Mortgage Definitions

GLOSSARY OF TERMS

Adjustable Rate Mortgage (ARM)

A mortgage on which the interest rate may change according to movements in the financial market.

Amortization

A payment method that involves paying off part of the principal along with the interest, instead of interest-only payments. Amortization can speed up loan payments and decrease the balance owed by keeping interest from accruing.

Annual Percentage Rate (APR)

A measure of the cost of credit, expressed as a yearly rate. It includes interest as well as other loan charges. Because all lenders follow the same rules to ensure the accuracy of the APR, it provides consumers with a good basis for comparing the cost of loans.

Appraisal

the comparison of recent sales of similar homes (minimum of 3) in the last 6 months within ½ mile of your property. The appraisal determines the LTV (loan to value) needed by lenders.

Assets

Proof of assets by 3 months of bank statements or brokerage accounts.

Balloon Mortgage

A loan with regular monthly payments in which the final balance is due in one lump sum at the end of the term of the loan.

Cap

A limit on the amount an interest rate or monthly payment can increase during the adjustment period or the life of the loan.

Closing

A meeting to sign documents that transfer ownership of a property from seller to buyer.

Conventional Loan

A mortgage or deed of trust not obtained under a government-insured program.

Conversion Clause

A provision in some ARMs that allows you to change the ARM to a fixed-rate loan at some point during the term.

Credit Report

the public records of your credit as reported to the different credit agencies such as TRW, Equifax and TU (CBI). It is important to have 12 months of clean credit particularly on mortgages and less so on credit cards and other revolving credit.

Equity

The market value of real estate, less the amount of outstanding loans secured by the property.

Earnest Money

A sum paid to the seller to show that a potential purchaser is serious about buying.

Escrow Account

An account set up by a lender to which the borrower makes monthly payments for such obligations as real estate taxes, homeowners insurance, and private mortgage insurance. The lender disburses these funds on behalf of the borrower as the bills become due.

Fixed Rate Mortgage

A mortgage with an interest rate that remains the same throughout the life of the loan.

Hazard Insurance

Protection against damage caused by fire, storm or other hazards. Many lenders require homeowners to carry it in an amount at least equal to the mortgage amount.

Income

for salaried individuals, the most recent income as determined by pay stubs. Base income is used directly but variable income such as commission, bonuses and overtime must be proven for 2 years and expected to continue in the future. Self-employed people require 2 years of tax rectums and recent P & L statements.

Index

Any adjustable rate mortgage adjustments must be based on the movement of an independent index that is beyond the control of the lender and that can easily be verified by the borrower.

Margin

The number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment.

Negative Amortization

An increase in the outstanding amount when a monthly payment does not cover the monthly interest due.

Origination Fee

A charge for the work involved in preparing and servicing a mortgage application.

Point

a premium paid on the mortgage equal to a per-cent of the amount loaned. For example, a 1 point loan has a premium of $1,000 on a $100,000 mortgage.

Principal

Amount of debt, not including interest. The face value of a note, mortgage, etc.

Principal and interest (P&I)

Determined by the amount, rate, term (number of years) of your mortgage. General rules are that P&I increases when the term is shortened. For example, a 15 year mortgage has a P&I payment about 30% greater than a 30 year mortgage.

Private Mortgage Insurance (PMI)

This type of insurance protects the lender from loss due to payment default by the borrower. With this insurance protection, the lender is willing to make a larger loan, thus reducing your downpayment requirements.

Recording Fee

A charge for recording the transfer of a property, paid to the government.

Title Search

the examination of public records concerning the ownership of your property. The title search is usually done in the courthouse. A clean title without liens is required.