A-Credit
A consumer with the best credit rating, deserving of the lowest prices
that lenders offer. Most lenders require a FICO score above 720
(see Credit Issues). There is seldom any payoff for being above
the A-credit threshold (see Does the Mortgage Market Reward Virtue?),
but you pay a penalty for being below it.
Acceleration clause
A clause in your mortgage which allows the lender to demand payment of
the outstanding loan balance for various reasons. The most common reasons
for accelerating a loan are if the borrower defaults on the loan or transfers
title to another individual without informing the lender.
Accrued interest
Interest that is earned but not paid, adding to the amount owed. Same
as Negative amortization.
Adjustable rate mortgage (ARM)
A mortgage on which the interest rate, after an
initial period, can be changed by the lender. While ARMs in many countries
abroad allow rate changes at the lender's discretion ("discretionary
ARMs"), in the US most ARMs base rate changes on a pre-selected
interest rate index over which the lender has no control. These are "indexed
ARMs". There is no discretion associated with rate changes on indexed
ARMs. For articles on ARMs, click on Adjustable Rate Mortgages.
Adjustment date
The date the interest rate changes on an adjustable-rate mortgage
Adjustment interval
On an ARM, the time between changes in the interest rate or monthly
payment. The rate adjustment interval and the payment adjustment
interval are the same on a fully amortizing ARM, but may not be on
a negative amortization ARM. See Should You Fear Negative Amortization?
Affordability
A consumer's capacity to afford a house. Affordability is usually expressed
in terms of the maximum price the consumer could pay for a house,
and be approved for the mortgage required to pay that amount. Read
How Much House Can You Afford? And How Much House Should You Buy?
Agreement of sale
A contract signed by buyer and seller stating the terms and conditions
under which a property will be sold.
Alternative documentation
Expedited and simpler documentation requirements designed to speed
up the loan approval process. Instead of verifying employment with
the applicant's employer and bank deposits with the applicant's bank,
the lender will accept paycheck stubs, W-2s, and the borrower's original
bank statements. Alternative documentation remains “full documentation”,
as opposed to the other documentation options. See What Are Mortgtage
Documentation Requirements?
Amortization
The repayment of principal from scheduled mortgage payments that exceed
the interest due. The scheduled payment less the interest equals
amortization. The loan balance declines by the amount of the scheduled
payment, plus the amount of any extra payment. For a detailed explanation,
see Mortgage Amortization: How Does It Work? If the payment is less
than the interest due, the balance rises, which is negative amortization.
Amortization schedule
A table showing the mortgage payment, broken down by interest and amortization,
the loan balance, tax and insurance payments if made by the lender,
and the balance of the tax/insurance escrow account.
Amount financed
On the Truth in Lending form, the loan amount less "prepaid finance
charges", which are lender fees paid at closing. For example,
if the loan is for $100,000 and the borrower pays the lender $4,000
in fees, the amount financed is $96,000. A useless number. See Another
Truth in Lending Lie.
Annual percentage rate (APR)
This is not the note rate on your loan. It is a value created according
to a government formula intended to reflect the true annual cost
of borrowing, expressed as a percentage. It works sort of like this,
but not exactly, so only use this as a guideline: deduct the closing
costs from your loan amount, then using your actual loan payment,
calculate what the interest rate would be on this amount instead
of your actual loan amount. You will come up with a number close
to the APR. Because you are using the same payment on a smaller amount,
the APR is always higher than the actual not rate on your loan.
Application
A request for a loan that includes the information about the potential
borrower, the property and the requested loan that the solicited
lender needs to make a decision. In a narrower sense, the application
refers to a standardized application form called the "1003" which
the borrower is obliged to fill out.
Application fee
A fee that some lenders charge to accept an application. It may or
may not cover other costs such as a property appraisal or credit
report, and it may or may not be refundable if the lender declines
the loan.
Appraisal
A written estimate of a property's current market value prepared
by an appraiser.
Appraiser
An individual qualified by education, training, and experience to estimate
the value of real property and personal property. Although some appraisers
work directly for mortgage lenders, most are independent.
Appraisal fee
A fee charged by an appraiser for the appraisal of a particular property.
Approval
Acceptance of the borrower's loan application. Approval means that
the borrower meets the lender's qualification requirements and also
its underwriting requirements. In some cases, especially where approval
is provided quickly as with automated underwriting systems, the approval
may be conditional on further verification of information provided
by the borrower.
Assumption
A method of selling real estate where the buyer of the property agrees
to become responsible for the repayment of an existing loan on the
property. Unless the lender also agrees, however, the seller remains
liable for the mortgage.
Assumable mortgage
A mortgage contract that allows, or does not prohibit, a creditworthy
buyer from assuming the mortgage contract of the seller. Assuming
a loan will save the buyer money if the rate on the existing loan
is below the current market rate, and closing costs are avoided as
well. A loan with a "due-on-sale" clause stipulating that
the mortgage must be repaid upon sale of the property, is not assumable.
See Are Mortgage Assumptions a Good Deal?
Authorized user
Someone authorized by the original credit card holder to use the holder’s
card. The card-holder is responsible for the charges of the authorized
user, but the authorized user is not responsible for paying any charges,
including his own. But sometimes authorized users are dunned for the
unpaid bills of the card holder. See Are Authorized Users At Risk?
Automated underwriting
A computer-driven process for informing the loan applicant very quickly,
sometimes within a few minutes, whether the applicant will be approved,
or whether the application will be forwarded to an underwriter. The
quick decision is based on information provided by the applicant,
which is subject to later verification, and other information retrieved
electronically including information about the borrower's credit
history and the subject property.
Automated underwriting system
A particular computerized system for doing automated underwriting.
Mortgage insurers and some large lenders have developed such systems,
but the most widely used are Fannie Mae’s “Desktop Underwriter” and
Freddie Mac’s “Loan Prospector”.
Balance
The amount of the original loan remaining to be paid. It is equal to
the loan amount less the sum of all prior payments of principal.
See Mortgage Amortization: How Does it Work?
Balloon mortgage
A mortgage loan that requires the remaining principal balance be paid
at a specific point in time. For example, a loan may be amortized
as if it would be paid over a thirty year period, but requires that
at the end of the tenth year the entire remaining balance must be
paid.
Balloon
The loan balance remaining at the time the loan contract calls for
full repayment.
Bankruptcy
By filing in federal bankruptcy court, an individual or individuals
can restructure or relieve themselves of debts and liabilities. Bankruptcies
are of various types, but the most common for an individual seem
to be a "Chapter 7 No Asset" bankruptcy which relieves
the borrower of most types of debts. A borrower cannot usually qualify
for an "A" paper loan for a period of two years after the
bankruptcy has been discharged and requires the re-establishment
of an ability to repay debt.
Bimonthly mortgage
A mortgage on which the borrower pays half the monthly payment on the
first day of the month, and the other half on the 15th. See Alternative
Early Payoff Plans.
Biweekly mortgage
A mortgage on which the borrower pays half the monthly payment every
two weeks. Because this results in 26 (rather than 24) payments per
year, the biweekly mortgage amortizes before term. See Biweekly Mortgages.
Bridge loan
A short-term loan, usually from a bank, that "bridges" the
period between the closing date of a home purchase and the closing date
of a home sale. To qualify for a bridge loan, the borrower must have
a contract to sell the existing house. Read How Can I Buy Before I Sell?
Builder-financed construction
Having the builder finance the construction. Read Should the Builder
Finance Construction?
Buy-down
A permanent buy-down is the payment of points in exchange for a lower
interest rate. See Points. A temporary buy-down concentrates the
rate reduction in the early years. See Temporary Buy-Down.
Buy-up
Paying a higher interest rate in exchange for a rebate by the lender
which reduces upfront costs. See Negative Points.
