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Mortgage Glossary

Abstract of Title A detailed transaction history of the title for a specific property from the original source up to the present.

Acceptance An agreement by the buyer or seller to enter into a contract and be bound by the terms of the offer.

Acceleration Clause In the event of a default, this portion of the mortgage states that the entire outstanding balance of the loan is due and payable.

ARM (Adjustable Rate Mortgage) A conventional mortgage in which the interest rate is adjusted periodically, based on the fluctuation of a financial index. ARM loans typically have rate caps that limit the amount and frequency of interest rate changes.

Amortization The incremental reduction of a loan balance by scheduled installment payments. The first payments are mostly allocated to paying interest on the loan, then gradually reallocate more of the payment to reducing the principal balance until the loan is paid off.

APR (Annual Percentage Rate) The annual percentage rate refers to the lender-set cost of the loan to the borrower, expressed as a yearly percentage rate.

Application Fee Nonrefundable fees paid by the borrower when applying for a loan. These fees may include charges for pulling a credit report or a property appraisal.

Appraisal A detailed report made by a qualified professional determining the value of a property on a given date.

Appreciation An increase in the value of a property over time. Appreciation is favorable as it grows the equity you have in your home and enables you to use it as collateral for a line of credit or to eliminate private mortgage insurance (PMI) charges.

Approved Term The number of months that it will take to pay off your mortgage.

Assessed Value The value of a property determined by authorities for the purpose of taxation. Also called an assessment.

Assumption of Mortgage When the buyer takes responsibility for paying the seller's mortgage payments, with the seller remaining on the mortgage as secondarily liable.

Balloon Mortgage A loan with lower monthly payments for a specific period of time that do not fully pay off the balance. Then at the end of the loan, a lump sum is due to settle the balance.

Break Even Point The point where income equals expenses. Used in with decisions relating to purchasing discount points on a mortgage or determining the benefits of refinancing, it is the point in time when the savings you'll realize from lower interest rates equal the costs of closing the loan.

Bridge Loan A short term mortgage that provides finances between the end of one loan and the start of another. Often used by borrowers to buy a home before they have sold their current home.

Broker A compensated independent third party that uses their expertise to arrange the best funding options and negotiate contract terms between parties.

Buydown A prepayment of a portion of a loan in order to lower monthly mortgage payments over a specified term.

Cap Predetermined maximum interest rate or payment amount increase allowed on an adjustable rate mortgage (ARM).

Certificate of Title A document provided by a title company or attorney state states who the owner of the property is according to public record.

Closing The culmination of the real estate transaction, when title and deed are legally transferred from seller to buyer, the buyer assumes the mortgage liability and takes ownership of the home.

Closing Costs Additional expenses over the price of the property that are a result of the real estate transaction, including attorney fees, document fees, appraisal costs, insurance, etc.

Closing Disclosure The final disclosure generated by the lender that includes interest rate, monthly payments, and closing costs, in order to compare the Loan Estimate against the actual final closing costs. Regulations state that this document must be received by the borrower at least 3 business days before the Closing.

Closing Statement A financial statement of all funds received and expected at closing, including the escrow deposit for taxes, hazard insurance and mortgage insurance.

Collateral An substantial asset, such as a car or a home, that is used for guaranteeing the repayment of a loan. If the loan is not paid back, the collateral is forfeited to the lender.

Commission An agent's or broker's fee for arranging and negotiating a real estate transaction, typically a percentage of the sale price.

Comparables (Comps) When determining the fair market value of a property, similar properties in close proximity with approximately the same features and amenities are used as a basis for comparison.

Compound Interest Interest paid on a loan's principal balance and compounded on top of the accrued and unpaid interest.

Condominium A single unit that is owned by the occupant and is located within a multi-unit building or complex of buildings.

Contingency An agreed upon condition that must be met for a contract to remain binding.

Conventional Mortgage A fixed or adjustable rate mortgage loan that is not insured by FHA, guaranteed by VA, or funded by the government.

Convertible ARM An specific type of adjustable-rate mortgage (ARM) that can be converted to a fixed-rate mortgage under certain terms.

Co-signer A second party that signs a loan and assumes responsibility for repayment of the loan while receiving no benefit from the loan proceeds.

