Mortgage Terms

Adjustable Rate Mortgage (ARM) – A mortgage loan which allows the lender to adjust the interest rate periodically in accordance with a stated index and as agreed to at the inception of the loan by all parties (also known as variable rate mortgages).

Amortization – Repayment of a mortgage loan with periodic payments of principal and interest. The payments are calculated so that the debt is paid off at the end of a fixed period.

Annual Percentage Rate (APR) – A numerical figure which expresses (on an annual basis) the charges imposed on the borrower to obtain a mortgage loan (such as interest, discount points and other costs).

Appraisal – A report prepared by a qualified real estate appraiser which creates an estimate of the fair market value of a property.

Balloon Mortgage – A short-term mortgage with fixed installments of principal and interest that do not fully amortize the loan. The balance of the mortgage is due in a lump sum at the end of the term.

Buydown Mortgage – A fixed-rate mortgage with a below-market interest rate for a stated initial period. The lender receives a subsidy paid at closing from the builder, seller or buyer.

Caps – Percentage restrictions on an ARM that limit the amount the interest rate may change per year and over the life of the loan.

Cash Reserve – In the mortgage commitment, some lenders require that the borrower have on deposit in their bank accounts at the time of the closing an amount equal to a predetermined number of months of the cost of principal, interest, taxes and insurance. This is called a cash reserve.

Certificate of Occupancy – A certificate issued by a local governmental entity responsible for the use of land in the community where the property is located stating that the structures on the property or any improvements made to those structures comply with the codes, ordinances and regulations of that governmental entity and that they may be occupied.

Closing – The final step in the mortgage loan process after loan commitment. The closing is a meeting between all parties involved in the mortgage transaction in which mortgage documents are signed (also known as a settlement).

Closing Costs – Fees paid at a mortgage closing. Some examples of closing costs are title insurance, attorney fees, recording fees and taxes.

Collateral – Property pledged as security for repayment of a mortgage loan.

Commitment Fee – A fee paid to the lender for originating the mortgage. When this fee is a percentage of the amount of the mortgage it is also called points. One point is one percent of the amount of the mortgage (also known as origination fee).

Commitment Letter – A written offer by the lender to the applicant which states the terms under which the lender agrees to make a mortgage loan.

Conforming Loan – A mortgage in which the loan amount is less than or equal to the maximum amount eligible for purchase by either Government Sponsored Enterprise (GSE – Fannie Mae or Freddie Mac). Loan amounts are considered conforming if they are less than or equal to the following amounts based on the applicable property type (Note: These amounts may change from time to time): 1 Family – $417,000 2 Family – $553,850 3 Family – $645,300 4 Family – $801,950

Credit Score – A numerical rating provided on a credit report that indicates likelihood to repay debts based upon a person’s past credit/payment history and his or her current credit standing.

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 known as bottom ratio).

Discount Points – A one-time charge paid by the borrower to the lender at closing to obtain a lower interest rate on the mortgage loan. One point equals 1% of the loan amount; therefore, two points on a $100,000 mortgage would equal $2,000.

Equity – The amount by which the value of the borrower’s home exceeds the amount owed on the mortgage loan. If the borrower’s home is worth $100,000 and the borrower owes $65,000 on the mortgage loan secured by the borrower’s home, then the borrower’s equity in that home is $35,000 or 35% equity in the home.

Escrow Account – An account established with a mortgage lender comprised of funds from a borrower used to pay taxes and insurance premiums when they become due (also known as impounds).

Federal Housing Administration (FHA) – A federal agency that is part of the U.S. Department of Housing and Urban Development (HUD) that sets policy for mortgage underwriting and provides insurance for residential mortgages.

First Mortgage – A mortgage whose lien is superior to the lien of any other mortgage on the same property. This lien is superior either because it was recorded prior to all other mortgages, or because the lender of another mortgage, which had been recorded ahead of this mortgage has agreed to have a lien subordinated to the lien of this mortgage.

Good Faith Estimate – An estimate of the fees a borrower will be required to pay for a mortgage. Federal law requires that the lender provide the Good Faith Estimate within three business days of the initial loan application.

Housing expense ratio – The relationship of a borrower’s monthly payment obligation on housing (principal, interest, taxes, insurances and other applicable housing expenses) divided by monthly income, expressed as a percentage (also known as top ratio).

Index – A benchmark, usually a published interest rate, such as the U.S. Prime Rate or the one-year London Interbank Offered Rate (LIBOR) security yields, used to calculate the interest rate of an adjustable rate mortgage when the rate is scheduled to change. Generally, a margin stated in loan documents is added to the index to determine the new interest rate.