Cap
Same as Float-down.
Cash Flow Option Loan
Same as Flexible Payment ARM.
Cash-Out refi
Refinancing for an amount in excess of the balance on the old loan
plus settlement costs. The borrower takes "cash-out" of
the transaction. This way of raising cash is usually an alternative
to taking out a home equity loan. For a discussion of the relative
merits of the two approaches, read Debt Consolidation With a Cash-Out
Refinance.
Closing
On a home purchase, the process of transferring ownership from the
seller to the buyer, the disbursement of funds from the buyer and
the lender to the seller, and the execution of all the documents
associated with the sale and the loan. On a refinance, there is no
transfer of ownership, but the closing includes repayment of the
old lender.
Closing costs
Same as Settlement costs.
Closing date
The date on which the closing occurs. See Mortgage Closing Date: Does
it Matter?
CMG plan
A technique for repaying a loan early that involves using the mortgage
as a substitute for a checking account. See The CMG Plan: Your Mortgage
as a Checking Account.
Co-Borrowers
One or more persons who have signed the note, and are equally responsible
for repaying the loan. Unmarried co-borrowers who live together are
advised to agree beforehand on what happens if they split. See On
Buying a House With a Domestic Partner.
COFI
Cost of funds index. One of many interest rate indexes used to determine
interest rate adjustments on an adjustable rate mortgage. See What
Is a Coffee Loan? and Which Adjustable Rate Mortgage Index Is the
Best?
Conforming mortgage
A loan eligible for purchase by the two major Federal agencies that
buy mortgages, Fannie Mae and Freddie Mac. See What Do Fannie Mae
and Freddie Mac Do?
Construction financing
The method of financing used when a borrower contracts to have a house
built, as opposed to purchasing a completed house. See Pitfalls in
Financing Home Construction .
Contract knavery
Inserting provisions into a loan contract that severely disadvantage
the borrower, without the borrower’s knowledge, and sometimes
despite oral assurances to the contrary. Prepayment penalties are
perhaps the most frequently cited subject of such abuse. Read What
Is Predatory Lending?
Conventional mortgage
A home mortgage that is neither FHA-insured nor VA-guaranteed.
Conversion option
The option to convert an ARM to an FRM at some point during its life.
These loans are likely to carry a higher rate or points than ARMs
that do not have the option. See Conversion Option on an Adjustable
Rate Mortgage?
Correspondent
A lender who delivers loans to a (usually larger) wholesale lender
against prior price commitments the wholesaler has made to the correspondent.
The commitment protects the correspondent against pipeline risk.
COSI
Cost of savings index. One of many interest rate indexes used to determine
interest rate adjustments on an adjustable rate mortgage. See Which
Adjustable Rate Mortgage Index Is the Best?
Co-signing a note
Assuming responsibility for someone else's loan in the event that that
party defaults. A risk not to be taken lightly. See The Hazards of
Co-signing, and Co-Signing a Mortgaage: How Much Help?
Credit report
A report from a credit bureau containing detailed information bearing
on credit-worthiness, including the individual's credit history.
See What Is a Credit Report? and Credit Reports and Credit Scores.
cost of funds index (COFI)
One of the indexes that is used to determine interest rate changes
for certain adjustable-rate mortgages. It represents the weighted-average
cost of savings, borrowings, and advances of the financial institutions
such as banks and savings & loans, in the 11th District of the
Federal Home Loan Bank.
Credit
An agreement in which a borrower receives something of value in exchange
for a promise to repay the lender at a later date. (top)
Credit history
A record of an individual's repayment of debt. Credit histories are
reviewed my mortgage lenders as one of the underwriting criteria
in determining credit risk.
Creditor
A person to whom money is owed.
Credit report
A report of an individual's credit history prepared by a credit bureau
and used by a lender in determining 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.
Credit score
A single numerical score, based on an individual's credit history,
that measures that individual's credit worthiness. Credit scores
are as good as the algorithm used to derive them. The most widely
used credit score is called FICO for Fair Issac Co. which developed
it. Many of the columns in Mortgage Credit Issues discuss factors
that affect the FICO score, including Raise Credit Score by Paying
Delinquencies? and Do Credit Inquiries Hurt Your Credit Credit?
Cumulative interest
The sum of all interest payments to date or over the life of the loan.
This is an incomplete measure of the cost of credit to the borrower
because it does not include up-front cash payments, and it is not
adjusted for the time value of money. See Interest cost.
Current index value
The most recently published value of the index used to adjust the interest
rate on an indexed ARM.
Deadbeat
A borrower who doesn't pay. See When Good Credit Marries Bad Credit.
And Can a Deadbeat Pay Cash?
Debtaholic
A borrower who cannot handle debt except by complete abstinence. See
Are Credit Problems Cured by the Passage of Time?
Debt consolidation
Rolling short-term debt into a home mortgage loan, either at the time
of home purchase or later. For columns on the subject, see Debt Consolidation.
Deed in lieu of foreclosure
Deeding the property over to the lender as an alternative to having
the lender foreclose on the property. See Options When Equity in
Your Home is Gone and Mortgage Payment Problems: What If You Can't
Pay?
Default
Failure of the borrower to honor the terms of the loan agreement. Lenders
(and the law) usually view borrowers delinquent 90 days or more as
in default.
Deferred interest
Deferred interest
Same as negative amortization.
Delinquency
A mortgage payment that is more than 30 days late. For articles on payment
problems, see Payment Problems. Don't confuse with Late payment.
Demand clause
A clause in the note that allows the lender to demand repayment at any
time for any reason. See What Is a Demand Clause?
Direct lender
Same as lender.
Discount mortgage
broker
A mortgage broker who claims to be compensated entirely by the lender
rather than by the borrower. See Are Discount Mortgage Brokers Upfront?
Discount points
Same as points.
Discretionary
ARM
An adjustable rate mortgage on which the lender has the right to change
the interest rate at any time subject only to advance notice. Discretionary
ARMs are found abroad, not in the US. See Can You Have Peace of Mind
With an ARM?
Documentation
requirements
The set of lender requirements that specify how information about a loan
applicant's income and assets must be provided, and how it will be used
by the lender. See What Are Mortgage Documentation Requirements?
Down payment
The difference between the value of the property and the loan amount,
expressed in dollars, or as a percentage of the price. For example,
if the house sells for $100,000 and the loan is for $80,000, the down
payment is $20,000 or 20%. To read articles about the down payment,
see Down Payment.
Dual apper
A borrower who submits applications through two loan providers, usually
mortgage brokers. See Is It OK to Submit Two Mortgage Loan Applications?
Dual index mortgage
A mortgage on which the interest rate is adjustable based on an interest
rate index, and the monthly payment adjusts based on a wage and salary
index. See Dual Index Mortgages.
Due-on-sale clause
A provision of a loan contract that stipulates that if the property is
sold the loan balance must be repaid. This bars the seller from transferring
responsibility for an existing loan to the buyer when the interest
rate on the old loan is below the current market. A mortgage containing
a due-on-sale clause is not an assumable mortgage.
Effective rate
A term used in two ways. In one context it refers to a measure of interest
cost to the borrower that is identical to the APR except that it is
calculated over the time horizon specified by the borrower. The APR
is calculated on the assumption that the loan runs to term, which most
loans do not. (See
Does the Annual Percentage Rate (APR) Help?). In most texts on the mathematics
of finance, however, the "effective rate" is the quoted rate
adjusted for intra-year compounding. For example, a quoted 6% mortgage
rate is actually a rate of .5% per month, and if interest received in
the early months is invested for the balance of the year at .5%, it results
in a return of 6.17% over the year. The 6.17% is called the "effective
rate" and 6% is the "nominal" rate.
Equity
In connection with a home, the difference between the value of the home
and the balance of outstanding mortgage loans on the home.
