2/1 BUY DOWN MORTGAGE
The 2/1 Buy Down Mortgage allows the borrower to qualify at below market rates so they can borrow more. The initial starting interest rate increases by 1% at the end of the first year and adjusts again by another 1% at the end of the second year. It then remains at a fixed interest rate for the remainder of the loan term. Borrowers often refinance at the end of the second year to obtain a better long term rate; however, even keeping the loan in place for three full years or more will keep their average interest rate in line with the original market conditions.
ACCELERATION CLAUSE
Provision in a mortgage that allows the lender to demand payment of the entire principal balance if a monthly payment is missed or some other default occurs.
ADDITIONAL PRINCIPAL PAYMENT
A way to reduce the remaining balance on the loan by paying more than the scheduled principal amount due.
ADJUSTABLE-RATE MORTGAGE (ARM)
A mortgage with an interest rate that changes during the life of the loan according to movements in an index rate. Sometimes called AMLs (adjustable mortgage loans) or VRMs (variable-rate mortgages).
ADJUSTED BASIS
The cost of a property plus the value of any capital expenditures for improvements to the property minus any depreciation taken.
ADJUSTMENT DATE
The date that the interest rate changes on an adjustable-rate mortgage (ARM).
ADJUSTMENT PERIOD
The period elapsing between adjustment dates for an adjustable-rate mortgage (ARM).
AFFORDABILITY ANALYSIS
An analysis of a buyer’s ability to afford the purchase of a home. Reviews income, liabilities, and available funds, and considers the type of mortgage you plan to use, the area where you want to purchase a home, and the closing costs that are likely.
AMORTIZATION
The gradual repayment of a mortgage loan, both principal and interest, by installments.
AMORTIZATION TERM
The length of time required to amortize the mortgage loan expressed as a number of months. For example, 360 months is the amortization term for a 30-year fixed-rate mortgage.
ANNUAL ARM
This loan has a rate that is recalculated once a year.
ANNUAL PERCENTAGE RATE (APR)
The cost of credit, expressed as a yearly rate including interest, mortgage insurance, and loan origination fees. This allows the buyer to compare loans; however APR should not be confused with the actual note rate.
APPRAISAL
A written analysis prepared by a qualified appraiser and estimating the value of a property.
APPRAISED VALUE
An opinion of a property’s fair market value, based on an appraiser’s knowledge, experience, and analysis of the property.
ASSET
Anything owned of monetary value including real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, etc.).
ASSIGNMENT
The transfer of a mortgage from one person to another.
ASSUMABILITY
An assumable mortgage can be transferred from the seller to the new buyer. Generally requires a credit review of the new borrower and lenders may charge a fee for the assumption. If a mortgage contains a due-on-sale clause, it may not be assumed by a new buyer.
ASSUMPTION FEE
The fee paid to a lender (usually by the purchaser of real property) when an assumption takes place.
BALANCE SHEET
A financial statement that shows assets, liabilities, and net worth as of a specific date.
BALLOON MORTGAGE
A mortgage with level monthly payments that amortizes over a stated term but also requires that a lump sum payment be paid at the end of an earlier specified term.
BALLOON PAYMENT
The final lump sum paid at the maturity date of a balloon mortgage.
BEFORE-TAX INCOME
Income before taxes are deducted.
BIWEEKLY PAYMENT MORTGAGE
A plan to reduce the debt every two weeks (instead of the standard monthly payment schedule). The 26 (or possibly 27) biweekly payments are each equal to one-half of the monthly payment required if the loan were a standard 30-year fixed-rate mortgage. The result for the borrower is a substantial savings in interest.
BRIDGE LOAN
A second trust that is collateralized by the borrower’s present home allowing the proceeds to be used to close on a new house before the present home is sold. Also known as “swing loan.”
BROKER
An individual or company that brings borrowers and lenders together for the purpose of loan origination.
