Key Terms Glossary

2/1 Buy Down Mortgage

The 2/1 Buy Down Mortgage allows the borrower to qualify at below market ratesso they can borrow more. The initial starting interest rate increases by 1% atthe end of the first year and adjusts again by another 1% at the end of thesecond year. It then remains at a fixed interest rate for the remainder of theloan term.
Borrowers often refinance at the end of the second year to obtain the best longterm rates; however, even keeping the loan in place for three full years ormore will keep their average interest rate in line with the original marketconditions.

Acceleration Clause
Provision in a mortgage that allows the lender to demand payment of the entireprincipal 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 thescheduled principal amount due.

Adjustable-Rate Mortgage (ARM)
A mortgage with an interest rate that changes during the life of the loanaccording to movements in an index rate. Sometimes called AMLs (adjustablemortgage loans) or VRMs (variable-rate mortgages).

Adjusted Basis
The cost of a property plus the value of any capital expenditures forimprovements 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 buyers ability to afford the purchase of a home. Reviewsincome, liabilities, and available funds, and considers the type of mortgageyou plan to use, the area where you want to purchase a home, and the closingcosts that are likely.

The gradual repayment of a mortgage loan, both principal and interest, byinstallments.

Amortization Term
The length of time required to amortize the mortgage loan expressed as a numberof months. For example, 360 months is the amortization term for a 30-yearfixed-rate mortgage.

Annual Percentage Rate (APR)
The cost of credit, expressed as a yearly rate including interest, mortgageinsurance, and loan origination fees. This allows the buyer to compare loans,however APR should not be confused with the actual note rate.

A written analysis prepared by a qualified appraiser and estimating the valueof a property.

Appraised Value
An opinion of a property's fair market value, based on an appraiser'sknowledge, experience, and analysis of the property.

Anything owned of monetary value including real property, personal property,and enforceable claims against others (including bank accounts, stocks, mutualfunds, etc.).

The transfer of a mortgage from one person to another.

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 afee for the assumption. If a mortgage contains a due-on-sale clause, it may notbe assumed by a new buyer.

Assumption Fee
The fee paid to a lender (usually by the purchaser of real property) when anassumption takes place.

Balance Sheet
A financial statement that shows assets, liabilities, and net worth as of aspecific date.

Balloon Mortgage
A mortgage with level monthly payments that amortizes over a stated term butalso requires that a lump sum payment be paid at the end of an earlierspecified 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 monthlypayment schedule). The 26 (or possibly 27) biweekly payments are each equal toone-half of the monthly payment required if the loan were a standard 30-yearfixed-rate mortgage. The result for the borrower is a substantial savings ininterest.

Bridge Loan
A second trust that is collateralized by the borrower's present home allowingthe proceeds to be used to close on a new house before the present home issold. Also known as "swing loan."

An individual or company that brings borrowers and lenders together for thepurpose of loan origination.

When the seller, builder or buyer pays an amount of money up front to thelender to reduce monthly payments during the first few years of a mortgage.Buydowns can occur in both fixed and adjustable rate mortgages.

Limits how much the interest rate or the monthly payment can increase, eitherat each adjustment or during the life of the mortgage. Payment caps don't limitthe amount of interest the lender is earning and may cause negativeamortization.

Certificate of Eligibility
A document issued by the federal government certifying a veteran’s eligibilityfor a Department of Veterans Affairs (VA) mortgage.

Certificate of Reasonable Value (CRV)
A document issued by the Department of Veterans Affairs (VA) that establishesthe maximum value and loan amount for a VA mortgage.

Change Frequency
The frequency (in months) of payment and/or interest rate changes in anadjustable-rate mortgage (ARM).

A meeting held to finalize the sale of a property. The buyer signs the mortgagedocuments and pays closing costs. Also called "settlement."

Closing Costs
These are expenses - over and above the price of the property- that areincurred by buyers and sellers when transferring ownership of a property.Closing costs normally include an origination fee, property taxes, charges fortitle insurance and escrow costs, appraisal fees, etc. Closing costs will varyaccording to the area country and the lenders used.

Compound Interest
Interest paid on the original principal balance and on the accrued and unpaidinterest.

