Annual Percentage Rate (APR)
The cost of a mortgage stated as a yearly rate; includes such items as interest, mortgage insurance, and loan origination fee (points).
Adjustable-Rate Mortgage (ARM)
A mortgage whose interest rate changes periodically based on the changes in a specified index. Your ARM is referenced to a particular index that changes. Lenders use that published index to serve as the basis for determining interest rate changes on adjustable rate mortgage loans. As the indices published rate fluctuates, so does your mortgage rate. You can find these indices in the Wall Street Journal. The most commonly used indices are:
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Amortization
The repayment of a mortgage loan by installments with regular payments to cover the principal and interest.
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.
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.
Bridge Loan
A form of second trust that is collateralized by the borrower's present home (which is usually for sale) in a manner that allows the proceeds to be used for closing on a new house before the present home is sold. Also known as "swing loan."
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 reduces the interest rate over the entire life of a mortgage.
Cash-Out Refinance
A refinance transaction in which the amount of money received from the new loan exceeds the total of the money needed to repay the existing first mortgage, closing costs, points, and the amount required to satisfy any outstanding subordinate mortgage liens. In other words, a refinance transaction in which the borrower receives additional cash that can be used for any purpose.
Combination Loan (or 80/10/10)
With this type of loan, you receive a first mortgage for 80% 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.
Conforming Loan
The current conforming loan limit is $417,000 and below. Conforming loan limits change annually and they depend on your property location.
Construction Loan
A short-term, interim loan for financing the cost of construction. The lender makes payments to the builder at periodic intervals as the work progresses.
Conventional Mortgage
A mortgage that is not insured or guaranteed by the federal government.
Convertible ARM
An adjustable-rate mortgage (ARM) that can be converted to a fixed-rate mortgage under specified conditions.
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.
Fair Market Value (FMV)
The highest price that a buyer, willing but not compelled to buy, would pay, and the lowest a seller, willing but not compelled to sell, would accept.
Fixed Rate Mortgage (FRM)
A mortgage in which the interest rate does not change during the entire term of the loan.
Good Faith Estimate
An estimate of charges which a borrower is likely to incur in connection with a settlement.
Hazard Insurance
Insurance protecting against loss to real estate caused by fire, some natural causes, vandalism, etc., depending upon the terms of the policy.
Home Equity Line of Credit (HELOC)
A credit line that is secured by a second deed of trust on a house. 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.
Home Equity Loan (HELON)
A loan secured by a second deed of trust on a house, typically used as a home improvement loan.
Impound Account
An impound account is an account established by the lender to pay a borrower's tax and insurance costs. The borrower's monthly mortgage payment is then increased to cover these costs, with the additional amount being held in the impound account and disbursed by the lender when the payments are due. Lenders typically prefer this arrangement because it reduces the possibility of a lapse in tax or insurance payments that could diminish the value of the lender's investment (your house). Therefore, while it is often possible to opt out of an impound account, it will result in additional charges.
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 Mortgage
The current loan limit for a conforming loan is $417,000. Loan amounts of $417,001 and above are considered non-conforming or jumbo mortgages and are usually subject to higher pricing.
Loan-to-Value (LTV)
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.
Lock Period
The amount of time that a lender will guarantee a loan's interest rate. Once you've locked in the interest rate on a loan, the lender will guarantee that rate for a certain period of time, usually for 30, 45 or 60 days.
Lock-In
A written agreement guaranteeing the home buyer a specified interest rate provided the loan is closed within a set period of time. The lock-in also usually specifies the number of points to be paid at closing.
Margin
The number of percentage points a lender adds to the index value to calculate the ARM interest rate at each adjustment period.
Mortgage Insurance (MI / PMI)
Insurance written by an independent mortgage insurance company protecting the mortgage lender against loss incurred by a mortgage default. Usually required for loans with an LTV of 80.01% or higher.
Negative Amortization
Negative Amortization, or "deferred interest," occurs when the mortgage payment is less than a loan's accruing interest. This causes a loan's balance to grow instead of reduce or "amortize."
Origination Fee
A fee imposed by a lender to cover certain processing expenses in connection with making a real estate loan. Usually a percentage of the amount loaned, such as one percent.
PITI
Principal, interest, taxes and insurance--the components of a monthly mortgage payment.
Points
Charges levied by the mortgage lender and usually payable at closing. One point represents 1% of the face value of the mortgage loan.
Prepaids
Those expenses of property which are paid in advance of their due date and will usually be prorated upon sale, such as taxes, insurance, rent, etc.
Pre-Paid Interest
This amount represents the interest that accrues between the day your loan closes and the last day of that month, and is added to your closing costs. After this one-time prepayment your interest will be included in your regular monthly payments.
Prepayment 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.
Principal
When taking out a loan, principal refers to the amount of debt, not including interest.
Qualifying Ratios
The ratio of your fixed monthly expenses to your gross monthly income, used to determine how much you can afford to borrow. The fixed monthly expenses would include PITI along with other obligations such as student loans, car loans, or credit card payments.
Rate Cap
The annual rate of interest on a loan, expressed as a percentage of 100.
Rebate
Compensation received from a wholesale lender which can be used to cover closing costs or as a refund to the borrower. Loans with rebates often carry higher interest rates than loans with "points".
Stated Income
Some loan products require only that applicants "state" the source of their income without providing supporting documentation such as tax returns.
Total Debt Ratio
Monthly debt and housing payments divided by gross monthly income. Also known as Obligations-to-Income Ratio or Back-End Ratio.
Variable Rate
An interest rate that may change once an account opens.
Yield
The amount generated in interest on an account.
Yoga
A series of postures and breathing exercises practiced to achieve control of the body and mind, tranquility, attaining liberation from the material world, etc.
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