Credit Bureau An organization that gathers, records, updates and stores financial and public records of individuals who have been granted credit and provides this information to lenders and other authorized users for a fee. The 3 major credit bureaus are Equifax, Experian and TransUnion.

Credit Limit The maximum amount you are allowed to borrow against a line of credit, such as a credit card or home equity line of credit (HELOC).

Credit Report A report generated by one or all three (3) of the major credit bureaus that details the borrower's credit standing in order to determine how likely they are to repay a loan.

Credit Score A number determined by the Credit Bureaus ranging from 300 to 850 that ranks an individual's ability to repay a credit obligation. The lower the number the greater risk the borrower is to the lender, resulting in less approvals and higher interest rates. A higher number delivers easier approvals and lower interest rates.

Debt Consolidation A lower interest loan that is used to pay off multiple higher interest debts, reducing total interest charges and improving debt management.

Debt-to-Income Ratio Your total monthly debt payments, such as loans and credit cards, divided by your gross monthly income, expressed as a percentage.

Deed A legal document that transfers ownership of a property from a seller to a buyer.

Default Failure to make payments on time or meet the terms of a loan as agreed upon in the mortgage note.

Down Payment The amount of cash that you put down on the purchase of your home. The amount of your mortgage is the difference between your down payment and home's purchase price.

Due-On-Sale A provision in a mortgage agreement giving the lender the right to demand immediate repayment of a loan balance if the property is sold.

Earnest Money A deposit given to a seller or their agent by a potential buyer at the time of an offer as a sign of good faith. If the offer is accepted, earnest money becomes part of the down payment.

Easement A right to the limited use of land owned by a homeowner. Utilities often use easement rights to install and maintain poles and lines on your property.

Encumbrance Anything limiting factor that hinders the title of a property, such as outstanding mortgages, easement rights or unpaid property taxes.

Equity The difference between the appraised value of your home and your outstanding mortgage balances and other liens. When a mortgage is completely paid off, the homeowner has 100% equity in the home.

Escrow Funds deposited with a third party, usually for the purposes of holding a portion of the monthly mortgage payment to pay property taxes, homeowners insurance and private mortgage insurance (PMI).

Fair Market Value Determined by an appraiser and based on the features and condition of a home, as well as comparable properties in the neighborhood, this is the price that you can expect your home to sell for.

Fannie Mae An acronym for the Federal National Mortgage Association - a government-sponsored organization that buys and secures mortgages for resale on the secondary market.

Federal Housing Administration (FHA) An agency of the Department of Housing and Urban Development (HUD) that provides mortgage insurance for certain residential mortgages that meet eligibility requirements. FHA loans make mortgages accessible to buyers with low or no credit and smaller available down payments.

FICO® Score Short for Fair Isaac Corporation that formulates credit scores for assessing credit risk. FICO scores range from a low of 300 to a high of 850.

First Mortgage The initial mortgage that holds a primary lien against a property.

Fixed-Rate Mortgage A conventional mortgage that has a specified interest rate and constant monthly payments that remain the same over the entire life of the loan.

Fixture Permanent item on a property, such as a hot water heater or plumbing fixture, that is considered a part of the property and transferred to the buyer upon closing.

Flood Certification A report required by the lender to determine if a property is located within a flood hazard zone, which would then require a federally mandated flood insurance policy.

Flood insurance Insurance that protects the homeowner against loss due to flooding. This type of insurance is required by law when a property is located within a special flood hazard zone.

Forbearance A period of time when your monthly loan payments are temporarily suspended or reduced to alleviate financial hardship.

Foreclosure The legal procedure when a property is sold by the lender in order to repay the borrower's loan.

Freddie Mac An acronym for the Federal Home Loan Mortgage Corporation - a government-sponsored organization that buys and secures mortgages for resale in the secondary market.

Good Faith Estimate (GFE) An itemized list of specific cost estimates associated with a home loan that the lender is required to provide to the borrower within 3 business days of the mortgage application.

Graduated Payment Mortgage A fixed rate loan with monthly payments that start low and increase by a fixed amount for a specific time period until they reach a certain point at which they remain fixed for the remainder of the loan term.

Gross Income Your total pay before any payroll taxes, deductions or garnishments are taken out.