Consumer Reporting Agency (or Bureau)
An organization that handles the preparation of reports used by lenders todetermine a potential borrower's credit history. The agency gets data for thesereports 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 somepoint during the term. Usually conversion is allowed at the end of the firstadjustment period. The conversion feature may cost extra.

Credit Report
A report detailing an individual's credit history that is prepared by a creditbureau 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 theU.S. population, based on the individual's credit usage history. The creditscore most widely used by lenders is the FICO® score, developed by Fair, Isaacand Company. This 3-digit number, ranging from 300 to 850, is calculated by amathematical equation that evaluates many types of information that are on yourcredit report. Higher FICO® scores represents lower credit risks, whichtypically equate to better loan terms. In general, credit scores are criticalin the mortgage loan underwriting process.

Deed of Trust
The document used in some states instead of a mortgage. Title is conveyed to atrustee.

Failure to make mortgage payments on a timely basis or to comply with otherrequirements of a mortgage.

Failure to make mortgage payments on time.

This is a sum of money given to bind the sale of real estate, or a sum of moneygiven to ensure payment or an advance of funds in the processing of a loan.

In an ARM with an initial rate discount, the lender gives up a number ofpercentage points in interest to reduce the rate and lower the payments forpart of the mortgage term (usually for one year or less). After the discountperiod, 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 financedwith a mortgage.

Effective Gross Income
A borrowers normal annual income, including overtime that is regular orguaranteed. Salary is usually the principal source, but other income mayqualify if it is significant and stable.

The amount of financial interest in a property. Equity is the differencebetween the fair market value of the property and the amount still owed on themortgage.

An item of value, money, or documents deposited with a third party to bedelivered upon the fulfillment of a condition. For example, the deposit offunds or documents into an escrow account to be disbursed upon the closing of asale of real estate.

Escrow Disbursements
The use of escrow funds to pay real estate taxes, hazard insurance, mortgageinsurance, 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 payfor taxes, hazard insurance, mortgage insurance, lease payments, and otheritems as they become due.

Fannie Mae
A congressionally chartered, shareholder-owned company that is the nation'slargest supplier of home mortgage funds.

FHA Mortgage
A mortgage that is insured by the Federal Housing Administration (FHA). Alsoknown as a government mortgage.

FICO Score
FICO® scores are the most widely used credit score in U.S. mortgage loanunderwriting. This 3-digit number, ranging from 300 to 850, is calculated by amathematical equation that evaluates many types of information that are on yourcredit report. Higher FICO® scores represent lower credit risks, whichtypically equate to better loan terms.

First Mortgage
The primary lien against a property.

Fixed Installment
The monthly payment due on a mortgage loan including payment of both principaland 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 toamortize the remaining balance, at the interest accrual rate, over theamortization term.

A government-owned corporation that assumed responsibility for the specialassistance loan program formerly administered by Fannie Mae. Popularly known asGinnie Mae.

Growing-Equity Mortgage (GEM)
A fixed-rate mortgage that provides scheduled payment increases over anestablished period of time. The increased amount of the monthly payment isapplied 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 atclosing. Items that appear on the statement include real estate commissions,loan fees, points, and initial escrow amounts. Each item on the statement isrepresented by a separate number within a standardized numbering system. Thetotals at the bottom of the HUD-1 statement define the seller's net proceedsand 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 fixedpayment for a longer period of time than most adjustable rate loans. Forexample, a "5/1 loan" has a fixed monthly payment and interest forthe 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 forpeople who expect to move or refinance, before or shortly after, the adjustmentoccurs.

The index is the measure of interest rate changes a lender uses to decide theamount an interest rate on an ARM will change over time. The index is generallya published number or percentage, such as the average interest rate or yield onTreasury bills. Some index rates tend to be higher than others and some morevolatile.

Initial Interest Rate
This refers to the original interest rate of the mortgage at the time ofclosing. This rate changes for an adjustable-rate mortgage (ARM). It's alsoknown as "start rate" or "teaser."

The regular periodic payment that a borrower agrees to make to a lender.

Insured Mortgage
A mortgage that is protected by the Federal Housing Administration (FHA) or byprivate mortgage insurance (MI).

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 Rate Buydown Plan
An arrangement that allows the property seller to deposit money to an account.That money is then released each month to reduce the mortgagor's monthlypayments during the early years of a mortgage.

