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Mortgage Terms
ARMs...Loan-to-value...PITI. Mortgage terminology can be confusing.
Here is a guide to help you separate the mortgagors from the mortgagees.
Acceleration clause
A provision of a mortgage requiring payment in full of the balance
of the mortgage if monthly payments are missed.
Adjustable-rate mortgage
A mortgage in which the rate of interest is adjusted based on a standard
rate index. Most ARMs have a cap on how much the interest rate may
increase.
Amortization
The process through which the mortgage debt is altered, usually declining,
as payments are made to the lender. "Negative amortization" occurs
when monthly payments are too small to cover either the principal
or interest reductions.
Amortization schedule
A schedule of how mortgage debt is changed over time.
Annual percentage rate (APR)
The rate of interest to be paid on a loan over its projected life;
sometimes referred to as the "true" rate of interest.
Appraisal
A professional evaluation of the value of a home or other piece of
property. It is often required by a lender.
Appreciation
The amount by which the value of a piece of property increases over
time.
APR
See "annual percentage rate."
Assumption
When a buyer assumes the loan payments and obligations of the seller.
If the buyer defaults, however, both the buyer and seller are responsible
for the debt.
Balloon mortgage
A real estate loan in which some portion of the debt will remain unpaid
at the end of the term of the loan. A balloon will usually result
in a single large payment due when the loan ends.
Cap
A limit on how much a mortgage interest rate may increase or decrease
for an adjustable-rate mortgage.
Community Home Buyers Program
A set of low-income loans guaranteed by Fannie Mae. These loans require
only 3 percent or 5 percent down.
Conventional mortgage
A home loan that follows a fixed rate.
Convertible ARM
An adjustable-rate mortgage that is convertible to a fixed rate at
a future date, usually for a fee.
Credit report
A full listing of debts and credit. Credit reports are kept by several
companies, and are ordered by a lending company when you apply for
a mortgage.
Curtailment
A payment that shortens or ends a mortgage, thereby paying off the
entire debt.
Debt-to-income ratio
A ratio used by lending institutions to determine whether a person
is qualified for a mortgage. Debt-to-income is the total amount of
debt, including credit cards and other loans, divided by total gross
monthly income.
Default
Failure to pay mortgage payments over a specified period of time.
Delinquency
Being late with loan payments.
Discount points
A percentage of the mortgage paid to the lender to lower the interest
rate on a loan. One point equals one percent.
Down payment
The amount of money required up front by a lending institution in
order to get a mortgage. This can be as low as 3 percent, depending
on the type of loan.
Equity
The difference between the market value of a house and the amount
still owed on the mortgage.
Escrow
Money and documents deposited in a trust account to be held by one
party for another. Often used by brokers to hold deposit money prior
to closing. Also used by lenders to hold money for taxes and insurance
on a home.
FHA loan
A loan guaranteed by the Federal Housing Administration. FHA issues
specific guidelines for mortgages.
Fixed-rate mortgage
A loan with an interest rate that never changes.
First mortgage
The original loan taken out to purchase a home.
Foreclosure
The legal process that occurs when a buyer defaults on a loan. The
lending institution takes back the property because of a lack of payments.
GIM
See "government-insured mortgage."
Government-insured mortgage
Loans in which the government promises to make good on the insured
portion, should the borrow default on the loan. Generally, government
loans do not require large down payments. They do, however, have strict
eligibility requirements.
GPM
See "graduated payment mortgage."
Graduated payment mortgage (GPM)
A mortgage with an interest rate that starts out low and increases
gradually according to a predetermined rate.
Housing-to-income ratio
A ratio used by lending institutions to determine whether a person
is qualified for a mortgage. Housing-to-income is the total cost of
housing divided by gross monthly income.
Interest
The amount charged per year on a home loan. The rate varies according
to the type of loan.
Interest rate cap
A limit on the amount interest can rise or fall during a specified
period of time on an adjustable-rate mortgage.
Late charge
A fee assessed for late payments on a home loan.
Lease-option
A method of financing in which a person leases the house from a lender
with an option to buy.
Lifetime cap
A limit on how high the interest rate on an adjustable-rate mortgage
can rise over the lifetime of the loan.
Loan-to-value ratio (LTV)
The amount of the loan divided by the purchase price of the house.
Lock in
Allows the borrower to be assured a given rate of interest for a mortgage.
This usually involves paying a fee to the lender. Mortgage rates not
"locked in" are subject to changing market conditions.
LTV
See "loan-to-value ratio."
Margin
A set number of percentage points a lender adds to the index rate
to determine the interest rate for an ARM.
Mortgage insurance
Insurance designed to cover the lender should the borrower default
on the loan. Depending on the mortgage, this may be required by the
lender.
Mortgagee
A person or organization that lends money for a home.
Mortgagor
A person who borrows money for a home.
Negative amortization
A decrease in amortization. This occurs when monthly payments are
too small to cover either the principal or interest reductions.
PITI
Stands for Principle, Interest, Taxes and Insurance.
PMI
See "private mortgage insurance."
Points
An interest fee charged by the lender. One point is equal to one percent
of the mortgage. The use of points allows the lender to raise its
yield above the apparent interest rate.
Prime rate
The best interest rate available to a lender's most qualified customers.
Prepayment penalty
A fee imposed on a borrower who pays off a mortgage before it is due.
Prequalification
A process by which a potential home buyer qualifies for a home mortgage
before making an offer on a house. A lending institution agrees to
make a loan in the specified amount to the person it has prequalified.
Principal
The amount of a home loan.
Private mortgage insurance (PMI)
Mortgage insurance that protects lenders from a loss if the buyer
defaults.
Refinancing
A way of obtaining a better interest rate and lower monthly payments.
A second loan is taken out to pay off the first, higher-rate loan.
Second Mortgage
An additional mortgage on a property. It often carries a shorter term
and a higher interest rate than the original mortgage.
Secondary mortgage market
A market in which existing mortgages are resold.
Seller take-back
An arrangement in which the seller becomes the mortgagee on a home
purchase.
Seller financing
When the current owner of a house holds the mortgage loan for the
buyer.
Take-back mortgage
A loan made directly from the seller to the buyer.
Title company
A company that searches for titles and insures title claims.
Title insurance
A policy that protects the owner of a title from loss resulting from
disputes over ownership claims.
Truth-in-Lending Act
A federal law requiring lenders to reveal all of the terms of a mortgage.
VA Loan
A low-income loan guaranteed by the Veterans Administration. To obtain
a VA loan, the borrower must have served in the armed forces.
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