Hazard Insurance Insurance that covers damage expenses resulting from fire, windstorms, and other common hazards.

Home Equity Line of Credit (HELOC) A line of credit t in which the borrower's residence is used as collateral. A HELOC is often used for home improvements, debt consolidation or other major expenses.

Homeowner's Insurance An insurance policy that covers loss of your home and your possessions in case of fire or wind damage, theft, liability for property damage and personal liability.

HUD An acronym for the U.S. Department of Housing and Urban Development - a government agency responsible for the implementation and administration of housing and urban development programs such as the Federal Housing Administration (FHA), and oversees Fannie Mae and Freddie Mac.

Income Property Real estate that is owned strictly for investment purposes and not used as the owner's residence.

Index A measurement used to determine how much the annual percentage rate (APR) of an adjustable rate Mortgage (ARM) will change at the beginning of each adjustment period. Generally, the index plus or minus margin equals the new rate that will be charged, subject to any caps.

Inflation Rate The percentage rate increase in overall prices of consumer goods, used to determine the real value of currency.

Jumbo Loan Or a Nonconforming Loan, is a larger loan that exceeds the limitations of terms of sale to Fannie Mae and Freddie Mac. Lenders may charge additional fees and place restrictions on these loans due to the higher risk.

Lien A legal claim of a lender on a borrower's property used as collateral for a debt.

Lifetime Adjustment Cap A limit on how much the interest rate can increase during the term of an adjustable rate mortgage (ARM).

Line of Credit An agreement between lender and borrower, secured by the borrower's home, to extend credit up to a certain amount over a fixed period of time. Instead of a lump sum payout, the borrower can draw upon the credit line for a certain period of time as needed.

Loan Estimate Disclosure statement that is presented to the borrower within 3 days of their loan application lisitng all costs and fees associated with the loan. The Loan Estimate supercedes the Good Faith Estimate (GFE).

Loan-To-Value Ratio (LTV) The comparison of the amount of the outstanding mortgage balance and the appraised value of the property, shown as a percentage.

Lock Period The time span prior to closing in which you can secure an interest rate for your loan, typically ranging from 30 to 90 days.

Market Value The estimated price at which a property will most likely sell.

Maturity Date The predetermined date when the outstanding balance, interest and fees on a loan must all be repaid.

Mortgage A binding agreement between lender and borrower to secure funding for a real estate purchase with the property acting as collateral for the loan to be repaid on an installment basis, typically over 10-30 years.

Mortgage Insurance Or Private Mortgage Insurance (PMI), is an insurance policy paid for by the borrower that protects the lender against default of a loan in which the borrower has less than 20% equity in the home.

Negative Amortization When a loan's interest rate has increased to a point where the monthly payments aren't enough to cover the interest due. No portion of the payment is applied to the principal balance and the unpaid interest is added on to the loan total, leaving the borrower owing increasingly more that the original loan amount.

Offer to Purchase A written proposal to buy a piece of real estate that becomes binding when accepted by the seller. Also called a sales contract.

Option ARM An adjustable-rate mortgage (ARM) that gives the borrower the option of different monthly payment options to manage payments in rising rate markets and take advantage of falling interest rates.

Origination The date on which the proceeds of a loan are disbursed to receiving parties.

Origination Fee A fee levied by the lender to cover the costs of processing a mortgage.

Owner Financed A home purchase in which the seller provides all or part of the financing for the home sale.

Payoff The amount of outstanding balance of a mortgage on a specific date that would fully satisfy the terms of the loan.

PITI An acronym for principal, interest, taxes and insurance payments to the lender.

Points Fees paid to the lender upon closing the loan in order to lower the long term interest rate and increase the effective yield of the mortgage. A point is 1% of the amount of the mortgage loan.

Prepayment An amount added to the regular monthly loan payment for the purposes of reducing the principal balance of a loan before the principal is due, decreasing your total interest expenses.

Prepayment Penalty A fee that may be charged by the lender to the borrower if a mortgage loan is repaid before its full term is reached.

Pre-Approval A commitment by a lender to extend credit to a borrower based on their creditworthiness determined by verified financial information, credit reports and asset review.