BUYDOWN
When the seller, builder or buyer pays an amount of money up front to the lender to reduce monthly payments during the first few years of a mortgage. Buydowns can occur in both fixed and adjustable rate mortgages.
CAP
Limits how much the interest rate or the monthly payment can increase, either at each adjustment or during the life of the mortgage. Payment caps don’t limit the amount of interest the lender is earning and may cause negative amortization.
CERTIFICATE OF ELIGIBILITY
A document issued by the federal government certifying a veteran’s eligibility for a Department of Veterans Affairs (VA) mortgage.
CERTIFICATE OF REASONABLE VALUE (CRV)
A document issued by the Department of Veterans Affairs (VA) that establishes the maximum value and loan amount for a VA mortgage.
CHANGE FREQUENCY
The frequency (in months) of payment and/or interest rate changes in an adjustable-rate mortgage (ARM).
CLOSING
A meeting held to finalize the sale of a property. The buyer signs the mortgage documents and pays closing costs. Also called a “settlement.”
CLOSING COSTS
These are expenses – over and above the price of the property- that are incurred by buyers and sellers when transferring ownership of a property. Closing costs normally include an origination fee, property taxes, charges for title insurance and escrow costs, appraisal fees, etc. Closing costs will vary according to the area country and the lenders used.
COMPOUND INTEREST
Interest paid on the original principal balance and on the accrued and unpaid interest.
CONSUMER REPORTING AGENCY (OR BUREAU)
An organization that handles the preparation of reports used by lenders to determine a potential borrower’s credit history. The agency gets data for these reports from a credit repository and from other sources.
CONVERSION CLAUSE
A provision in an ARM allowing the loan to be converted to a fixed-rate at some point during the term. Usually conversion is allowed at the end of the first adjustment period. The conversion feature may cost extra.
CREDIT REPORT
A report detailing an individual’s credit history that is prepared by a credit bureau and used by a lender to determine a loan applicant’s creditworthiness.
CREDIT RISK SCORE
A credit score measures a consumer’s credit risk relative to the rest of the U.S. population, based on the individual’s credit usage history. The credit score most widely used by lenders is the FICO® score, developed by Fair, Issac and Company. This 3-digit number, ranging from 300 to 850, is calculated by a mathematical equation that evaluates many types of information that are on your credit report. Higher FICO® scores represents lower credit risks, which typically equate to better loan terms. In general, credit scores are critical in the mortgage loan underwriting process.
DEED OF TRUST
The document used in some states instead of a mortgage. Title is conveyed to a trustee.
DEFAULT
Failure to make mortgage payments on a timely basis or to comply with other requirements of a mortgage.
DELINQUENCY
Failure to make mortgage payments on time.
DEPOSIT
This is a sum of money given to bind the sale of real estate, or a sum of money given to ensure payment or an advance of funds in the processing of a loan.
DISCOUNT
In an ARM with an initial rate discount, the lender gives up a number of percentage points in interest to reduce the rate and lower the payments for part of the mortgage term (usually for one year or less). After the discount period, the ARM rate usually increases according to its index rate.
DOWN PAYMENT
Part of the purchase price of a property that is paid in cash and not financed with a mortgage.
EFFECTIVE GROSS INCOME
A borrower’s normal annual income, including overtime that is regular or guaranteed. Salary is usually the principal source, but other income may qualify if it is significant and stable.
EQUITY
The amount of financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on the mortgage.
ESCROW
An item of value, money, or documents deposited with a third party to be delivered upon the fulfillment of a condition. For example, the deposit of funds or documents into an escrow account to be disbursed upon the closing of a sale of real estate.
ESCROW DISBURSEMENTS
The use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, and other property expenses as they become due.
ESCROW PAYMENT
The part of a mortgagor’s monthly payment that is held by the servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due.
FANNIE MAE
A congressionally chartered, shareholder-owned company that is the nation’s largest supplier of home mortgage funds.
