Glossary

Adjustable Rate Mortgage - A mortgage in which the interest rate and payment changes periodically over the life of the loan based on changes in a specified index. The changes are usually subject to a cap. Amortization – The payment of a mortgage loan through monthly installments of principal and interest. The monthly payment amount is based on a schedule that will allow you to own your home at the end of a specific time period (for example 30 years) Initially, most of the payment goes to interest but over time more and more of the payment goes towards principal until it is all paid off. Annual Percentage Rate (APR) - The APR is a calculation based on a government formula designed to reflect the true annual cost of borrowing, expressed as a percentage. It includes the interest, points, mortgage insurance, and other various fees associated with the loan. The rate is also adjusted for the time value of money, meaning that dollars paid by the borrower early on carry a heavier weight than dollars paid years later. An important note, the APR is calculated on the assumption that the loan completes its full term, and is therefore potentially deceptive for borrowers who intend to sell early. Application Fee - Fees that some lenders charge upon application. It goes towards initial processing expenses like the property appraisal and credit report. Appraisal -A report that estimates the property's fair market value based on an analysis of the sales of comparable homes in the same area. An appraisal is required by your lender and must be made by a qualified appraiser. Balloon Mortgage -A mortgage that typically offers low rates for an initial period of time (usually less than 10) years, and then requires that the balance is due or is refinanced by the borrower. The loan is typically amortized as if it would be paid over a thirty year period to keep monthly payments low. Cap--The limit on an adjustable rate mortgage that the payment or interest rate can be increased or decreased during each adjustment period (usually 6 or 12 months). Some ARMs also have a lifetime cap. Closing Costs - Costs that the borrower must pay at the time of closing, in addition to the down payment. There are two categories of closing costs, "non-recurring closing costs" and "pre-paid items." Non-recurring closing costs are any items which are paid just once such as origination fees, discount points, attorney's fees, credit report, title insurance and survey. "Pre-paids" are costs which recur during your loan, like property taxes and homeowners insurance. Your lender will estimate the amount of non-recurring closing costs and prepaid items on the Good Faith Estimate which must be issued to you within three days of receiving a home loan application. Conforming Loan - A mortgage loan which conforms to all of the guidelines and is therefore eligible for purchase by the two major federal agencies that buy mortgages which are Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC). Credit scoring - an unbiased way of deciding who should receive credit. Weights or scores are associated with your personal credit attributes, such as your income, debt and the time spent at your current address. These scores are added to give a total credit score. The total credit score is a prediction of how likely a person with that score is to default on their loan. Discount Points (or Points) -The Amounts paid to the lender (based on percentage of the loan amount) to buy down the interest rate. Each point charged represents one percent of the loan amount; for example, one point on a $100,000 mortgage is $1,000. In general, paying one point on a 30 year fixed mortgage reduces your interest rate 1/8 (.125) of a percent. Fannie Mae (FNMA) – The nickname for Federal National Mortgage Association. Fannie Mae is a congressionally chartered and shareholder-owned company that is the nation's largest source of financing for home mortgages. Federal Housing Administration (FHA) - An agency of the U.S. Department of Housing and Urban Development (HUD). They mainly insure residential mortgage loans made by private lenders. They also set the standards for construction and underwriting but do not plan or construct housing nor lend money. Freddie Mac - A common Nickname for Federal Home Loan Mortgage Corporation (FHLMC). They are a federally chartered corporation that purchases residential mortgages, and then sells and insures securities based on the mortgages to investors. Good Faith Estimate - A written estimate provided by the lender of the closing costs a borrower is likely to pay at settlement. This estimate must be provided to all loan applicants within three business days after a loan application is received. Hazard Insurance - Insurance to protect the homeowner and the lender against physical damage to a property from fire, wind, vandalism, and certain other natural causes. Mortgage lenders often require the borrower to carry an amount of hazard insurance on the property that is at least equal to the amount of the loan amount. Jumbo Loan - A loan that exceeds the legislated purchase limits of Federal National Mortgage Association (Fannie Mae) or Federal Home Loan Mortgage Corporation (Freddie Mac). Also called a non-conforming loan. Loan to Value Ratio (LTV) - The loan amount divided by the value of the property expressed as a percentage. Value is defined as the lower of sales price or appraised value of the property. Generally, the lower the LTV the more favorable the terms of the programs offered by lenders. Lock or Lock In - A designated period of time during which a borrower and a lender have agreed to a specific interest rate. Most locks are from 30 to 45 days. This usually involves paying a fee to the lender. Mortgage rates not "locked in" are subject to changing market conditions. Under some conditions, if you lock and the rates drop, the better rate can be obtained. Mortgage-Backed Security (MBS) - A security backed by a group of mortgages issued by the Federal Home Loan Mortgage Corporation (FNMA) and the Federal National Mortgage Association (FHLMC). Investors of mortgage backed securities receive payments derived from the interest and principal of the underlying mortgages. Mortgage Insurance (MIP or PMI) - Insurance purchased by the buyer that covers the lender against losses incurred as a result of a default on a home loan. This is generally required on all loans that have a loan-to-value higher than 80%. Also, FHA loans and some first-time buyer programs still require mortgage insurance regardless of the LTV. When you have accumulated 20% of your home's value as equity, you can ask your lender to waive the PMI. Negative Amortization - A gradual increase in mortgage principal that occurs when the monthly payment is not large enough to cover the entire principal and interest due. This shortfall is added to the outstanding balance to create "negative" amortization. Origination Fee - The fee that a lender charges you for processing a loan. It is usually expressed as a percentage of the loan amount. Unlike points, the origination fee doesn't impact the interest rate. It doesn't usually include fees for appraisals, credit reports, inspections or loan document preparation. PITI - Stands for principal, interest, taxes and insurance which are the four components of your monthly mortgage payment. The payments of principal and interest go directly towards repaying the loan while the taxes and insurance (homeowner's and PMI) goes into an escrow account to be paid on your behalf when they are due. Prepayment Penalty - A fee charged by a mortgage lender to a borrower who wants to pay off part or all of a mortgage loan in advance of schedule. The charge is generally expressed as a percent of the loan balance at the time of prepayment, or it can be a specified number of months interest. It is not allowed for FHA or VA loans. Reverse Mortgage - A loan that enables elderly homeowners, to use their home's equity without selling their home or moving from it. A lending institution makes a check out to the homeowners each month. This payment is really a loan against the value of a home. Because the payment is a loan, it's tax-free when the homeowners receive it. These loans are non-recourse. Title Insurance - Insurance that protects lenders and homeowners against financial loss in a property because of legal disputes over the ownership of a property. Underwriting - The process of analyzing a loan application to determine the amount of risk for the lender making the loan. Underwriting involves evaluating the borrower's creditworthiness and the property itself and then selecting the appropriate loan term and interest rate. Variable Rate - In a variable interest loan, the interest rate changes periodically in relation to an index. For example, the interest rate might be linked to the cost of US Treasury Bills and be updated monthly, quarterly, semi-annually, or annually. VA Loan - A loan backed by the U.S. Department of Veterans Affairs (VA). VA loans are made to honorably discharged veterans or their un-remarried widows or widowers. These loans require low or no down payment and offer low interest rates.