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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