Glossary
Adjustable Rate Mortgage (ARM) - The interest rate on this mortgage rises and falls with changes in certain published indexes such as the Prime Rate, treasury notes, etc. An ARM may start out with a lower interest rate for a certain period of time, after which your mortgage payments may adjust periodically (adjustment period). There is usually a cap as to how high the rates can rise over the life of the loan, typically
one year, three years or five years.
Amortization Schedule - a table showing the breakdown of a fixed mortgage payment between interest and the return of principal
Annual Percentage Rate (APR) - The cost of your loan expressed as a yearly rate. For mortgages, it includes interest, points, origination fees, attorney fees, mortgage insurance or any other charge that is expressed as a fee.
Appraisal - Analysis of value performed by a certified appraiser for an accurate determination of market value or useful value. Generally the value used by lenders and insurance companies.
Assessed Value - Value that county or city tax assessors place on a piece of property or buildings. This is usually not the same as the actual market or appraised value of the property. The assessed value is multiplied by the tax rate to determine the tax liability.
Balloon Mortgage - A mortgage loan with an amortization schedule longer than the maturity of the loan. Typically offer lower interest rates for shorter-term financing. At the end of the balloon term, you have the option to refinance the mortgage for the remaining term or pay off the outstanding balance with a lump-sum payment. Certain conditions may apply if you choose to refinance your loan at the end of the balloon term.
Caps - Safeguards that limit how much your ARM interest rate and payments can go up at any one time and over the life of the loan.
Closing - Can also be called settlement or closing escrow. Completes the real estate purchase transaction and is usually handled by an attorney or representative such as a title company.
Closing Costs - Money paid by the borrower, seller, or lender on the borrowers behalf when the loan is closed.
Conventional Financing - Mortgage loans made without government backing from the Veterans Administration (VA) or the Federal Housing Administration (FHA).
Debt-to-Income Ratio - This measures how much you owe (debt) against how much you earn (income). This is calculated by dividing your total monthly debt (including mortgage loan payment, monthly installment payments, and minimum payment on all revolving debt) by your gross monthly income. The mortgage loan payment should include principal, interest, real estate taxes, hazard insurance, and mortgage insurance if required. Generally the lower the ratio, the better your financial condition.
Escrow Account - An account set aside by your mortgage servicer to pay for annual expenses such as insurance and property taxes. Part of your monthly mortgage payment goes into this account so you don't have to make one lump payment when these expenses are due.
Escrow Waiver - Can be requested by the borrower, instructing the mortgage servicer to not establish an escrow account. The borrower pays annual payments for taxes and insurance directly to the billing agent for these items. Escrow waiver requests may be limited based upon the loan to value of the mortgage.
Fixed Rate Loan - A loan where the interest rate remains the same for the term of the loan.
Index - A published rate such as One-Year Treasury Rate and the Prime Rate that is used by lenders to calculate the interest adjustments on ARM loans. This index can vary from lender to lender and will vary depending on the loan program.
Loan-to-Value Ratio (LTV) - The percent of the appraised value of the property to the amount loaned. For example: a home is appraised at $100,000 and you want to borrow $80,000 that is an 80% loan-to-value. Lenders often have a maximum loan-to-value requirement depending on the loan.
Margin (spread) - The amount added to an index to determine the interest rate on an ARM.
Origination Fee - The amount that a lender charges to initiate and process a mortgage loan.
Point - An upfront fee to secure the loan interest rate. One point is equal to one percent of the loan amount (one point on $100,000 loan would be $1,000). Many lenders allow customers the option of paying additional points in exchange for a lower interest rate on the loan.
Refinance - Take out a new loan to pay off an existing loan. Refinancing usually involves new closing costs.
Rate Lock-In - A guarantee that the rate in effect when you apply for the loan will be the final rate when you close the loan. The rate lock-in is good for a specific time, typically 45 to 60 days from the date of the lock-in.
Settlement Statement (HUD-1) - A statement that itemizes the services provided to you and the fees charged to you for those services.
Survey - A measurement and mapping of the exact location of your land and improvements. It is often called a plat. A licensed surveyor provides this service.
Term - The loan term (sometimes called the amortization period) refers to the length of time it will take to pay off your loan by making regular payments.
Title Insurance - Insurance purchased to prevent loss resulting from any problems with the title to the property you are financing.
Title Search - Verifies that the title to the property you are buying is clear of any claims from other persons by providing a historical summary of legal documents affecting the real property
Underwriting - Guidelines the lender uses to determine if a borrower qualifies for a loan. Different loan programs have different guidelines for qualifying.
Variable Rate Loan - A loan where the interest varies with either the Prime Rate or LIBOR (London Interbank Offered Rate) over the term of the loan.
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