loan money himself.

 

Buyers Broker

An agent hired by a buyer to locate a property for purchase and to represent the buyer in negotiations with the seller's broker for the best possible deal for the buyer.

C 

Caps (Interest)

Consumer safeguards which limit the amount the interest rate on an adjustable rate mortgage can change in an adjustment interval and/or over the life of the loan.

 

Cash Out

A refinance for more than the balance of the original mortgage, so that money is taken out of the equity built up in the house.

 

Cashier's Check (or Bank Check)

A check whose payment is guaranteed because it was paid for in advance and is drawn on the bank's account instead of the customer's.

 

Ceiling

The maximum allowable interest rate of an adjustable rate mortgage.

 

Certificate of Occupancy

Document issued by local government agency stating that a property meets the requirements of health and building codes.

 

Clear Title

A marketable title, free of outstanding judgments and disputes.

 

Closing (or Settlement)

Meeting between the buyer, seller and lender or their agents at which property and funds legally change hands.

 

Closing Costs

Fees incurred in a real estate or mortgage transaction and paid by borrower and/or seller during the closing of the mortgage loan. These sometimes include attorney's fees, title insurance, appraisal, survey, and any items which must be prepaid, such as taxes and insurance escrow payments. The cost of closing usually are about 3 to 6 percent of the mortgage amount.

 

Commitment

A formal offer by a lender to make a loan under certain terms or conditions to a borrower.

 

Condominium

A form of property ownership in which the homeowner holds title to an individual dwelling unit and an interest in common areas and facilities of a multi-unit project.

 

Conforming Loan

A mortgage loan which is eligible to be purchased by FNMA and FHLMC and is under the existing maximum loan amount ($275,000 as of December 2000 for a one unit property).

 

Construction Loan

A short term interim loan to fund the construction of buildings or homes, which usually advances the money to the builder as work progresses. After completion, a permanent loan is used to pay off the construction loan.

 

Cost of Funds Index (COFI)

An index of the weighted-average interest rate paid by savings institutions for sources of funds, usually by members of the 11th Federal Home Loan Bank District.

 

Covenants, Conditions and Restrictions (CC&R's)

A document that defines the use, requirements and restrictions of a property.

 

Credit Report

A report detailing the credit history of a prospective borrower, used to help determine creditworthiness.

D

Legal document by which title to a property is transferred from one owner to another. The deed contains a description of the property, and is signed, witnessed and delivered to the buyer at closing.

 

Default

Failure to meet legal obligations in a contract, including failure to make payments on a loan. A mortgage is generally considered to be in default when a payment is 30 days past due.

 

Delinquency

Failure to make payments on time.

 

Deposit

Cash paid to the seller when a formal sales contract is signed.

 

Depreciation

Decline in property value.

 

Discount Points (or Points)

Money paid to a lender at closing in exchange for lower interest rates. Each point is equal to 1% of the loan amount.

 

Down Payment

Money paid for a house from one's own funds at closing. The down payment will be the amount of the difference between the purchase price and mortgage amount.

 

Due-on-Sale Clause

Provision in a mortgage or deed of trust allowing the lender to demand immediate payment of the loan balance upon sale of the property.

E 

Earnest Money

Deposit made by a buyer towards the down payment in evidence of good faith when the purchase agreement is signed.

 

Equity

The percentage of property value held by the owner; the difference between the current market value of a property and the outstanding mortgage balance.

F 

Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac)

Quasi-governmental agency that purchases conventional mortgages from insured depository institutions and HUD-approved mortgage bankers.

 

Federal Housing Administration (FHA)

Government agency, division of the Department of Housing and Urban Development, which insures residential mortgage loans made by private lenders and sets standards for underwriting mortgage loans.

 

Federal National Mortgage Association (FNMA or Fannie Mae)

Corporation created by Congress that buys and sells residential mortgages, providing funds for one in seven mortgages.

 

Federal Reserve

Central bank of the United States and major regulatory agency for many commercial banks.

