Acceleration
Clause
Allows
the lender to speed up the rate at which
your loan comes due or even to demand immediate
payment of the entire outstanding balance
of the loan should you default on your
loan.
Adjustable
Rate Mortgage (ARM)
Is
a mortgage in which the interest rate is
adjusted periodically based on a pre-selected
index. Also sometimes known as the renegotiable
rate mortgage or the variable rate mortgage.
Adjustment
Interval
On
an adjustable rate mortgage, the time between
changes in the interest rate and/or monthly
payment, typically one, three or five years,
depending on the index.
Amortization
Means
loan payment by equal periodic payments
calculated to pay off the debt at the end
of a fixed period, including accrued interest
on the outstanding balance.
Annual Percentage
Rate (APR)
An
interest rate reflecting the cost of a
mortgage as a yearly rate. This rate is
likely to be higher than the stated note
rate or advertised rate on the mortgage,
because it takes into account points and
other credit costs. The APR allows homebuyers
to compare different types of mortgages
based on the annual cost for each loan.
Appraisal
An
estimate of the value of property, made
by a qualified professional called an "appraiser".
Assumption
The
agreement between buyer and seller where
the buyer takes over the payments on an
existing mortgage from the seller. Assuming
a loan can usually save the buyer money
since this is an existing mortgage debt,
unlike a new mortgage where closing costs
and new, possibly higher, market-rate interest
charge will apply.
Balloon
(Payment) Mortgage
Usually
a short-term fixed-rate loan which involves
small payments for a certain period of
time and one large payment for the remaining
amount of the principal at a time specified
in the contract.
Broker
An
individual in the business of assisting
in arranging funding or negotiating contracts
for a client but who does not loan the
money himself. Brokers usually charge a
fee or receive a commission for their services.
Buydown
When
the lender and/or the homebuilder subsidizes
the mortgage by lowering the interest rate
during the first few years of the loan.
While the payments are initially low, they
will increase when the subsidy expires.
Caps (Interest)
Consumer
safeguards which limit the amount the interest
rate on an adjustable rate mortgage may
change per year and/or the life of the
loan.
Caps (Payment)
Consumer
safeguards which limit the amount monthly
payments on an adjustable rate mortgage
may change.
Closing
The
meeting between the buyer, seller and lender
or their agents where the property and
funds legally change hands. Also called
settlement.
Closing
Costs
Usually
include an origination fee, discount points,
appraisal fee, title search and insurance,
survey, taxes, deed recording fee, credit
report charge and other costs assessed
at settlement. The costs of closing usually
are about 3 percent to 7 percent of the
mortgage amount.
Commitment
An
agreement, often in writing, between a
lender and a borrower to loan money at
a future date subject to the completion
of paperwork or compliance with stated
conditions.
Construction
Loan
A
short-term interim loan for financing the
cost of construction. The lender advances
funds to the builder at periodic intervals
as the work progresses.
Conventional
Loan
A
mortgage not insured by FHA or guaranteed
by the VA or Farmers Home Administration
(FmHA).
Credit Report
A
detailed account of the credit, employment
and residence history of an individual
used by prospective lender to help determine
creditworthiness. Credit reports also list
any judgments, tax liens, bankruptcies
or similar matters of public record entered
against the individual.
Debt to Income
Ratio
The
ratio, expressed as a percentage, which
results when a borrower's monthly payment
obligation on long-term debts is divided
by his or her net effective income (FHA/VA
loans) or gross monthly income (Conventional
loans). See Housing Expenses-to-Income
Ratio.
Deed of Trust
In
many states, this document is used in place
of a mortgage to secure the payment of
a note.
Default
Failure
to meet legal obligations in a contract,
specifically, failure to make the monthly
payments on a mortgage.
Deferred Interest
See
Negative Amortization.
Delinquency
Failure
to make payments on time. This can lead
to foreclosure.
Discount Points
Prepaid
interest assessed at closing by the lender.
Each point is equal to 1 percent of the
loan amount (e.g., two points on a $100,000
mortgage would cost $2,000).
Down Payment
Money
paid to make up the difference between
the purchase price and mortgage amount.
Down payments usually are 5 percent to
20 percent of the sales price on Conventional
loans. However, no money down programs
are available.
Due-On-Sale
Clause
A
provision in a mortgage or deed of trust
that allows the lender to demand immediate
payment of the balance of the mortgage
if the mortgage holder sells the home.
Earnest Money
Money
given by a buyer to a seller as part of
the purchase price to bind a transaction
or assure payment.
Equal Credit
Opportunity Act (ECOA)
A
federal law that requires lenders and other
creditors to make credit equally available
without discrimination based on race, color,
religion, national origin, age, sex, marital
status or receipt of income from public
assistance programs.
Equity
The
difference between the fair market value
of the home and the current indebtedness
owed on the home, also referred to as the
owner's interest.
Escrow
Refers
to a neutral third party who carries out
the instructions of both the buyer and
seller to handle all the paperwork of settlement
or "closing". Escrow may also
refer to an account held by the lender
into which the homebuyer pays money for
tax or insurance payments.
Fannie Mae
See Federal
National Mortgage Association.
Farmers
Home Administration (FmHA)
Provides
financing to farmers and other qualified
borrowers who are unable to obtain loans
elsewhere.
Federal
Home Loan Mortgage Corporation (FHLMC)
Also
called Freddie Mac, is a quasi-governmental
agency that purchases conventional mortgages
from insured depository institutions and
HUD-approved mortgage bankers.
Federal
Housing Administration (FHA)
A
division of the Department of Housing and
Urban Development. Its main activity is
the insuring of residential mortgage loans
made by private lenders. FHA also sets
standards for underwriting mortgages.
Federal
National Mortgage Association (FNMA)
Also
known as Fannie Mae. A tax-paying corporation
created by congress that purchases and
sells conventional residential mortgages
as well as those insured by FHA or guaranteed
by VA. This institution, which provides
funds for one in seven mortgages, makes
mortgage money more available and more
affordable.
FHA Loan
A
loan insured by the Federal Housing Administration
open to all qualified home purchasers.
While there are limits to the size of FHA
loans, they are generous enough to handle
moderate-priced homes almost anywhere in
the country.
FHA Mortgage
Insurance
Requires
a small fee (up to 2.25 percent of the
loan amount) paid at closing or a portion
of this fee added to each monthly payment
of an FHA loan to insure the loan with
FHA. On a 9.5 percent $75,000 30-year fixed-rate
FHA loan, this fee would amount to either
$1,688 at closing or an extra $14 a month
for the life of the loan. In addition,
FHA mortgage insurance requires an annual
fee of 0.5 percent of the current loan
amount; the higher the loan to value, the
more years the fee must be paid.
Fixed-Rate
Mortgage
A
mortgage on which the interest rate is
set for the term of the loan.
Foreclosure
A
legal procedure in which property securing
debt is sold by the lender to pay a defaulting
borrower's debt.
Freddie Mac
See Federal
Home Loan Mortgage Corporation.
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