Adjustable-rate mortgage (ARM)
With adjustable-rate mortgages (commonly called ARMs), the interest rate changes over time according to terms specified in advance by the lender. The initial interest rate is usually lower than that offered with a fixed-rate mortgage. This means that the monthly repayment amount would also be lower. At predetermined times, the interest rate will be adjusted either up or down. Consequently, the monthly payment amount will also increase or decrease. Even though the interest rate is subject to change, most adjustable-rate mortgage programs offer the protection of a “rate cap,” which limits the amount the rate can be increased each year and over the life of the loan.

Adjustment date
The date on which the interest rate changes for an adjustable-rate mortgage.

Adjustment period
The amount of time between the adjustment dates for an adjustable-rate mortgage.

The gradual repayment of a mortgage loan through regular payments of principal and interest.

Amortization term
The amount of time required to repay the mortgage loan. The amortization term is expressed in months. For example, for a 30-year, fixed-rate mortgage, the amortization term is 360 months (30 years X 12 months).

Annual percentage rate (APR)
The annual percentage rate is a rate that reflects the total cost of your mortgage loan. The APR reflects factors including the interest rate on your mortgage loan, the term of the loan, and the other applicable costs of financing such as points, fees and certain closing costs.

The process of supplying a lender with information about a borrower’s income, debt, and assets as well as information about the property being purchased. The lender evaluates and verifies this information to make sure that it fits into the predetermined guidelines for the type of mortgage loan the borrower would like to obtain.

An unbiased, professional opinion of a property’s value based on its style and appearance, construction quality, usefulness, and the value of similar properties in the same or a nearby community.

An increase in the value of a property due to changes in market conditions or other causes. The opposite of depreciation.

Anything of monetary value that is owned by a person. Assets can include bank accounts, stocks, mutual funds, personal property.

Balloon mortgage
A balloon mortgage is a mortgage that is amortized over the full term of the loan repayment period but at the end of a specified period the balance of the mortgage comes due. Thus, a balloon payment needs to be made. For example, with a 7-year balloon you would make monthly payments for seven years that have been calculated based on a 30-year mortgage payment. At the end of the 7 years, the remaining principal balance would be due and payable in full.

Balloon payment
The final lump sum payment that is made at the maturity date of a balloon mortgage.

The person applying for a mortgage loan, and the person who will be responsible for repaying the loan.

Bridge loan
This type of mortgage loan is sometimes used when a buyer will be closing on a new house before the present home is sold. The buyer’s present home is used as collateral for another mortgage loan, which is used to purchase the new home. Also known as a “swing loan.”

Buydown mortgage
A temporary buydown is a mortgage where 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.

A limit on how much the interest rate can change, either at each adjustment period or over the life of the loan.

Cash-out refinance
A refinance transaction where the amount of money received from the new loan exceeds the total amount 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 where the borrower receives additional cash that can be used for any purpose.

Change frequency
The frequency (in months) of payment and/or interest rate changes in an adjustable-rate mortgage.

Also known as a profit and loss write-off, a charge-off is an account that was not paid to the extent that the creditor has internally listed it as a loss for tax purposes. It does not mean that the creditor will no longer attempt to collect the amount that is owed.

A meeting at which the sale of a property is finalized by the buyer and seller signing the documents needed to transfer legal ownership of the property. The mortgage documents are signed and closing costs are also paid at this time. Also called “settlement.”

Closing costs
Expenses (over and above the purchase price of the property) necessary to transfer ownership of a property from the seller to the buyer. The fees are due at settlement. Closing costs will vary according to the area of the country and the loan amount requested.

Closing statement
A list giving a complete breakdown of costs involved in a real estate transaction, prepared by the lender’s agent at closing. Also referred to as the HUD1.

If more than one person will be responsible for repaying the loan, the second person listed on the application is the Co-Borrower. If there will be more than one borrower, either one can be listed as the borrower and/or co-borrower, but the borrower’s name must appear on the deed to the property being purchased. For VA loans, the individual with VA certification must be listed as the borrower, not the co-borrower.

Commitment letter
A formal offer by a lender stating the terms under which it agrees to lend money to a applicant. Also known as a “loan commitment.”