 

Fee Simple

Highest degree of ownership one can have in a property. Absolute ownership of real property. 

 

First Mortgage

A mortgage which is in first lien position, taking priority over all other liens. In the case of a foreclosure, the first mortgage will be repaid before any other mortgages.

 

Fixed Rate Mortgage

A mortgage whose interest rate does not change for the life of the loan. Principal and interest are also fixed.

 

Flood Insurance

A form of hazard insurance required by lenders to cover properties in flood zones.

G 

Good Faith Estimate

Written estimate of costs the borrower will have to pay at closing, provided by a lender within three days of loan application. Provided up-front to you from Paone Mortgage Corporation.

H 

Hazard Insurance (or Homeowner's Insurance) 

Protects the insured against loss due to fire or other natural disaster in exchange for a premium paid to the insurer.

I 

Index

A published rate used by lenders to calculate interest adjustments on ARMs (Index+Margin=Interest Rate). Some indexes are more volatile than others. Some common indices are 1 year Treasury bills, COFI (Cost of Funds Index) and 6 month LIBOR (London Interbank Offered Rate).

 

Initial Rate

The rate charged during the first interval of an ARM

 

Interest 

Charge paid for borrowing money, calculated as a percentage of the amount borrowed.

 

Interest Rate Cap

A safeguard built into ARMs to prevent drastic changes in interest rates.

J 

Joint Tenancy (or Tenants in Common)

The ownership of property by two or more persons with the survivor taking the share of the deceased.

 

Jumbo Loan

A mortgage larger than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, currently over $300,700. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.

K 

L 

Late Charge

Penalty paid by a borrower when a payment is made after the due date.

 

Lender

The bank, mortgage company, or mortgage broker offering the loan.

 

LIBOR (London Interbank Offered Rate)

The interest rate charged among banks for short-term Eurodollar loans, and a common index for ARM's.

 

Lien

A claim by one person on the property of another for payment of a debt.

 

Loan Application

Document required by lenders prior to loan approval containing detailed information about the borrower and property.

 

Loan Origination Fee

Fee charged by a lender for processing a mortgage, usually expressed as a percentage of the loan (or points), which pays for the work in evaluating and processing the loan. 

The percentage of the property value borrowed. (Loan amount/property value=LTV)

 

Lock or Lock In

A lenders guarantee of an interest rate for a set period of time, usually between loan application and loan closing; protects borrower against rate increases during that time.

M 

Margin

The number of percentage points added to an index to calculate the interest rate on an ARM at each adjustment.

 

Marketable Title 

A title that is free and clear of liens, clouds or other defects which would prevent the sale of the property.

 

Market Rate

The average rate charged by lenders for conventional, fixed rate loans.

 

Market Value

The highest price a buyer would pay for a property and the lowest price a seller would accept.

 

Mortgagee

The lender in a mortgage loan transaction.

 

Mortgage

Document creating a lien on a property as security for the payment of a debt.

 

Mortgage Banker

Originates and services mortgage loans, funding them with their own money.

 

Mortgage Broker

Arranges financing for borrowers, but places loans with lenders rather than funding them with their own money.

 

Mortgage Note

Legal document obligating a borrower to repay a loan at a stated interest rate during a specific period of time. This agreement is secured by a mortgage.

 

Mortgagor

The borrower in a mortgage loan transaction.

N 

Negative Amortization

Increase in principal balance which occurs when monthly payments are not large enough to pay all interest due on a loan, usually caused when payment caps prevent sufficient payment increases. Unpaid deferred interest is added to the loan balance, which means that the borrower ends up owing more than the original amount of the loan.

 

Note

Legal document stating the terms of a debt and a promise to repay it.

O 

P 

Per Diem Interest

Interest calculated per day. (Depending on the day of the month on which closing takes place, you will have to pay interest from the date of closing to the end of the month. Your first mortgage payment will probably be due the first of the following month. I.e. If you close on May15th you will pay 15 days of interest and the first payment will be due on the first of the month.)