Equity grabbing
A type of predatory lending where the lender intends for the borrower
to default so the lender can grab the borrower's equity. Read What
Is Predatory Lending?
Escrow
An agreement that money or other objects of value be placed with a third
party for safe keeping, pending the performance of some promised act
by one of the parties to the agreement. It is common for home mortgage
transactions to include an escrow agreement where the borrower adds
a specified amount for taxes and hazard insurance to the regular monthly
mortgage payment. The money goes into an escrow account out of which
the lender pays the taxes and insurance when they come due. For articles
on this subject, see Escrows.
Fallout
Loan applications that are withdrawn by borrowers, sometimes because
they have found a better deal. See Why Is Locking Unique to Mortgages?
Fannie Mae
One of two Federal agencies that purchase home loans from lenders. (The
other is Freddie Mac). Both agencies finance their purchases primarily
by packaging mortgages into pools, then issuing securities against
the pools. The securities are guaranteed by the agencies. They also
raise funds by selling notes and other liabilities. See What Do Fannie
Mae and Freddie Mac Do?
Fees
The sum of all upfront cash payments required by the lender as part of
the charge for the loan. Origination fees and points are expressed
as a percent of the loan. Junk fees are expressed in dollars.
FHA mortgage
A mortgage on which the lender is insured against loss by the Federal
Housing Administration, with the borrower paying the mortgage insurance
premium. The major advantage of an FHA mortgage is that the required
down payment is very low, but the maximum loan amount is also low.
For articles on FHA, see FHA Mortgages.
FICO Score
See Credit Score.
Financing points
Including points in the loan amount. Read Can Mortgage Points Be Financed?
First mortgage
A mortgage that has a first-priority claim against the property in the
event the borrower defaults on the loan. For example, a borrower defaults
on a loan secured by a property worth $100,000 net of sale costs. The
property has a first mortgage with a balance of $90,000 and a second
mortgage with a balance of $15,000. The first mortgage lender can collect
$90,000 plus any unpaid interest and foreclosure costs. The second
mortgage lender can collect only what is left of the $100,000.
Fixed rate mortgage
(FRM)
A mortgage on which the interest rate and monthly mortgage payment remain
unchanged throughout the term of the mortgage.
Flexible payment
ARM.
Same as Option ARM.
Float
Allowing the rate and points to vary with changes in market conditions.
The borrower may elect to lock the rate and points at any time but
must do so a few days before the closing. Allowing the rate to float
exposes the borrower to market risk, and also to the risk of being
taken advantage of by the loan provider. See Is it Wise to Float?
Float-down
A rate lock, plus an option to reduce the rate if market interest rates
decline during the lock period. Also called a cap. A float-down costs
the borrower more than a lock because it is more costly to the lender.
Float-downs vary widely in terms of how often the borrower can exercise
(usually only once), and exactly when the borrower can exercise. See
What Is a Float-Down? Do not confuse with interest rate increase caps
and payment increase caps.
Foreclosure
The legal process by which a lender acquires possession of the property
securing a mortgage loan when the borrower defaults. See Can a Mortgage
Lender Profit From Foreclosure?
Forbearance agreement
An agreement by the lender not to exercise the legal right to foreclose
in exchange for an agreement by the borrower to a payment plan that
will cure the borrower’s delinquency. See Mortgage Payment Problems:
What If You Can't Pay?
Freddie Mac
One of two Federal agencies that purchase home loans from lenders. The
other is Fannie Mae.
Fully amortizing
payment
The monthly mortgage payment which, if maintained unchanged through the
remaining life of the loan at the then-existing interest rate, will pay
off the loan over the remaining life. See Mortgage Amortization: How
Does It Work? On FRMs the payment is always fully amortizing, provided
the borrower has made no prepayments. (If the borrower makes prepayments,
the monthly payment is more than fully amortizing). On GPMs, the payment
in the early years is always less than fully amortizing. On ARMs, the
payment may or may not be fully amortizing, depending on the type of
ARM. See How Does Negative Amortization on a Mortgage Work?
Fully indexed
interest rate
The current index value plus the margin on an ARM. Usually, initial interest
rates on ARMs are below the fully indexed rate. If the index does not
change from its initial level, after the initial rate period ends the
interest rate will rise to the fully indexed rate after a period determined
by the interest rate increase cap. For example, if the initial rate is
4% for 1 year, the fully indexed rate 7%, and the rate adjusts every
year subject to a 1% rate increase cap, the 7% rate will be reached at
the end of the third year. See What Is an Adjustable Rate Mortgage? and
What Is the Real Price of an Adjustable Rate Mortgage?
Generic prices
Prices that assume a more or less standardized set of transaction characteristics
that generally command the lowest prices. Generic prices are distinguished
from transaction specific prices, which pertain to the characteristics
of a specific transaction. See What Mortgage Market Niche Are You In?
Gift of equity
A sale price below market value, where the difference is a gift from
the sellers to the buyers. Such gifts are usually between family members.
Lenders will usually allow the gift to count as down payment. See Avoiding
Taxes on a Gift of Equity.
Good fairy syndrome
A belief that somewhere out there is a good fairy who will solve all
our financial (and other) problems. See Mortgage Fraud and Belief in
a Good Fairy.
Good faith estimate
The form that lists the settlement charges the borrower must pay at closing,
which the lender is obliged to provide the borrower within three business
days of receiving the loan application. See Why Do Lenders Itemize
Loan Charges? and How to Shop Settlement Costs.
Government National Mortgage Association
(GNMA)
A Federal agency that guarantees mortgage securities that are issued
against pools of FHA and VA mortgages.
Grace period
The period after the payment due date during which the borrower can pay
without being hit for late fees. Grace periods apply only to mortgages
on which interest is calculated monthly. Simple interest mortgages
do not have a grace period because interest accrues daily. See What
Are Simple Interest Mortgages?
Graduated payment
mortgage (GPM)
A mortgage on which the payment rises by a constant percent for a specified
number of periods, after which it levels out over the remaining term
and amortizes fully. For example, the payment might increase by 7.5%
every 12 months for 60 months, after which it is constant for the remaining
term at a fully amortizing level. See What is a Graduated Payment Mortgage
(GPM)?
Graduation period
The interval at which the payment rises on a GPM.
Graduation rate
The percentage increase in the payment on a GPM.
Guaranteed Mortgage Price Agreement
A proposal by HUD in 2002 to allow lenders and others to offer packages
of loans and settlement services at a single price. See HUD's Proposals
For Reform.
Hazard insurance
Insurance purchased by the borrower, and required by the lender, to protect
the property against loss from fire and other hazards. Also known as "homeowner
insurance", it is the second "I" in PITI. See Questions
About Home Owners Insurance.
Historical scenario
The assumption that the index value to which the rate on an ARM is tied
follows the same pattern as in some prior historical period. In meeting
their disclosure obligations in connection with ARMs, some lenders
show how the mortgage payment would have changed on a mortgage originated
some time in the past. That is not very useful. Showing how a mortgage
originated now would change if the index followed a historical pattern
would be useful, but nobody does it.
Homebuyer protection
plan
A plan purporting to protect FHA homebuyers against property defects.
See Is FHA Responsible For the Leaky Roof?
Homeowners insurance
Insurance purchased by the borrower, and required by the lender, to protect
the property against loss from fire and other hazards. It is the second "I" in
PITI. See Questions About Home Owners Insurance.
Home equity line
of credit (HELOC)
A mortgage set up as a line of credit against which a borrower can draw
up to a maximum amount, as opposed to a loan for a fixed dollar amount.
For example, using a standard mortgage you might borrow $150,000, which
would be paid out in its entirety at closing. Using a HELOC instead,
you receive the lender’s promise to advance you up to $150,000,
in an amount and at a time of your choosing. You can draw on the line
by writing a check, using a special credit card, or in other ways. See
What Is a HELOC and How Do You Shop For a HELOC?