Interim Interest – Interest owed by the borrower to the lender on the mortgage loan from the day of the closing to the date of the first payment.

Jumbo Loan – A mortgage in which the loan amount exceeds the maximum amount eligible for purchase by either Government Sponsored Enterprise (GSE – Fannie Mae or Freddie Mac). Loan amounts are considered Jumbo if they exceed the following amounts based on the applicable property type (note: these amounts may change from time to time): 1 Family – $417,000 2 Family – $553,850 3 Family – $645,300 4 Family – $801,950

LIBOR index – The London Interbank Offered Rate Index is the average yield of interbank offered rates for one-year U.S. dollar-denominated deposits in the London Market, as published in The Wall Street Journal.

Lien – An encumbrance on the property which acts as security for the payment of a debt or the performance of an obligation. A mortgage is a lien. A lender will want most, if not all, liens on the property removed before making a mortgage loan.

Loan-to-Value Ratio – The mortgage amount divided by the lower of the purchase price or the appraised value of the property. This ratio is expressed as a percentage. A lender will use this ratio in determining the maximum mortgage amount that it will make on the property.

Lock-In/Rate Lock Agreement – An agreement by the lender guaranteeing the applicant a specified interest rate on the mortgage loan provided the loan closes within a set period of time.

Mortgage – A pledge of real estate collateral to secure a debt. Also, the legal document describing and defining the pledge. The mortgage may also include the terms of repayment of the debt.

Mortgage Insurance – Insurance that protects the lender in case the homebuyer does not make their mortgage payments. Typically, a borrower would be required to pay a fee for mortgage insurance if their down payment is less than 20% (also known as private mortgage insurance or PMI).

Mortgage Note – A document signed at closing which states the borrower’s promise to re-pay a sum of money. The note states an interest rate and a fixed period of time (term) for repayment.

Mortgagee – The lender in a mortgage transaction.

Mortgagor – The borrower in a mortgage transaction.

Origination – The first step in the mortgage loan process consisting of the completion of the application.

Points – See “Commitment Fee” above.

Pre-Approval – A process in which a conditional commitment is issued after a loan profile is underwritten with all standard documentation except a property appraisal and a title search.

Pre-Qualification – A process in which the loan officer calculates the housing-to-income ratio and the total debt-to-income ratio to determine an approximate maximum mortgage loan amount.

Prime Rate – The U.S. Prime Rate is a commonly used, short-term interest rate as listed in the Wall Street Journal.

Private Mortgage Insurance (PMI) – See “Mortgage Insurance” above.

Processing – The second step in the mortgage application process which involves the collection and verification of information stated on the application. Credit reports and the appraisal are also ordered at this time.

Pro-Rata Share – In relation to a cooperative apartment building, the pro-rata share is your unit’s share of the building’s underlying mortgage. The share is determined by dividing the amount of the underlying mortgage by the number of shares in the building and then multiplying the per-share amount by the number of shares for your apartment. The lower of either the appraised value or purchase price then divides that number.

Ratios – Percentage applied by the lender during the underwriting of a mortgage loan application to determine how large of a loan to grant to an applicant. The ratios that lenders use are generally the Loan-to-Value Ratio, Housing-to-Income Ratio and Debt-to-Income Ratio.

Recording Fees – The fee charged by the recorder’s office to record documents such as Mortgages, Deeds of Trust, deeds and UCC Financing Statements.

Refinancing – New loan used to pay off an existing mortgage on the same property.

Seller Contributions – Payment by the seller of a property of some or all of the buyer’s closing costs.

Servicing – Post-closing activities the lender performs, such as collecting the payments and/or paying taxes and insurance from an escrow account.

Title – Written evidence of the ownership of property, such as a deed.

Title Search – A process that examines local public records, laws and related court decisions to determine if any other parties have valid claims against the subject property (such as past-due taxes, judgments or mechanics’ liens). It also discloses past and current facts about the subject property’s ownership.

Title Insurance Policy – In real estate, an insurance policy by which the insurer agrees to pay the insured (purchaser, mortgagee, etc.) a specific amount for any loss caused by defects of title to the subject property.

Treasury Index – The Treasury Index is the weekly average yield on U.S. Treasury securities adjusted to a constant maturity of one, three or five years, as made available by the Federal Reserve Board.

Truth-in-Lending Disclosure – Federal law requires that the lender must give this document to the mortgage applicant within three business days after loan application. This disclosure gives details of the mortgage payments along with the corresponding APR and finance changes.

Underwriting – In mortgage lending, the process used to determine whether the loan risk is acceptable to the lender. Underwriting involves the review of the property appraisal and examination of the borrower’s ability and willingness to repay the debt

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