Glossary of Terms


Adjustable Rate Mortgage

A home loan that permits the lender to adjust its interest rate periodically during the life of the loan on the basis of changes in a specified financial index

Affordability Analysis (Pre-Qualification)

A preliminary analysis of a borrower's ability to afford the purchase of a home. An affordability analysis takes into consideration factors such as income, liabilities, and available funds, along with the type of home loan, the likely taxes and insurance for the home, and the estimated closing costs.

Amortization

The gradual repayment of a home loan by periodic installments

Amortization Term (period)

The amount of time it takes to pay off the loan. The amortization term is expressed as a number of months. For example a 30 year fixed loan has a amortization term of 360 months.

Annual Percentage Rate (APR)

The effective cost of a home loan stated as a yearly rate taking into account such items as interest, mortgage insurance, most closing costs, discount points and loan origination fees. Disclosure of APR is required by the Truth-In-Lending Law.

Appraisal

A written analysis or opinion of the estimated value of a property prepared by a qualified appraiser.

Appraised Value

The dollar figure for a property's estimated fair market value, based on an appraisers knowledge, experience and analysis of the property and comparable properties nearby.

Appraiser

A person qualified by education, training and experience to estimate the value of real property.

Assessed Value

The value used to determine property taxes, based on a public tax assessor's opinion. Contrast

Assessment

The amount of tax due to local government. May also refer to the amount due to local government or to common owners of a property (i.e. HOA) for a special payment to cover expenses for improvements or maintenance, such as new sewers or roads

Assumable Loan

A home loan that allows a new purchaser of the home to take over ("assume") the loan obligation of the seller when a home is old.

Assumption

The buyer's acceptance of liability for the seller's existing home loan.

Buydown

A temporary buydown gives a borrower a reduced monthly payment during the first few years of a home loan and is typically paid for in an initial lump sum made by the seller, lender, or borrower. A permanent buydown is paid the same way but reduces the interest rate over the entire life of a home loan.

Co-signer

A person who signs a promissory note along with the borrower. A co-maker's signature helps to assure that the loan will be repaid. The borrower and the co-maker are jointly responsible for the repayment of the loan.

Conventional Loan

A home loan that is not insured or guaranteed by the federal government. Contrast with government loan. Can be for conforming or non-conforming loan amounts.

Discount Points

Amounts paid to the lender at origination to lower the rate on the face of the note.

Down Payment

The part of the purchase price of a property that the buyer pays in cash and does not finance with a home loan.

Equity Credit Opportunity Act (ECOA)

A federal law that requires lenders and other creditors to make credit equity available without discrimination based on race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs.

Equity

A homeowner's financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on any home loans or liens against the property.

Fair Credit Reporting Act

A consumer protect6ion law that requires the disclosure and use of consumer credit information establishes ruled for credit reporting to consumer's credit reporting agencies and establishes procedures for a consumer to view his/her credit report and correct mistakes on it.

Fair Market Value

The price that a buyer, willing but not compelled to buy, and a seller, willing but not compelled to sell, would agree on.

Federal Housing Administration

An agency of the US Department of Housing and Urban Development (HUD). Its main activity is the insuring of residential mortgage loans made by private lenders. The FHA sets standards for construction and loan underwriting but does not lend money or plan or construct housing.

FHA Coinsured Home Loans

A loan (under FHA Section 244) for which the Federal Housing Administration (FHA) and the originating lender share the risk of loss in the event of the borrower's default.

FHA Home Loan

A mortgage home loan that is insured by the Federal Housing administration (FHA). Also known as a government loan.

Fixed Period ARM

Provides a fixed rate for 3, 5, 7 or 10 years than adjusts annually based on a financial index for the remaining loan term.

Fixed Rate Loan

A mortgage in which the interest rate does not change during the entire term of the loan.

Gross Monthly Income

Normal monthly income includes overtime that is regular or guaranteed. The before taxes income may be from more than one source. Salary is generally the principle source, but other income may qualify if it is significant and stable.

GSE (Government-sponsored Enterprise): Fannie Mae (FNMA) & Freddie Mac (FHLMC)

A financial services corporation created by the United States Congress. Their intended function is to enhance the flow of credit to targeted sectors of the economy and to make those segments of the capital market more efficient and transparent, and to reduce the risk to investors and other suppliers of capital. The desired effect of the GSEs is to enhance the availability and reduce the cost of credit to the targeted borrowing sectors primarily by reducing the risk of capital losses to investors: agriculture, home finance and education. The two most well-known GSEs are the Federal National Mortgage Association, or Fannie Mae, and the Federal Home Loan Mortgage Corporation, or Freddie Mac.