Pre-Qualification A preliminary assessment of a buyer's creditworthiness based on information provided by the buyer and general lending guidleines in order to determine approximately how much financing the borrower can expect to obtain. A Pre-Qualification is not a loan commitment and carries less weight in negotations than a Pre-Approval.

Prime Rate The interest rate that banks charge on loans to their preferred customers. This rate is used as a base rate for credit car interest rates and other variable rate credit lines.

Principal The amount of a loan independent of interest and fees.

PMI (Private Mortgage Insurance) An insurance policy paid for by the borrower that protects the lender against default of a loan in which the borrower has less than 20% equity in the home.

Promissory Note A written promise to repay a loan over a specified period of time.

Qualifying Ratios Or Debt-to-Income Ratios, are guidelines that help lenders decide how much of a loan a borrower qualifies for.

Rate The amount of interest on a loan, expressed as a percentage.

Rate Lock Lenders offer borrowers the option of locking in an interest rate on their proposed mortgage for a specified period of time to provide stability and protection against market fluctuations during the loan process.

Rate Reduction Option An offering by the lender of a fixed-rate mortgage giving the borrower the option to reduce the loan's interest rate without having to refinance or requalify for the loan.

Realtor A real estate broker affiliated with the National Association of Realtors that works with home buyers and sellers to facilitate and negotiate real estate transactions.

Recording Fee A fee charged by a public official to record the legal documents associated with home titles.

Refinancing Repaying an existing debt with the proceeds from a new loan, typically using the same property as collateral, in order to realize savings from lower interest rates or a shorter loan term.

Rehabilitation Loan A mortgage for borrowers purchasing a home for the purpose of renovation and rehabilitation. This loan differs from a conventional loan in that it bases the loan amount on the home's "work completed" value.

Repayment Period The time span a borrower has to fully pay back a loan and satisfy all terms of the mortgage.

Second Mortgage A loan granted to a borrower that is currently paying an exisiting mortgage on a property. The second mortgage is subordinate to the first.

Security Asset that is pledged as collateral for a loan. In the event of the borrower defaulting on the loan, the lender has the legal right to sell the asset in order to satisfy the debt.

Short Sale When a homeowner can no longer afford to make mortgage payments due to financial hardship, and the home is worth less than the current principal balance of the mortgage, a Short Sale can be alternative to a foreclosure. The homeowner can sell the home to pay off the mortgage and the lender agrees to accept a lesser amount than what is currently owed given the homeowner can prove hardship.

Survey A map rendered by an engineer or surveyor depicting the property lines and distinguishing features of a real estate tract.

Term The agreed upon time period it will take to repay a loan. The loan term affects how much yor monthly payment will be as well as the total interest you'll pay over the life of the loan.

Title Physical document stating ownership of a property.

Title Company An independent entity that is compensated for investigating a property's title (or deed) for discrepancies or undiscovered liens and issues title insurance to the lender if the title is found to be clear of any encumbrances.

Title Insurance Insurance that protects the owner and the lender against issues that may arise affecting legal ownership of the property.

Title Search A review of public record by a Title Company to confirm legal ownership of a property and reveal any liens or encumbrances that would affect the sale of the property.

Truth-In-Lending A federal law that requires lenders to disclose the specific terms and conditions of a mortgage in order to provide borrowers a uniform basis of comparison of lending institutions.

Underwriter A qualified individual that approves or denies a loan, based on guidelines, regulations and their own expertise.

Underwriting The process of determining whether or not to approve a loan to a potential borrower based on their creditworthiness and setting a corresponding rate, term and loan amount based on those results.

Unsecured Loan A loan or a line of credit that is not guaranteed by any collateral.

Upfront Costs Fees incurred by the lender and payable by the borrower when applying for a loan.

VA Loan A mortgage guaranteed by the Department of Veterans Affairs (VA) for qualified veterans of U.S. military forces.

Variable Rate Or Adjustable Rate is an interest rate subject to market fluctuation that will affect the total interrest expense of yor loan.

W-2 Provided by your employer, a W-2 statement shows your gross annual income and all tax deductions made in the prior year. Lenders require this statement for income verification during the application process.

Walk-Through A final inspection of the property is conducted shortly before closing to confirm that the property is in the same condition that it was in at the time the offer was presented.

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