FHA MORTGAGE
A mortgage that is insured by the Federal Housing Administration (FHA). Also known as a government mortgage.
FICO SCORE
FICO® scores are the most widely used credit score in U.S. mortgage loan underwriting. This 3-digit number, ranging from 300 to 850, is calculated by a mathematical equation that evaluates many types of information that are on your credit report. Higher FICO® scores represent lower credit risks, which typically equate to better loan terms.
FIFTEEN-YEAR FIXED RATE MORTGAGE
This loan is fully amortized over a 15-year period and features constant monthly payment. It offers all the advantages of the 30-year loan, plus a lower interest rate- and you’ll own your home twice as fast. The disadvantage is that, with a 15-year loan, you commit to a higher monthly payment. Many borrowers opt for a 30-year fixed rate loan and voluntarily make larger payments that will pay off their loan in 15 years. This approach is often safer than committing to a higher monthly payment, since the difference in interest rates isn’t that great.
FIRST MORTGAGE
The primary lien against a property.
FIXED INSTALLMENT
The monthly payment due on a mortgage loan including payment of both principal and interest.
FIXED-RATE MORTGAGE (FRM)
A mortgage interest that are fixed throughout the entire term of the loan.
FULLY AMORTIZED ARM
An adjustable-rate mortgage (ARM) with a monthly payment that is sufficient to amortize the remaining balance, at the interest accrual rate, over the amortization term.
GNMA
A government-owned corporation that assumed responsibility for the special assistance loan program formerly administered by Fannie Mae. Popularly known as Ginnie Mae.
GROWING-EQUITY MORTGAGE (GEM)
A fixed-rate mortgage that provides scheduled payment increases over an established period of time. The increased amount of the monthly payment is applied directly toward reducing the remaining balance of the mortgage.
GUARANTEE MORTGAGE
A mortgage that is guaranteed by a third party.
HOUSING EXPENSE RATIO
The percentage of gross monthly income budgeted to pay housing expenses.
HUD-1 STATEMENT
A document that provides an itemized listing of the funds that are payable at closing. Items that appear on the statement include real estate commissions, loan fees, points, and initial escrow amounts. Each item on the statement is represented by a separate number within a standardized numbering system. The totals at the bottom of the HUD-1 statement define the seller’s net proceeds and the buyer’s net payment at closing.
HYBRID ARM (3/1 ARM, 5/1 ARM, 7/1 ARM)
A combination fixed rate and adjustable rate loan – also called 3/1, 5/1, 7/1 – can offer the best of both worlds: lower interest rates (like ARMs) and a fixed payment for a longer period of time than most adjustable rate loans. For example, a “5/1 loan” has a fixed monthly payment and interest for the first five years and then turns into a traditional adjustable rate loan, based on then-current rates for the remaining 25 years. It’s a good choice for people who expect to move or refinance, before or shortly after, the adjustment occurs.
HYBRID ARM (3/1 ARM, 5/1 ARM, 7/1 ARM)
These increasingly popular ARMS- also called 3/1, 5/1, or 7/1- can offer the best of both works; lower interest rates (like ARMS) and a fixed payment for a longer period of time than most adjustable rate loans. For example, a “5/1 loan” has a fixed monthly payment and interest rate for the first five years and then turns into a traditional adjustable-rate loan, based on then- current rates for the remaining 25 years. It’s a good choice for people who expect to move (or refinance) before or shortly after the adjustment occurs.
INDEX
The index is the measure of interest rate changes a lender uses to decide the amount an interest rate on an ARM will change over time. The index is generally a published number or percentage, such as the average interest rate or yield on Treasury bills. Some index rates tend to be higher than others and some more volatile.
INITIAL INTEREST RATE
This refers to the original interest rate of the mortgage at the time of closing. This rate changes for an adjustable-rate mortgage (ARM). It’s also known as “start rate” or “teaser.”