 

PITI

Abbreviation for Principal, Interest, Taxes and Insurance, the components of a monthly mortgage payment; also called monthly housing expenses.

Points (or Discount Points)

Money paid to a lender at closing in exchange for lower interest rates. Each point is equal to 1% of the loan amount.

Power of Attorney

Legal document authorizing one person to act on behalf of another.

 

Prepaid Expenses

Taxes, insurance and assessments paid in advance of their due dates, included at closing.

 

Prepayment

Full or partial payment of the principal before the due date. This might occur if the borrower makes extra payments, sells the property or refinances the existing loan.

 

Prequalification

The process of determining how much money a prospective home buyer will be eligible to borrow prior to application for a loan.

 

Primary Mortgage Market

Includes banks, savings and loans, credit unions and mortgage bankers who make mortgage loans directly to borrowers. These lenders sometimes sell their mortgages to lenders like FNMA in the secondary mortgage market.

 

Prime Rate

Lowest commercial interest rate charged by a bank on short term loans to its most credit worthy customers.

 

Principal

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

 

Private Mortgage Insurance (PMI)

Insurance purchased by a buyer when a down payment is less than 20% of the purchase price to protect the lender against default.

 

Property Tax

A government tax based on the market value of a property.

Q 

Qualifying Ratio

Comparison of a borrower's expenses (housing or total debt) to their income.

R 

Real Estate Broker

An agent who represents a buyer or seller in a real estate transaction.

 

Real Estate Settlement Procedures Act

Law requiring lenders to give borrowers advance notice of closing costs.

 

Real Property

Land and everything that is permanently affixed to it.

 

Rescission

The cancellation of a contract, permitted by law within three days of signing a mortgage not used to purchase a home.

 

Recording

The act of entering documents concerning title to a property into the public records.

 

Recording Fee

Money paid to an agent for entering the sale of a property into the public records.

 

Refinancing

The process of paying off one loan with the proceeds from a new loan secured by the same property.

S 

Satisfaction

The payment of a debt which satisfies an obligation.

 

Secondary Mortgage Market

The market into which primary mortgage lenders sell the mortgages they make to obtain funds to originate more new loans; includes investors like Fannie Mae and Freddie Mac.

 

Servicing (or Loan Administration)

The collection of mortgage payments from borrowers and related responsibilities (such as handling escrows for property tax and insurance, foreclosing on defaulted loans and remitting payments to investors).

 

Settlement (or Closing)

Meeting between the buyer, seller and lender or their agents at which property and funds legally change hands.

 

Survey

A measurement of land, prepared by a licensed surveyor, showing a property's boundaries, elevations, improvements and relationship to surrounding tracts.

T 

Tax Impound

Money paid to and held by a lender for annual tax payments. 

 

Tax Lien

Claim against a property for unpaid taxes.

The number of years it will take to pay off a loan.

 

Title

Document which gives evidence of ownership of a property. Also the rights of ownership and possession of that property.

 

Title Company

A company that insures title to property.

 

Title Insurance

Insurance which protects the lender (lender's policy) or the buyer (owner's policy) against loss due to disputes over ownership of a property.

 

Title Search

Examination of municipal records to ensure the seller is the legal owner of a property and to verify there are no liens or other claims against the property.

 

Truth In Lending Act

Federal law requiring written disclosure of the terms of a mortgage (including the APR and other charges) by a lender to a borrower after application.

 

Two-step Mortgage

Mortgage with a low fixed interest rate for 5, 7 or 10 years, which is then adjusted to a new rate for the remainder of the loan.

U 

Underwriting

The process of verifying data and evaluating a loan for approval.

V 

Verification of Deposit (VOD)

Document signed by the borrower's bank or other financial institution verifying the borrower's account balance and history.

 

Verification of Employment (VOE)

Document signed by the borrower's employer verifying the borrower's position and salary.

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W 

Walk Through

A final inspection of a home to check for problems that may need to be corrected before closing.

X 

Y 

Z 

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