Community home improvement mortgage loan
An alternative financing option that allows low- and moderate-income homebuyers to obtain 95 percent financing for the purchase and improvement of a home in need of modest repairs. The repair work can account for as much as 30 percent of the appraised value.

Community property
In some states, property acquired during a marriage is presumed to be owned jointly (i.e. community property) unless acquired as separate property of either spouse.

Comparables are properties similar to the property under consideration; they are reasonably similar in size, location, and amenities and have been recently sold. Comparables help the appraiser determine the approximate fair market value of the subject property. Also referred to as Comps.

Conforming loan
A mortgage loan for less than $300,700 ($451,050 for properties in Alaska and Hawaii). Loans for more than this are called Jumbo loans or Non-conforming loans.

Construction loan
A short-term, interim loan for financing the cost of construction. The lender makes payments directly to the builder at periodic intervals as the home is built. Once the home is complete, the interim loan is converted to the mortgage loan.

Consumer reporting agency (or bureau)
An organization that prepares reports that are used by lenders to determine a potential borrower’s credit history. The agency obtains data for these reports from a credit repository as well as from other sources.

A condition that must be met before a contract is legally binding. For example, homepurchasers often include a contingency that specifies that the contract is not binding until the purchaser obtains a satisfactory home inspection report from a qualified home inspector.

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

Conversion clause
A provision in some adjustable-rate mortgages that allows the borrower to change the ARM to a fixed-rate mortgage at specified timeframes after loan origination.

Convertible ARM
An adjustable-rate mortgage that can be converted to a fixed-rate mortgage under specified conditions.

Corporate relocation
Arrangements under which an employer moves an employee to another area of the country. Some mortgage-related expenses may be paid by the employer.

Cost of funds index (COFI)
An index that is used to determine interest rate changes for certain adjustable-rate mortgage plans. It represents the weighted-average cost of savings, borrowings, and advances of the 11th District members of the Federal Home Loan Bank of San Francisco.

Credit history
A record of an individual’s open and fully repaid debts. A credit history helps a lender determine whether a potential borrower has a history of repaying debts in a timely manner.

Credit report
An account of an individual’s credit history that is prepared by a credit bureau and used by a lender to determine a loan applicant’s creditworthiness.

Credit repository
An organization that gathers, records, updates, and stores financial and public records information about the payment records of individuals who are being considered for credit.

An amount owed to another. Also referred to as liability.

Debt-to-income ratio
Relationship of a borrower’s monthly payment obligation on long-term debts divided by gross monthly income, expressed as a percentage. Also called the bottom ratio or back-end ratio.

The failure to make on-time payment in the amount specified in the terms of the obligation or note.

Department of Veterans Affairs (VA)
A cabinet-level agency of the federal government. The Servicemen’s Readjustment Act of 1944 authorized the agency to administer a variety of benefit programs designed to facilitate the adjustment of returning veterans to civilian life. Among the benefit programs is the VA Home Loan Guaranty program, which encourages mortgage lenders to offer long-term, low down payment financing to eligible veterans by partially guaranteeing the lender against loss upon foreclosure.

Discount points
Charges levied by a mortgage lender and usually payable at closing. One point represents 1% of the face value of the mortgage loan.

The part of the purchase price of a property that the buyer pays in cash and does not finance with a mortgage.
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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.

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

An item of value, money, or documents deposited with a third party to be delivered upon the fulfillment of a condition. For example, the deposit by a borrower to the lender of funds to pay taxes and insurance premiums when they become due, or the deposit of funds or documents with an attorney or escrow agent to be disbursed upon the closing of a sale of real estate.

Escrow account
Third-party account for holding money, such as a buyer’s earnest money or the owner’s taxes and insurance payment, prior to paying the expenses.

Escrow analysis
The periodic examination of escrow accounts to determine if current monthly deposits will provide sufficient funds to pay taxes, insurance, and other bills when due.

Escrow payment
The portion of a mortgagor’s monthly payment that is held by the servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Known as “impounds” or “reserves” in some states.

The ownership interest of an individual in real property. The sum total of all the real property and personal property owned by an individual at time of death.