Home Equity Conversion
Mortgage (HECM)
A reverse mortgage program administered by FHA. See Reverse Mortgages.
Home equity line
Same as HELOC.
Home equity loan
Same as second mortgage.
Home Keeper
A reverse mortgage program administered by Fannie Mae. See Reverse Mortgages.
Home Owners Loan
Corporation
A Federal Government agency established by Congress in 1933 to help families
avoid having their homes foreclosed. See Home Owners Loan Corporation
II - a Fable.
Housing bank
A government-owned or affiliated housing lender. With minor exceptions,
government in the US has never loaned directly to consumers, but housing
banks are widespread in many developing countries. Read Government
as Mortgage Lender.
Housing bubble
A marked increase in house prices fueled partly by expectations that
prices will continue to rise. See A Look at Housing Bubbles.
Housing expense
The sum of mortgage payment, hazard insurance, property taxes, and homeowner
association fees. Same as PITI and "monthly housing expense."
Housing expense
ratio
The ratio of housing expense to borrower income, which is used (along
with the total expense ratio and other factors) in qualifying borrowers.
See Qualifying for a Mortgage.
Housing investment
The amount invested in a house, equal to the sale price less the loan
amount. See How Much House Should You Buy?
HUD1 form
The form a borrower receives at closing that details all the payments
and receipts among the parties in a real estate transaction, including
borrower, lender, home seller, mortgage broker and various other service
providers.
Hybrid ARM
An ARM on which the initial rate holds for some period, during which
it is "fixed-rate", after which it becomes adjustable rate.
Generally, the term is applied to ARMs with initial rate periods of
3 years or longer.
Indexed ARM
An ARM on which the interest rate adjusts mechanically based on changes
in an interest rate index, as opposed to a "discretionary ARM" on
which the lender can change the rate at any time subject only to advance
notice. All ARMs in the US are indexed. See Peace of Mind With an Adjustable
Rate Mortgage?
Initial interest
rate
The interest rate that is fixed for some specified number of months at
the beginning of the life of a an ARM. The initial rate is sometimes
referred to as a "teaser" when it is below the fully indexed
interest rate. See Information to Evaluate an Adjustable Rate Mortgage.
Initial rate
period
The number of months for which the initial rate holds, ranging from 1
month to 10 years. See Information to Evaluate an Adjustable Rate Mortgage.
Interest accrual
period
The period over which the interest due the lender is calculated. If the
interest accrual period on a 6 % mortgage for $100,000 is a year, as
it is on some loans in the UK and India, the interest for the year is
.06($100,000) = $6,000. If interest accrues monthly, as it does on most
mortgages in the US, the monthly interest is .06/12($100,000) = $500.
If interest accrues biweekly, as on a few programs in the US, the biweekly
interest is .06/26($100,000) = $230.77. And if interest accrues daily,
as HELOCs and some other mortgages in the US do, the daily interest is
.06/365($100,000) = $16 .44.
Interest cost
A time-adjusted measure of cost to a mortgage borrower. It is calculated
in the same way as the APR except that the APR assumes that the loan
runs to term, and is always measured before taxes. The formula is shown
in Mortgage Formulas. Interest cost is measured over the individual
borrower's time horizon, and it may be measured after taxes at the
individual borrower's tax rate. In addition, the cost items included
in interest cost may be more or less inclusive than those included
in the APR.
Interest due
The amount of interest, expressed in dollars, computed by multiplying
the loan balance at the end of the preceding period times the annual
interest rate divided by the interest accrual period. It is the same
as interest payment except when the scheduled mortgage payment is less
than the interest due, in which case the difference is added to the
balance and constitutes negative amortization.
Interest-only
mortgage
A mortgage on which for some period the monthly mortgage payment consists
of interest only. During that period, the loan balance remains unchanged.
See Interest Only Mortgages.
Interest payment
The dollar amount of interest paid each month. It is the same as interest
due so long as the scheduled mortgage payment is equal to or greater
than than the interest due. Otherwise, the interest payment is equal
to the scheduled payment.
Interest rate
The rate charged the borrower each period for the loan of money, by custom
quoted on an annual basis. A rate of 6%, for example, means a rate
of 1/2% per month. A mortgage interest rate is a rate on a loan secured
by a specific property. See Mortgage Interest Rates.
Interest rate
adjustment period
The frequency of rate adjustments on an ARM after the initial rate period
is over. The rate adjustment period is sometimes but not always the same
as the initial rate period. As an example, a 3/3 ARM is one in which
both periods are 3 years while a 3/1 ARM has an initial rate period of
3 years after which the rate adjusts every year. See Information to Evaluate
an Adjustable Rate Mortgage.
Interest rate
ceiling
The highest interest rate possible under an ARM contract; same as "lifetime
cap." It is often expressed as a specified number of percentage
points above the initial interest rate. See Information to Evaluate an
Adjustable Rate Mortgage.
Interest rate
floor
The lowest interest rate possible under an ARM contract. Floors are less
common than ceilings. See Information to Evaluate an Adjustable Rate
Mortgage.
Interest rate
increase cap
The maximum allowable increase in the interest rate on an ARM each time
the rate is adjusted. It is usually 1 or 2 percentage points, but may
be 5 points if the initial rate period is 5 years or longer. See Information
to Evaluate an Adjustable Rate Mortgage.
Interest rate
decrease cap
The maximum allowable decrease in the interest rate on an ARM each time
the rate is adjusted. It is usually 1 or 2 percentage points. See Information
to Evaluate an Adjustable Rate Mortgage.
Interest rate
index
The specific interest rate series to which the interest rate on an ARM
is tied, such as "Treasury Constant Maturities, 1-Year," or "Eleventh
District Cost of Funds." All the indices are published regularly
in readily available sources. For a listing and discussion of various
indices, see Adjustable Rate Mortgage Indexes and Which Adjustable Rate
Mortgage Index Is the Best?
Interim refinance
An ill-advised scheme to avoid a prepayment penalty by refinancing twice
instead of once. Read The Interim Mortgage Refinance Scam.
Internet mortgages
Mortgages delivered using the internet as a major part of the communication
process between the borrower and the lender. See Using the Internet.
Investor
In real estate, a borrower who owns or purchases a property as an investment
rather than as a residence.
Jumbo mortgage
A mortgage larger than the maximum eligible for purchase by the two Federal
agencies, Fannie Mae and Freddie Mac, $333,700 in 2004 (see Non-conforming
mortgage). However, some lenders use the term to refer to programs
for even larger loans, such as, e.g., greater than $500,000.
Junk fees
A derogatory term for lender fees expressed in dollars rather than as
a percent of the loan amount. See What Are Junk Fees on a Mortgage?,
Is the Term "Junk Fees" Unfair?, and How to Estimate Junk
Fees.
Late fees
Fees that lenders are entitled to collect from borrowers who don't pay
within the grace period. Most mortgage notes offer borrowers a 10 or
15-day grace period, with a late charge of about 5% on payments received
on the 16th or later. Read Are These Mortgage Late Fees Kosher?
Late payment
A payment received after the grace period stipulated in the note. Most
mortgage grace periods are 10 or 15 days.
Lead-Generation
site
A mortgage web site designed to provide leads (potential customers) to
lenders. Where a referral site provides information about lenders to
consumers, with consumers contacting the lenders, a lead-generation site
provides information about the consumers to the lenders, and the lenders
contact the consumers. They are sometimes called "auction sites" because
lenders post their prices directly to the consumer. See Mortgage Auction
(or Lead Generation) Sites .
Lease-to-own
purchase
A transaction in which a hopeful home buyer leases a home with an option
to buy it within a specified period. See Lease-to-Own House Purchases.