Homeowner's Insurance (hazardous insurance)

Insurance coverage that compensates for physical damage to a property from fire, wind, vandalism or other hazards. The policy typically combines personal liability insurance and property hazard insurance coverage for a dwelling and its contents. See also homeowner's insurance.

Home Equity Line of Credit (HELOC)

A mortgage loan, which is usually in a subordinate position that allows the borrower to obtain multiple advances of the loan proceeds at his or her own discretion, up to an amount that represents a specified percentage of the borrower's equity in a property.

Inflation

An increase in the amount of money or credit available in relation to the amount of goods or services available, which causes an increase in the general price level of goods and services. Over time, inflation reduces the purchasing power of a dollar, making it worth less.

Insured Mortgage

A mortgage that is protected by the Federal Housing Administration (FHA) or by private mortgage insurance (PMI). If the borrower defaults on the loan, the insurer must pay the lender by the lesser of the loss incurred or the insured amount.

Interest

The fee charged for borrowing money.

Interest Accrual Rate

The percentage rate at which interest accrues on the mortgage. In most cases, it is also the rate used to calculate the monthly payments.

Interest Payment

The portion of a monthly payment that goes to interest based on the amortization schedule.

Interest Rate

The percentage rate of return charged for use of a sum of money. This percentage rate is specified in the mortgage note. See note rate.

Interest Rate Buydown Plan

A temporary buydown gives a borrower a reduced monthly payment during the first few years of a home loan and is typically paid for in an initial lump sum made by the seller, lender or borrower. A permanent buydown is paid the same way but reduces the interest rate over the entire life of a home loan.

Jumbo Mortgage

A mortgage loan that may have high credit quality, but is in an amount above conventional conforming loan limits. This standard is set by the two government-sponsored enterprises, Fannie Mae and Freddie Mac, and sets the limit on the maximum value of any individual mortgage they will purchase from a lender. Fannie Mae (FNMA) and Freddie Mac (FHLMC) are large agencies that purchase the bulk of U.S. residential mortgages from banks and other lenders, allowing them to free up liquidity to lend more mortgages. When FNMA and FHLMC limits don't cover the full loan amount, the loan is referred to as a "jumbo mortgage".

Line of Credit

An agreement by lender to extend credit up to a certain amount for a certain time without the need for the borrower to file another application. See home equity line of credit.

Liquid Asset

A cash asset or an asset that is easily converted into cash.

Loan Amount

A sum of borrowed money (principal) that is generally repaid over time with interest.

Loan Commitment

A lender's agreement to advance money on specified terms after specified conditions are met. See commitment letter.

Loan Originator

The process by which mortgage lender makes a home loan and records a mortgage against the borrower's real property as security for repayment of the loan.

Loan-to-Value (LTV) Ratio

The ratio of the total amount borrowed in a mortgage against a property compared to the appraised value of the property. For example, if you have an $80,000 1st mortgage on a home with an appraised value of $100,000, the LTV is 80% ($80,000/$100,000=80%).

Lock-in

A written agreement in which the lender guarantees a specified loan program interest rate and points if a mortgage goes to closing within a set period of time.

Lock-in Period

The time period during which the lender has guaranteed an interest rate to a borrower.

Monthly Mortgage Insurance (MI) payment

Portion of monthly payment that covers the cost of Private Mortgage Insurance.

Monthly Principal & Interest (P&I) payment

Portion of monthly payment that covers the principal and interest due on the loan.

Monthly Taxes & Insurance (T&I) payment

Portion of monthly payment that funds the escrow or impound account for taxes and insurance.

Monthly Payment

Payments to reduce the principal balance of a home loan made once a month.

Mortgage

A legal document that pledges a property to the lender as security for the payment of a debt.

Mortgage Banker

A company that originates, sells and services mortgages exclusively for the purpose of loan origination.

Mortgage Broker

An individual or company that brings borrowers and lenders together for the purpose of loan origination. Mortgage brokers typically require a fee or a commission for their services.

Negative Amortization

An increase in the outstanding balance of a mortgage that occurs when the monthly payment in not large enough to cover the interest due. The amount of the shortfall is added to the remaining balance to create "negative" amortization.

Non-Conforming Loan

See jumbo loan.

Note

A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.

Note Rate

The interest rate stated on a mortgage note.

Original Principal Balance

The total amount of principal owed on a mortgage before any payments are made.

Origination Fee

A fee paid to a lender for processing a loan application, making a home loan and recording a mortgage against the borrower's real property as a security for repayment of the loan. The origination fee is stated in the form of points. One point is 1% of the mortgage amount (e.g., 1,000 on a $100,000 loan).