Examination of title
The review of title on a property from the public records or an abstract of the title.

Fair Credit Reporting Act
A consumer protection law that regulates the disclosure of consumer credit reports by consumer/credit reporting agencies and establishes procedures for correcting mistakes on a credit record.

Fannie Mae
The nation’s largest mortgage investor created in 1968 by an amendment to Title III of the National Housing Act (12 USC 1716 et seq.). This stockholder-owner corporation, a portion of whose board of directors is appointed by the President of the United States, supports the secondary market in mortgages on residential property with mortgage purchase and securitization programs.

Fannie Mae’s Community Homebuyer’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 prepurchase homebuyer education sessions.

Federal Housing Administration (FHA)
A federal agency within the Department of Housing and Urban Development (HUD) that provides mortgage insurance for residential mortgages and sets standards for construction and underwriting. The FHA does not lend money, nor does it plan or construct housing.

FHA mortgage
An FHA mortgage is insured/guaranteed by the Federal Housing Administration (FHA). FHA mortgages have limits on the maximum amount of money that can be borrowed.

Financial position
Your overall monetary situation including the amount of cash you have on hand as well as your monthly income and debts.

First mortgage
A mortgage that is the primary lien against a property.

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

Good faith estimate
A document which tells borrowers the approximate costs they will pay at or before settlement, based on common practice in the locality.

A secured line of credit using the available equity in the applicant’s residence as collateral. HELOC stands for Home Equity line of credit.

Homeowner’s insurance
Insurance coverage which provides compensation to the insured in case of property loss or damage. Also referred to as Hazard insurance.

Homeowner’s policy
Insurance policy covering at least the appraised value of the property and dwelling.

Housing expense ratio
The relationship of a borrower’s monthly payment obligation on housing (PITI – Principal, Interest, Taxes, and Insurance) divided by the gross monthly income. This ratio is sometimes referred to as the top ratio or front end ratio.

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

HUD-1 Uniform Settlement Statement
Standard form used to disclose costs at closing. All charges imposed in the transaction, including mortgage broker fees, must be disclosed separately.

Sources of revenue such as salary, bonuses, interest, investment income, etc.

A published interest rate to which the interest rate on an adjustable-rate mortgage is tied. Some commonly used indeces include the 1-Year Treasury Bill, 6-Month LIBOR, and the 11th District Cost of Funds (COFI).

Interest rate
The fee paid to a lender to borrow money.

Jumbo mortgage
A mortgage loan for more than $300,700 ($451,050 for properties in Alaska and Hawaii). Also called Non-conforming loans. Loans for less than this are called Conforming loans

A legal claim against a property for money due, either voluntary or involuntary, that must be paid when the property is sold.

Lifetime cap
A provision of an adjustable-rate mortgage that limits the highest rate that can occur over the life of the loan.

Loan amount
The amount of money the homebuyer will borrow from the lender to purchase the home.

Loan consultant
An experienced mortgage representative who will assist you with evaluating and selecting the mortgage loan program that meets your needs. You can contact a loan consultant by phone or e-mail.

Loan to value ratio (LTV)
The ratio of the amount of a mortgage loan to the appraised value of the home or the sales price, whichever is lowest. The LTV may affect programs available to a borrower.

The process by which a lender commits to lend at a particular rate as long as the mortgage transaction closes within a specified time period. The document which specifies the terms of the lock-in is called a rate commitment or lock-in agreement.

Monthly mortgage payments
A predetermined portion of the total amount borrowed, plus interest, that is paid to the lender each month. One month’s worth of the property tax, mortgage insurance, and homeowner’s insurance also may be included in the monthly payment.

Monthly rental income
The amount of income you receive monthly from a rental property. For your mortgage application, we can only consider 75% of this income.

A legal document that pledges a property to a lender as security for payment of the loan it makes to the homebuyer.

Mortgage insurance (MI)
Insurance which protects mortgage lenders against loss in the event of default by the borrower. This allows lender to make loans with lower downpayments. The federal government offers MI through HUD/FHA; private entities offer MI for conventional loans.

Mortgage lien amount
Amount of existing mortgage.