Lender
See Mortgage lender.
Lien
The lender’s right to claim the borrower’s property in the
event the borrower defaults. If there is more than one lien, the claim
of the lender holding the first lien will be satisfied before the claim
of the lender holding the second lien, which in turn will be satisfied
before the claim of a lender holding a third lien, etc.
Loan amount
The amount the borrower promises to repay, as set forth in the mortgage
contract. It differs from the amount of cash disbursed by the lender
by the amount of points and other upfront costs included in the loan.
Loan "churning"
The process of raising cash periodically through successive cash-out
refinancings. It is a scam initiated by mortgage brokers that victimizes
wholesale lenders, with the connivance of borrowers. See Periodic Mortgage
Refinacings: Who Gets Conned?
Loan discount
fee
The term used to describe points on the Good Faith Estimate.
Loan modification
A change in the terms of a loan, usually the interest rate and/or term,
in response to the borrower's inability to make the payments under
the existing term. See See Mortgage Payment Problems: What If You Can't
Pay?
Loan officer
Employees of lenders or mortgage brokers who find borrowers, sell and
counsel them, and take applications. See Mortgage Lenders, Mortgage
Brokers and Loan Officers.
Loan provider
A lender or a mortgage broker.
Loan-to-value
ratio
The loan amount divided by the lesser of the selling price or the appraised
value. Also referred to as LTV. The LTV and down payment are different
ways of expressing the same set of facts. See What Is the Down Payment?
Lock
An option exercised by the borrower, at the time of the loan application
or later, to "lock in" the rates and points prevailing in
the market at that time. The lender and borrower are committed to those
terms, regardless of what happens between that point and the closing
date. See Locking the Price of a Mortgage Loan.
Lock commitment
letter
A written statement from a lender verifying that the price and other
terms of a loan have been locked. Borrowers who lock through a mortgage
broker should always demand to see the lock commitment letter. See Did
You Pay For Insurance You Didn't Get?
Lock failure
The inability or unwillingness of a lender to honor a mortgage price
that a borrower had believed was guaranteed. See Questions About the
Failure of Mortgage Locks.
Lock jumper
A borrower, usually refinancing rather than purchasing
a home, who allows a lock to expire when interest rates go down
in order to lock again at the lower rate. See Is the Borrower
Committed by a Mortgage Lock?
Lock per
iodThe number of days for which any lock or float-down holds. Ordinarily,
the longer the period, the higher the price to the borrower.
Mandatory disclosure
The array of laws and regulations dictating the information that must
be disclosed to mortgage borrowers, and the method and timing of disclosure.
See Mandatory Mortgage Disclosure.
Manufactured
housing
A house built entirely in a factory, transported to a site and installed
there. They are usually built without knowing where they will be sited,
and are subject to a Federal building code administered by HUD. See Manufactured
Housing: a Messy Picture.
Margin
The amount added to the interest rate index, ranging generally from 2
to 3 percentage points, to obtain the fully indexed interest rate on
an ARM. See Information to Evaluate an Adjustable Rate Mortgage.
Market niche
A particular combination of loan, borrower and property characteristics
that lenders use in setting prices and underwriting requirements. These
characteristics are believed to affect the default risk or cost of
the loan. As examples, borrowers who don't intend to occupy the house
they purchase pay more than those who do, and borrowers who refinance
only the balance on their existing loan pay less than those who take "cash
out". Read What Mortgage Market Niche Are You In?
Maturity
The period until the last payment is due. This is usually but not always
the term, which is the period used to calculate the mortgage payment.
Maximum loan
amount
The largest loan size permitted on a particular loan program. For programs
where the loan is targeted for sale to Fannie Mae or Freddy Mac, the
maximum will be the largest loan eligible for purchase by these agencies.
On FHA loans, the maximums are set by the Federal Housing Administration,
and vary somewhat by geographical area. On other loans, maximums are
set by lenders.
Maximum loan
to value ratio
The maximum allowable loan-to-value ratio on the selected loan program.
Maximum lock
The longest period for which the lender will lock the rate and points
on any program. The most common maximum lock period is 60 days, but
on some programs the maximum is 90 days; only a few go beyond 90 days.
See Why Is Locking Unique to Mortgages?
Minimum down
payment
The minimum allowable ratio of down payment to sale price on any program.
If the minimum is 10%, for example, it means that you must make a down
payment of at least $10,000 on a $100,000 house, or $20,000 on a $200,000
house. For articles on down payment, see Down Payment.
Monthly housing
expense
Same as Housing expense.
Monthly debt
service
Monthly payments required on credit cards, installment loans, home equity
loans, and other debts but not including payments on the loan applied
for.
Monthly total
expenses
Same as Total housing expense.
Mortgage
A written document evidencing the lien on a property taken by a lender
as security for the repayment of a loan. The term “mortgage” or “mortgage
loan” is used loosely to refer both to the lien and the loan.
In most cases, they are defined in two separate documents: a mortgage
and a note.
Mortgage auction
site
See Lead generation site.
Mortgage bank
Same as mortgage company.
Mortgage broker
An independent contractor who offers the loan products of multiple lenders,
termed wholesalers. A mortgage broker counsels on the loans available
from different wholesalers, takes the application, and usually processes
the loan. When the file is complete, but sometimes sooner, the lender
underwrites the loan. In contrast to a correspondent, a mortgage broker
does not fund a loan. For articles on mortgage brokers and how to deal
with them, see Mortgage Brokers.
Mortgage company
A mortgage lender who sells all loans in the secondary market. As distinguished
from a portfolio lender, who retains loans in its portfolio. Mortgage
companies may or may not service the loans they originate.
Mortgage formulas
Equations used to derive common measures used in the mortgage market,
such as monthly payment, balance, and APR. See Mortgage Formulas.
Mortgage insurance
Insurance against loss provided to a mortgage lender in the event of
borrower default. In most cases, the borrower pays the premiums. For
articles on mortgage insurance, see Mortgage Insurance.
Mortgage insurance
disclosure
Read Disclosure Rules About Mortgage Insurance.
Mortgage insurance
premium
The up-front and/or periodic charges that the borrower pays for mortgage
insurance. There are different mortgage insurance plans with differing
combinations of up-front, monthly and annual premiums. The most widely
used premium plan is a monthly charge with no upfront premium. For a
sample of monthly premiums, see Sample Mortgage Insurance Premiums.
Mortgage insurance
cancellation
Canceling a mortgage insurance policy. Read Canceling Private Mortgage
Insurance (I), and Canceling Private Mortgage Insurance (II).
Mortgage lender
The party who disburses funds to the borrower at the closing table. The
lender receives the note evidencing the borrower's indebtedness and
obligation to repay, and the mortgage which is the lien on the subject
property.
Mortgage payment
The monthly payment of interest and principal made by the borrower. The
formula used to calculate it is shown in Mortgage Formulas.
Mortgage price
The interest rate, points and fees paid to the lender and/or mortgage
broker. On ARMs, the price also includes the fully indexed rate and
the maximum rate. Read What Is the "Price" of a Mortgage?
Mortgage program
A bundle of mortgage characteristics that lenders see fit to distinguish
as a distinct instrument. These include whether it is an FRM, ARM,
or Balloon; the term; the initial rate period on an ARM; whether it
is FHA-insured or VA-guaranteed; and if is not FHA or VA, whether it
is "conforming" (eligible for purchase by Fannie Mae or Freddie
Mac) or "non-conforming".
Mortgage referrals
Advice on where to go to get a mortgage. See Mortgage Referrals: Who
Can You Trust?
Mortgage scams
Deceptive and exploitative schemes by lenders, brokers, home sellers
and sometimes even borrowers. See Mortgage Scams.
Mortgage shopping
Trying to find the best deal on a mortgage. See How to Shop For a Mortgage.