Payment Change Date

The date when a new monthly payment amount takes effect on an adjustable date and the borrower is notified 30 days prior as to the new rate.

Payoff

To pay the outstanding balance of a loan in full.

Personal Property

Any property that is not real property or is not permanently fixed to land. Cash, furniture and cars are all examples of personal property.

Piggyback

A combination of two loans. Example: A loan is made for 90% of the home price. 80% of the purchase price is supplied by a 1st mortgage and 10% by a 2nd mortgage. The 2nd mortgage is piggybacked on the 1st.

PITI Reserves

A cash amount that a borrower must have on hand after making a down payment and paying all closing costs for the purchase of a home. The principal, interest, taxes and insurance (PITI) reserves must equal the amount that the borrower would have to pay for PITI for a predefined number of months.

Pre-approval

A lender's conditional agreement to lend a specific amount on specific terms to a homebuyer. Our neighborhood lender will ask for written documentation of your information, which you can provide via fax or by email. With pre-approval, you know your file has been reviewed by an underwriter and that you have been approved (subject to satisfactory appraisal and no change in financial condition). Either way, you can shop with assurance because, you'll know up front how large a loan you could qualify for.

Pre-paid Items

Items requires by lender to be paid at closing prior to the period they cover such as prorated property taxes, homeowner's insurance and pre-paid interest.

Pre-paid Interest

Mortgage interest that is paid in advance of when it is due.

Prepayment

Any amount paid to the principal balance of a loan before the due date. Payment in full on a mortgage that may result from a sale of the property, the owner's decision to pay off the loan in full or a foreclosure. In each case, prepayment means payment occurs before the loan has been fully amortized.

Prepayment Penalty

A fee that may be charged to a borrower who pays off a loan before it is due. Generally, a prepayment penalty is added to a loan in exchange for a discounted rate.

Prequalification

Our lender will ask that you fill out an MBK prequalification form and provide certain documentation so they can ascertain whether you may qualify for the home. You are considering purchasing a credit report and d ebt to income ratio will be ran and if your prequalification is confirmed, you can purchase your new MBK home knowing this important step with your lender has been successfully completed.

Prime Rate

The interest rate that banks charge on short-term loans to its most credit-worthy customers. Changes in the prime rate influences changes in other rates, including mortgage interest rates.

Principal

The amount borrowed or remaining unpaid. The part of the monthly payment that reduces the remaining balance of a mortgage.

Principal Balance

The outstanding balance on a mortgage. The principal balance does not include interest or any other charges. See remaining balance.

Principal, Interest, Taxes and Insurance (PITI)

Four potential components of a monthly mortgage payment. Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the amounts that may be paid into an escrow account each month for property taxes and mortgage and hazard insurance.

Principal Payment

Portion of your monthly payment that reduces the remaining balance of a home loan.

Private Mortgage Insurance (PMI)

Mortgage insurance that is provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults. Most lenders generally require PMI for a loan with a loan-to-value (LTV) percentage in excess of 80%.

Qualifying Ratios

Calculations that are used in determining whether a borrower can qualify for a mortgage. They consist of two separate calculations: a housing expense as a percent of income ration and total debt obligations as a percent of income.

Rate Lock

A commitment issued by a lender to a borrower guaranteeing a specified interest rate for a specified period of time.

Real Estate Settlement Procedures Act (RESPA)

A consumer protection law that, among other things, requires advance disclosure of settlement costs to home buyers and sellers, prohibits certain types of referral and other fees, sets rules for escrow accounts and requires notice to borrowers when servicing of a home loan is transferred.

Rescission

The act of cancellation or annulment of a transaction or contract by the operation of a law. Borrowers usually have the option to cancel certain credit transactions, including a refinance or home equity transaction, within three business days after consummation (when the consumer becomes contractually obligated by, for example, signing the loan documents).

Second Mortgage

A mortgage that has a lien position subordinate to the first mortgage.

Secondary Mortgage Market

An informal market where lenders and investors buy and sell existing mortgages. Government-sponsored entities and private investors buy mortgages from lenders who use the proceeds to make additional loans.

Truth-in Lending

A federal law that requires lenders to fully disclose, in writing, the terms and conditions of credit, such as a mortgage, including annual percentage rate (APR) and other charges.

Underwriting

The process of evaluating a loan application to determine the risk involved for the lender. Underwriting involves an analysis of the borrower's creditworthiness and the quality of the property itself.

Variable Rate

An interest rate that changes periodically in relation to an index. Payments may increase or decrease per the terms of the loan agreement or note.