Mortgage note
A written promise to pay a sum of money at a stated interest rate during a specified term. A mortgage note is secured by a mortgage.

The person or company who receives the mortgage as a pledge for repayment of the loan.

The mortgage borrower who gives the mortgage as a pledge to repay.

Net rental income
To calculate your net rental income, take your monthly rental income and multiply by 75%. Subtract your monthly mortgage payment from this number to determine your net rental income.

Non-Conforming Loan
A mortgage loan for more than $300,700 ($451,050 for properties in Alaska and Hawaii). Also called Jumbo loans. Loans for less than this are called Conforming loans.

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 loan amount.

An abbreviation for Principal and Interest. P&I is an amount of money paid to the lender on a monthly basis. Principal is the portion of the mortgage payment that goes to reduce the outstanding balance of the loan. Interest is the portion of the mortgage payment that goes to pay the finance charge on the outstanding balance of the loan. For the complete monthly payment associated with a loan see PITI.

Payment cap
The limitation on increases or decreases in the payment amount of an adjustable-rate mortgage.

An abbreviation for Principal, interest, taxes and insurance, the components of a total monthly mortgage payment.

Charges levied by the mortgage lender and usually payable at closing. One point represents 1% of the face value of the mortgage loan. Also referred to as Discount Points.

Paying off an entire mortgage or portion thereof before the scheduled date.

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. The amount of this penalty is determined by the loan program, not all loan programs have a prepayment penalty.

An informal estimate of the amount of money a homebuyer can obtain through a mortgage loan.

The original balance of money lent, excluding interest. Also, the remaining balance of a loan, excluding interest.

Principal and interest
See P&I.

Private mortgage insurance (PMI)
Insurance written by a private company protecting the mortgage lender against financial loss occasioned by a borrower defaulting on the mortgage.

Property type
A detached home is a single-family, free-standing, home. An attached home/townhouse is a single family home attached to another where there is not common ownership of grounds. A condominium is a single unit of a multiple unit building. A co-op or “cooperative” is a share of ownership in a multiple unit building where your share is represented by the unit you own. A planned unit development (PUD) is a single family home in a development of smaller than usual lots which may have common amenities. A 2-, 3- or 4-Unit Multi-Family is a dwelling that consists of up to 4 residences from which the owner receives rental income.

Purchase price
The price a homebuyer pays to buy a home.

Ability to meet a loan program’s predetermined guidelines for income, assets, credit history, debt, etc.

The interest rate that is charged as a fee for borrowing money from a lender.

Rate cap
A limit on how much the interest rate can change, either at each adjustment period or over the life of the loan.

Rate lock-in
The process by which a lender commits to lend at a particular rate as long as the mortgage transaction closes within a specified time period. The document which specifies the terms of the lock-in is called a rate commitment or lock-in agreement.

Compensation received from a wholesale lender that 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.”

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 uses information from at least two of the three national credit bureaus and information provided on your loan application.

Settlement disclosure statement
Standard form used to disclose costs at closing. All charges imposed in the transaction, including mortgage broker fees, must be disclosed separately. Also referred to as the HUD1.

Subject property
The property for which the proceeds of the mortgage loan will be applied.

Tax savings
Amount that can be saved in taxes under the IRS deduction for mortgage interest.

Term of loan
The amount of time required to repay the mortgage loan. The term of loan is expressed in months. For example, for a 30-year, fixed-rate mortgage, the term is 360 months (30 years X 12 months). See also amortization term.

Written evidence of the right to or ownership in property. In the case of real estate, the documentary evidence of ownership is the title deed that specifies in whom the legal estate is vested and the history of ownership and transfers. Title may be acquired through purchase, inheritance, devise, gift, or through foreclosure of a mortgage.

Title insurance
Insurance against loss resulting from defects of title to a specifically described parcel of real property.

Total monthly payment
The total monthly mortgage payment includes principal, interest, taxes, and insurance.

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.

VA mortgage
A VA mortgage is guaranteed by the Department of Veteran Affairs and is available for military personnel, veterans, or spouses of veterans who died of service-related injuries.

Veterans Administration (VA)
See Department of Veterans Affairs.