Negative amortization
A rise in the loan balance when the mortgage payment is less than the
interest due. Sometimes called "deferred interest." It is
explained in detail in How Does Negative Amortization on a Mortgage
Work? Negative amortization arises most frequently on ARMs. See Should
You Fear Negative Amortization and Is a 3.95% Adjustable Rate Mortgage
a Good Deal?
Negative amortization
cap
The maximum amount of negative amortization permitted on an ARM, usually
expressed as a percentage of the original loan amount (e.g., 110%). Reaching
the cap triggers an automatic increase in the payment, usually to the
fully amortizing payment level, overriding any payment increase cap.
Negative points
Points paid by a lender for a loan with a rate above the rate on a zero
point loan. For example, a wholesaler quotes the following prices to
a mortgage broker. 8%/0 points, 7.5%/3 points, 8.75%/-3 points. On
mortgage web sites, negative points are usually referred to as "rebates" because
they are used to reduce a borrower's settlement costs. When negative
points are retained by a mortgage broker, they are called a "yield
spread premium". Read Can Mortgage Points Be Negative? and Ignore
Lender Payments to My Broker? On policy issues connected to negative
points, see HUD and Yield Spread Premiums, and A Better Approach to
YSPs?
Net branch
A facility offered by some lenders to mortgage brokers where de jure
the brokers become employees of the lender but de facto they retain
their independence as brokers. One of the advantages of this arrangement
to brokers is that they need not disclose yield spread premiums received
from lenders. See Must Mortgage Brokers Reveal All Their Charges?
Net jumping
Using a broker's time and expertise to become informed and creditworthy,
then jumping to the internet to get the loan. See How About Borrowers'
Tricks?
Niche
See Market niche.
Nichification
Proliferation in the number of loan, borrower and property characteristics
used by lenders to set mortgage prices and underwriting requirements.
Read What Mortgage Market Niche Are You In?
No change scenario
On an ARM, the assumption that the value of the index to which the rate
is tied does not change from its initial level.
No-Cost mortgage
A mortgage on which all settlement costs except per diem interest, escrows,
homeowners insurance and transfer taxes are paid by the lender and/or
the home seller. See Does "No-Cost" Mortgage Refinance Make
Sense?, Another Look at No-Cost Mortgage Refinance, and No-Cost Mortgages.
Non-conforming
mortgage
A mortgage that does not meet the purchase requirements of the two Federal
agencies, Fannie Mae and Freddie Mac, because it is too large or for
other reasons such as poor credit or inadequate documentation.
Non-Permanent
resident alien
A non-citizen with a green card employed in the US. As distinct from
a permanent resident alien, which lenders do not distinguish from US
citizens. Non-permanent resident aliens are subject to somewhat more
restrictive qualification requirements than US citizens.
No asset loan
A documentation requirement where the applicant's assets are not disclosed.
See What Are Mortgage Documentation Requirements?
No income loan
A documentation requirement where the applicant's income is not disclosed.
See What Are Mortgage Documentation Requirements?
No-Surprise adjustable
rate mortgage
An ARM with a preset graduated payment combined with variable term. See
Nominal interest
rate
A quoted interest rate that is not adjusted for either intra-year compounding,
or for inflation. A quoted rate of 6% on a mortgage, for example, is
nominal. Adjusted rates are called "effective" see Effective
rate.
No ratio loan
A documentation requirement where the applicant's income is disclosed
and verified but not used in qualifying the borrower. The conventional
maximum ratios of expense to income are not applied. See What Are Mortgage
Documentation Requirements?
Note
A document that evidences a debt and a promise to repay. A mortgage loan
transaction always includes both a note evidencing the debt, and a
mortgage evidencing the lien on the property, usually in two documents.
Option ARM
An adjustable rate mortgage with flexible payment options, monthly interest
rate adjustments, and very low minimum payments in the early years.
They carry a risk of very large payments in later years. See Option
(Flexible Payment) ARMs.
Origination fee
An upfront fee charged by some lenders, usually expressed as a percent
of the loan amount. It should be added to points in determining the
total fees charged by the lender that are expressed as a percent of
the loan amount. Unlike points, however, an origination fee does not
vary with the interest rate.
Overage
The difference between the price posted to its loan officers by a lender
or mortgage broker, and the price charged the borrower. See What Is
a Mortgage Overage?
Partial prepayment
Making a payment larger than the scheduled payment as a way of paying
off the loan earlier. See Prepayment.
Paydown magic
Belief that there is a special way to pay down the balance of a home
mortgage faster, if you know the secret. See Are Some Mortgage Prepayment
Methods Better? and Save With a Large Payment at Closing?
Payment adjustme
nt intervalThe period between payment changes on an ARM, which may or
may not be the same as the interest rate adjustment period. Loans on
which the payment adjusts less frequently than the rate may generate
negative amortization.
Payment increase
cap
The maximum percentage increase in the payment on an ARM at a payment
adjustment date. A 7.5% cap is common.
Payment decrease cap
The maximum percentage decrease in the payment on an ARM at a payment
adjustment date.
Payment period
The period over which the borrower is obliged to make payments. On most
mortgages, the payment period is a month, but on some it is biweekly.
Payment power
A program begun by Fannie Mae in 2003-4 that allows a borrower to skip
up to 2 mortgage payments in any 12 month period, and up to 10 over
the life of a loan. See Mortgage Payment Flexibility Under "Payment
Power" and How Would a Truly Flexible Mortgage Work?
Payment rate
The interest rate used to calculate the mortgage payment, which is usually
but not necessarily the interest rate.
Payment shock
A very large increase in the payment on an ARM that may surprise the
borrower. Also used to refer to a large difference between the rent
being paid by a first-time home buyer, and the monthly housing expense
on the purchased home.
Payoff month
The month in which the loan balance is paid down to zero. It may or may
not be the term.
Per diem interest
Interest from the day of closing to the first day of the following month.
In some cases, however, the borrower can get a credit at closing by
making the first payment a month earlier. See Mortgage Closing Date:
Does It Matter?
Periodic refinancing
An ill-advised scheme to tap into equity for cash advances through periodic
refinancings. See Periodic Mortgage Refinancing: Who Gets Conned?
Permanent buydown
Paying points as a way of reducing the interest rate.
Pick a Payment
ARM
Same as Flexible Payment ARM.
Pipeline risk
The lender's risk that between the time a lock commitment is given to
the borrower and the time the loan is closed, interest rates will rise
and the lender will take a loss on selling the loan. See Why Is Locking
Unique to Mortgages?
PITI
Shorthand for principal, interest, taxes and insurance, which are the
components of the monthly housing expense.
PMI
Private mortgage insurance, as distinguished from insurance provided
by government under FHA and VA. See Mortgage insurance.
Points
An upfront cash payment required by the lender as part of the charge
for the loan, expressed as a percent of the loan amount; e.g., "3
points" means a charge equal to 3% of the loan balance. It is
common today for lenders to offer a wide range of rate/point combinations,
especially on fixed rate mortgages (FRMs), including combinations with
negative points. On a negative point loan the lender contributes cash
toward meeting closing costs. Positive and negative points are sometimes
termed "discounts" and "premiums," respectively.
See Mortgage Points and Rebates.
Portable mortgage
A mortgage that can be moved from one property to another. These were
introduced in the US by E*TRADE Mortgage in 2003. See Portable Mortgages:
A Useful Option?
Portfolio lender
A lender that holds the loans it originates in its portfolio rather than
selling them, as a temporary lender does.
Pre-approval
A commitment by a lender to make a mortgage loan to a specified borrower,
prior to the identification of a specific property. It is designed
to make it easier to shop for a house. Unlike a pre-qualification,
the lender checks the applicant's credit. See Mortgage Qualification
Versus Mortgage Approval.