Interest Rate Ceiling
For an adjustable-rate mortgage (ARM), the maximum interest rate, as specifiedin the mortgage note.

Interest Rate Floor
For an adjustable-rate mortgage (ARM), the minimum interest rate, as specifiedin the mortgage note.

Late Charge
The penalty a borrower must pay when a payment is made a stated number of days(usually 15) after the due date.

Lease-Purchase Mortgage Loan
An alternative financing option that allows low- and moderate-income homebuyers to lease a home with an option to buy. Each month's rent paymentconsists of principal, interest, taxes and insurance (PITI) payments on thefirst mortgage plus an extra amount that accumulates in a savings account for adown payment.

A person's financial obligations. Liabilities include long-term and short-termdebt.

Lifetime Payment Cap
For an adjustable-rate mortgage (ARM), a limit on the amount that payments canincrease or decrease over the life of the mortgage.

Lifetime Rate Cap
For an adjustable-rate mortgage (ARM), a limit on the amount that the interestrate can increase or decrease over the life of the loan. See cap.

Line of Credit
An agreement by a commercial bank or other financial institution to extendcredit up to a certain amount for a certain time.

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

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

Loan-to-Value (LTV) Percentage
The relationship between the principal balance of the mortgage and theappraised value (or sales price if it is lower) of the property. For example, a$100,000 home with an $80,000 mortgage has an LTV of 80 percent.

Lock-In Period
The guarantee of an interest rate for a specified period of time by a lender,including loan term and points, if any, to be paid at closing. Short term locks(less than 21 days), are usually available after lender loan approval only.However, many lenders may permit a borrower to lock a loan for 30 days or moreprior to submission of the loan application.

The number of percentage points the lender adds to the index rate to calculatethe ARM interest rate at each adjustment.

The date on which the principal balance of a loan becomes due and payable.

Monthly Fixed Installment
That portion of the total monthly payment that is applied toward principal andinterest. When a mortgage negatively amortizes, the monthly fixed installmentdoes not include any amount for principal reduction and doesn't cover all ofthe interest. The loan balance therefore increases instead of decreasing.

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

Mortgage Banker
A company that originates mortgages exclusively for resale in the secondarymortgage market.

Mortgage Broker
An individual or company that brings borrowers and lenders together for thepurpose of loan origination.

Mortgage Insurance
A contract that insures the lender against loss caused by a mortgagor's defaulton a government mortgage or conventional mortgage. Mortgage insurance can beissued by a private company or by a government agency.

Mortgage Insurance Premium (MIP)
The amount paid by a mortgagor for mortgage insurance.

Mortgage Life Insurance
A type of term life insurance In the event that the borrower dies while thepolicy is in force, the debt is automatically paid by insurance proceeds.

The borrower in a mortgage agreement.

Negative Amortization
Amortization means that monthly payments are large enough to pay the interestand reduce the principal on your mortgage. Negative amortization occurs whenthe monthly payments do not cover all of the interest cost. The interest costthat isn't covered is added to the unpaid principal balance. This means thateven after making many payments, you could owe more than you did at thebeginning of the loan. Negative amortization can occur when an ARM has apayment cap that results in monthly payments not high enough to cover theinterest due.

Net Worth
The value of all of a person's assets, including cash.

Non Liquid Asset
An asset that cannot easily be converted into cash.

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

Origination Fee
A fee paid to a lender for processing a loan application. The origination feeis stated in the form of points. One point is 1 percent of the mortgage amount.

Owner Financing
A property purchase transaction in which the party selling the propertyprovides all or part of the financing.

Payment Change Date
The date when a new monthly payment amount takes effect on an adjustable-ratemortgage (ARM) or a graduated-payment mortgage (GPM). Generally, the paymentchange date occurs in the month immediately after the adjustment date.

Periodic Payment Cap
A limit on the amount that payments can increase or decrease during any one adjustmentperiod.

Periodic Rate Cap
A limit on the amount that the interest rate can increase or decrease duringany one adjustment period, regardless of how high or low the index might be.

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

A point is equal to one percent of the principal amount of your mortgage. Forexample, if you get a mortgage for $165,000 one point means $1,650 to the lender.Points usually are collected at closing and may be paid by the borrower or thehome seller, or may be split between them.

Prepayment Penalty
A fee that may be charged to a borrower who pays off a loan before it is due.