Predatory lending
A variety of unsavory lender practices designed to take advantage of
unwary borrowers. See the articles on Predatory Mortgage Lending.
Prepayment
A payment made by the borrower over and above the scheduled mortgage
payment. If the additional payment pays off the entire balance it is
a "prepayment in full"; otherwise, it is a "partial
prepayment." For articles on prepayment, see Mortgage Prepayment
(Paying Off Early).
Prepayment penalty
A charge imposed by the lender if the borrower pays off the loan early.
The charge is usually expressed as a percent of the loan balance at
the time of prepayment, or a specified number of months interest. Read
Mortgage Prepayment Penalties.
Pre-qualification
Same as qualification.
Price-gouging
Charging interest rates and/or fees that are excessive relative to what
the same borrowers could have found had they shopped the market. Read
What Is Predatory Lending? and Is This a Good Definition of Predatory
Lending?
Primary residence
The house in which the borrower will live most of the time, as distinct
from a second home or an investor property that will be rented. See
What Is a "Primary" Residence?
Principal
The portion of the monthly payment that is used to reduce the loan balance.
See Amortization.
Principal limit
The present value of a house, given the elderly owner's right to live
there until death or voluntary move-out, under the FHA reverse mortgage
program. See Which Reverse Mortgage Plan Do I Choose?
Private mortgage
insurance
Mortgage insurance provided by private mortgage insurance companies,
or PMIs. See Mortgage Insurance.
Processing
Compiling and maintaining the file of information about a mortgage transaction,
including the credit report, appraisal, verification of employment
and assets, and so on. The processing file is handed off to underwriting
for the loan decision.
Property flipping
Successive sham home sales at progressively higher prices as part of
a scheme to defraud FHA. See What Is Predatory Lending?
Qualification
The process of determining whether a prospective borrower has the ability,
meaning sufficient assets and income, to repay a loan. Qualification
is sometimes referred to as "pre-qualification" because it
is subject to verification of the information provided by the applicant.
Qualification is short of approval because it does not take account
of the credit history of the borrower. Qualified borrowers may ultimately
be turned down because, while they have demonstrated the capacity to
repay, a poor credit history suggests that they may be unwilling to
pay. For articles on qualification, see Qualifying For a Mortgage.
Qualification
rate
The interest rate used in calculating the initial mortgage payment in
qualifying a borrower. The rate used in this calculation may or may not
be the initial rate on the mortgage. On ARMs, for example, the borrower
may be qualified at the fully indexed rate rather than the initial rate.
Qualification
ratios
Requirements stipulated by the lender that the ratio of housing expense
to borrower income, and housing expense plus other debt service to borrower
income, cannot exceed specified maximums, e.g., 28% and 35%. These may
reflect the maximums specified by Fannie Mae and Freddie Mac; they may
also vary with the loan-value ratio and other factors. See Qualifying
For a Mortgage.
Qualification
requirements
Standards imposed by lenders as conditions for granting loans, including
maximum ratios of housing expense and total expense to income, maximum
loan amounts, maximum loan-to-value ratios, and so on. Less comprehensive
than underwriting requirements, which take account of the borrower's
credit record. See Qualifying For a Mortgage.
Rate
See Interest Rate.
Rate/point breakeven
The period you must retain a mortgage in order for it to be profitable
to pay points to reduce the rate. See The Break-Even Period For Paying
Points on a Mortgage
Rate/point options
All the combinations of interest rate and points that are offered on
a particular loan program. On an ARM, rates and points may also vary
with the margin and interest rate ceiling.
Rate protection
Protection for a borrower against the danger that rates will rise between
the time the borrower applies for a loan and the time the loan closes.
This protection can take the form of a "lock" where the rate
and points are frozen at their initial levels until the loan closes;
or a "float-down" where the rates and points cannot rise
from their initial levels but they can decline if market rates decline.
In either case, the protection only runs for a specified period. If
the loan is not closed within that period, the protection expires and
the borrower will either have to accept the terms quoted by the lender
on new loans at that time, or start the shopping process anew. See
Locking the Price of a Mortgage Loan.
Rebate
Same as Negative points.
Recast payment
Raising the mortgage payment to the fully amortizing payment. Periodic
recasts are sometimes used on ARMs in lieu of or in addition to negative
amortization caps.
Referral site
A mortgage web site that introduces potential
borrowers to participating lenders, in some cases to multiple hundreds
of them. The principal lure to the consumer is information on generic
prices posted by the lenders. See Are Are Mortgage Referral Sites
on the Internet Useful?
Refinance
Paying off an old loan while simultaneously taking a new one. This may
be done to reduce borrowing costs under conditions where the borrower
can obtain a new loan at an interest rate below the rate on the existing
loan. It may be done to raise cash, as an alternative to a home equity
loan. Or it may be done to reduce the monthly payment. For articles
on refinancing, see Mortgage Refinancing.
Required cash
The total cash required of the home buyer to close the transaction, including
down payment, points and fixed dollar charges paid to the lender, any
portion of the mortgage insurance premium that is paid up-front, and
other settlement charges associated with the transaction such as title
insurance, taxes, etc. The total required cash is shown on the Good
Faith Estimate of Settlement that every borrower receives.
RESPA
The Real Estate Settlement Procedures Act, a Federal consumer protection
statute first enacted in 1974. RESPA was designed to protect home purchasers
and owners shopping for settlement services by mandating certain disclosures,
and prohibiting referral fees and kickbacks.
Retail lender
A lender who offers mortgage loans directly to the public. As distinct
from a wholesale lender who operates through mortgage brokers and correspondents.
Reverse mortgage
A loan to an elderly home owner on which the balance rises over time,
and which is not repaid until the owner dies, sells the house, or moves
out permanently. See Reverse Mortgages.
Right of rescission
The right of refinancing borrowers, under the Truth in Lending Act, to
cancel the deal at no cost to themselves within 3 days of closing.
See Rescinding a Mortgage Refinance.
Sale-leaseback
A technique in which a seller deeds property to a buyer for a consideration,
and the buyer simultaneously leases the property back to the seller.
Scenario analysis
Determining how the interest rate and payment on an ARM will change in
response to specified future changes in market interest rates, called "scenarios".
See Choosing Between Fixed and Adjustable Rate Mortgages.
Scheduled mortgage
payment
The amount the borrower is obliged to pay each period, including interest,
principal, and mortgage insurance, under the terms of the mortgage contract.
Paying less than the scheduled amount results in delinquency.
Second mortgage
A loan with a second-priority claim against a property in the event that
the borrower defaults. The lender who holds the second mortgage gets
paid only after the lender holding the first mortgage is paid. For
articles on second mortgages, also known as "home equity loans," see
Second Mortgages.
Secondary markets
Markets in which mortgages or mortgage-backed securities are bought and
sold. See Will My Mortgage Loan Be Sold?, and Do Secondary Mortgage
Markets Help Borrowers?
Self-employed
borrower
A borrower who must document income using tax returns rather than information
provided by an employer. This complicates the process somewhat. See Difficult
For Self-employed To Qualify For a Mortgage?
Seller contribution
A contribution to a borrower's down payment or settlement costs made
by a home seller, as an alternative to a price reduction. See Are House
Seller Contributions Kosher?
Servicing
Administering loans between the time of disbursement and the time the
loan is fully paid off. This includes collecting monthly payments from
the borrower, maintaining records of loan progress, assuring payments
of taxes and insurance, and pursuing delinquent accounts. See articles
on Mortgage Servicing Problems.
Servicing agent
The party who services a loan, who may or may not be the lender who originated
it. See Is There Recourse Against Bad Mortgage Servicing?
Servicing release
premium
A payment made by the purchaser of a mortgage to the seller for the release
of the servicing on the mortgage. It has no direct relevance to borrowers.
Servicing transfer
When one servicing agent is replaced by another. Read When Your Mortgage
Lender Goes Bankrupt.
Settlement costs
Costs that the borrower must pay at the time of closing, in addition
to the down payment. For articles on settlement costs, see Settlement
Costs.
Shared appreciation
mortgage
A mortgage on which the borrower gives up a share in future price appreciation
in exchange for a lower interest rate and/or interest deferral. Read
Is This Shared Appreciation Mortgage a Good Deal?
Shopping site
A type of multi-lender web site that offers borrowers the capacity to
shop among multiple competing lenders. See Recent Developments in Mortgage
Web Sites.
Short sale
An agreement between a mortgage borrower in distress and the lender that
allows the borrower to sell the house and remit the proceeds to the
lender. It is an alternative to foreclosure, or a deed in lieu of foreclosure.
See Options When Equity in Your Home is Gone
Silent second
A second mortgage offered at preferential (subsidized) terms to those
who qualify. For example, a labor union may offer members who are first-time
home buyers a silent second to finance closing costs or the down payment.
The second might bear no interest, and might not be repayable until
the first mortgage is repaid or the property is sold.
Simple interest
mortgage
A mortgage on which interest is calculated daily based on the balance
at the time of the last payment. The daily interest charge within the
month is constant -- interest is not charged on the interest charges
of prior days. See What Are Simple Interest Mortgages?
Simple interest
biweekly mortgage
A biweekly mortgage on which the biweekly payment is applied to the balance
every two weeks, rather than held in an account as on a conventional
biweekly. See Alternative Early Payoff Plans. Also, The Simple Interest
Biweekly Scam.
Single file mortgage
insurance
A type of mortgage insurance on which the lender pays the premium and
prices it in the interest rate. See Single File Mortgage Insurance: An
Advance?
Single-lender
web site
A web site of an individual lender or mortgage broker who wants users
to select a loan from them. They are easy to identify because the name
of the lender or broker will be prominently displayed on the screens.
Single-lender sites account for the majority of all mortgage web sites.
See Single-Lender Mortgage Web Sites.
Stated assets
A documentation requirement where the borrower discloses her assets but
they are not verified by the lender. See What Are Mortgage Documentation
Requirements?
Stated income
A documentation requirement where the lender verifies the source of the
income but not the amount. See What Are Mortgage Documentation Requirements?
and Stated Income Loans: Lie to Get a Better Rate?
Streamlined refinancing
Refinancing that omits some of the standard risk control measures, and
is therefore quicker and less costly.
Subordinate financing
A second mortgage on the property which is not paid off when a new loan
is taken out. The second mortgage lender must allow subordination of
the second to the new first mortgage.
Subordination
policy
The policy of a second mortgage lender for allowing a borrower to refinance
the first mortgage while leaving the second in place. See Subordination
Policy of Second Mortgage Lenders
Sub-prime borrower
A borrower with poor credit. Such borrowers pay more than prime borrowers,
and are sometimes taken advantage of. Read Should Mortgage Borrowers
With Poor Credit Shop?
Sub-prime lender
A lender who specializes in lending to sub-prime borrowers. See What
Is a Sub-Prime Mortgage Lender?
Swing loan
Same as Bridge loan.
Tangible Net
Benefit
The net gain to a borrower from a refinancing, which some proposed legislation
would make the responsibility of lenders. See Are Lenders Responsible
For a "Tangible Net Benefit?"
Teaser rate
The initial interest rate on an ARM, when it is below the fully indexed
rate.
Temporary buydown
A reduction in the mortgage payment in the early years of the loan in
exchange for an upfront cash payment provided by the home buyer, the
seller, or both. See What Is a Temporary Buydown?
Temporary lender
A lender that sells the loans it originates, as opposed to a portfolio
lender who holds them.
Term
The period used to calculate the monthly mortgage payment. The term is
usually but not always the same as the maturity. On a 7-year balloon
loan, for example, the maturity is 7 years but the term in most cases
is 30 years. For articles on the subject, see Mortgage Term.
Title insurance
Insurance against loss arising from problems connected to the title to
property. See Questions About Title Insurance.
Total housing
expense
Housing expense plus Monthly debt service.
Total expense
ratio
The ratio of Total housing expense to borrower income.
Total interest
payments
The sum of all interest payments to date or over the life of the loan.
This is an incomplete measure of the cost of credit to the borrower because
it does not include up-front cash payments, and it is not adjusted for
the time value of money. See Effective rate.
Total expense
ratio
The ratio of housing expense plus current debt service payments to borrower
income, which is used (along with the housing expense ratio and other
factors) in qualifying borrowers. See qualification requirements.
Truth in Lending
(TIL)
The Federal law that specifies the information that must be provided
to borrowers on different types of loans. Also, the form used to disclose
this information. See Does Truth in Lending Help?
Underage
Fees collected from a borrower by a loan officer that are lower than
the target fees specified by the lender or mortgage broker who employs
the loan officer. See What Is a Mortgage Overage?
Underwriting
The process of examining all the data about a borrower's property and
transaction to determine whether the mortgage applied for by the borrower
should be issued. The person who does this is called an underwriter.
Underwriting
requirements
The standards imposed by lenders in determining whether a borrower qualifies
for a loan. These standards are more comprehensive than qualification
requirements in that they include an evaluation of the borrower’s
creditworthiness.
Upfront Mortgage Broker (UMB)
A mortgage broker who charges a set fee for services provided, established
in writing at the outset of the transaction, and acts as the borrower's
agent in shopping for the best deal. For articles on UMBs, see Upfront
Mortgage Brokers. UMBs are listed at List of Upfront Mortgage Brokers.
Upfront Mortgage
Lender
A lender offering loans on the internet who provides mortgage shoppers
with the information they need to make an informed decision before applying
for a mortgage; and guarantees them fair treatment during the period
after they apply through to closing. See Upfront Mortgage Lenders.
Vested
Having the right to use a portion of a fund such as an individual retirement
fund. For example, individuals who are 100 percent vested can withdraw
all of the funds that are set aside for them in a retirement fund.
However, taxes may be due on any funds that are actually withdrawn.
Veterans Administration
(VA)
An agency of the federal government that guarantees residential mortgages
made to eligible veterans of the military services. The guarantee protects
the lender against loss and thus encourages lenders to make mortgages
to veterans.
Waive escrows
Authorization by the lender for the borrower to pay taxes and insurance
directly. This is in contrast to the standard procedure where the lender
adds a charge to the monthly mortgage payment that is deposited in an
escrow account, from which the lender pays the borrower’s taxes
and insurance when they are due. On some loans lenders will not waive
escrows, and on loans where waiver is permitted lenders are likely either
to charge for it in the form of a small increase in points, or restrict
it to borrowers making a large down payment. See How Can I Avoid Escrows
on My Mortgage?
Wholesale lender
A lender who provides loans through mortgage brokers or correspondents.
The mortgage broker or correspondent initiates the transaction, takes
the borrower's application, and processes the loan. As distinct from
a Retail lender.
Workout assumption
The assumption of a mortgage, with permission of the lender, from a borrower
unable to continue making the payments. See Mortgage Payment Problems:What
If You Can't Pay?
Worst case scenario
The assumption that the interest rate on an ARM rises to the maximum
extent permitted in the note. On a one-month ARM with no rate adjustment
caps, for example, the rate would jump to the maximum rate stipulated
in the note in month 2.
Wrap-around mortgage
A mortgage on a property that already has a mortgage, where the new lender
assumes the payment obligation on the old mortgage. Wrap-around mortgages
arise when the current market rate is above the rate on the existing
mortgage, and home sellers are frequently the lender. A due-on-sale
clause prevents a wrap-around mortgage in connection with sale of a
property except by violating the clause. See What Is a Wrap-Around
Mortgage?
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