The process of determining how much money you will be eligible to borrow beforeyou apply for a loan.

Prime Rate
The interest rate that banks charge to their preferred customers. Changes inthe prime rate influence changes in other rates, including mortgage interestrates.

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

Principal Balance
The outstanding balance of principal on a mortgage not including interest orany other charges.

Principal, Interest, Taxes, and Insurance (PITI)
The four components of a monthly mortgage payment. Principal refers to the partof the monthly payment that reduces the remaining balance of the mortgage.Interest is the fee charged for borrowing money. Taxes and insurance refer tothe monthly cost of property taxes and homeowners insurance, whether theseamounts that are paid into an escrow account each month or not.

Private Mortgage Insurance (PMI)
Mortgage insurance provided by a private mortgage insurance company to protectlenders against loss if a borrower defaults. Most lenders generally require MIfor a loan with a loan-to-value (LTV) percentage in excess of 80 percent.

Qualifying Ratios
Calculations used to determine if a borrower can qualify for a mortgage. Theyconsist of two separate calculations: a housing expense as a percent of incomeratio and total debt obligations as a percent of income ratio.

Rate Lock
A commitment issued by a lender to a borrower or other mortgage originatorguaranteeing a specified interest rate and lender costs for a specified periodof time.

Real Estate Agent
A person licensed to negotiate and transact the sale of real estate on behalfof the property owner.

Real Estate Settlement Procedures Act (RESPA)
A consumer protection law that requires lenders to give borrowers advancenotice of closing costs.

A real estate broker or an associate who is an active member in a local realestate board that is affiliated with the National Association of Realtors.

The noting in the registrar’s office of the details of a properly executedlegal document, such as a deed, a mortgage note, a satisfaction of mortgage, oran extension of mortgage, thereby making it a part of the public record.

Paying off one loan with the proceeds from a new loan using the same propertyas security.

Revolving Liability
A credit arrangement, such as a credit card, that allows a customer to borrowagainst a pre-approved line of credit when purchasing goods and services.

Secondary Mortgage Market
Where existing mortgages are bought and sold.

The property that will be pledged as collateral for a loan.

Seller Carry-back
An agreement in which the owner of a property provides financing, often incombination with an assumable mortgage. See Owner Financing.

An organization that collects principal and interest payments from borrowersand manages borrowers’ escrow accounts. The servicer often services mortgagesthat have been purchased by an investor in the secondary mortgage market.

Standard Payment Calculation
The method used to determine the monthly payment required to repay theremaining balance of a mortgage in substantially equal installments over theremaining term of the mortgage at the current interest rate.

Step-Rate Mortgage
A mortgage that allows for the interest rate to increase according to aspecified schedule (i.e., seven years), resulting in increased payments aswell. At the end of the specified period, the rate and payments will remainconstant for the remainder of the loan.

Third-party Origination
When a lender uses another party to completely or partially originate, process,underwrite, close, fund, or package the mortgages it plans to deliver to thesecondary mortgage market.

Total Expense Ratio
Total obligations as a percentage of gross monthly income including monthlyhousing expenses plus other monthly debts.

Treasury Index
An index used to determine interest rate changes for certain adjustable-ratemortgage (ARM) plans. Based on the results of auctions that the U.S. Treasuryholds for its Treasury bills and securities or derived from the U.S. Treasury'sdaily yield curve, which is based on the closing market bid yields on activelytraded Treasury securities in the over-the-counter market.

A federal law that requires lenders to fully disclose, in writing, the termsand conditions of a mortgage, including the annual percentage rate (APR) andother charges.

Two-step Mortgage
An adjustable-rate mortgage (ARM) with one interest rate for the first five orseven years of its mortgage term and a different interest rate for theremainder of the amortization term.

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

VA Mortgage
A mortgage that is guaranteed by the Department of Veterans Affairs (VA). Alsoknown as a government mortgage.

"Wrap Around" Mortgage
A mortgage that includes the remaining balance on an existing first mortgageplus an additional amount requested by the mortgagor. Full payments on bothmortgages are made to the "Wrap Around" mortgagee, who then forwardsthe payments on the first mortgage to the first mortgagee. These mortgages maynot be allowed by the first mortgage holder, and if discovered, could be subjectto a demand for full payment.