This glossary will help you understand some of the more common terms used during the structuring, application, processing, and closing of your mortgage loan.
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An adjustable rate mortgage (ARM) usually has a lower initial interest rate than a fixed-rate mortgage, then changes during the life of the loan according to movements in an index rate.
The rate for your ARM is based on the index rate (see "Index Rate";) and can go up or down, depending on what the index rate is doing. Simply put, you obtain a lower rate with an ARM in exchange for assuming the risk that your payments may increase. The terms that follow will help you understand some of the important ARM concepts.
There are several types of ARMs available. The most common are one-year, three-year, five-year, seven-year or ten-year ARMs. The rate remains constant until the initial adjustment date and then can change once every year thereafter. For example, a five-year ARM has a fixed monthly principal and interest payment for the first five years and then adjusts annually based on the index rate.
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.
To determine your ARM rate, lenders usually charge a few percentage points over the Index Rate. Margin is the difference between the Index Rate and your ARM rate. Margins can differ from one loan type to another, but are usually constant over the life of the loan. Be sure to discuss the margin with your lender.
This is a limit on the amount your interest rate can increase. There are two different types of Interest Rate Caps:
Periodic caps limit the amount that an interest rate can increase or decrease from one adjustment period to the next.
Lifetime caps limit the amount that an interest-rate increase or decrease over the life of the loan.
The repayment of a mortgage loan, both principal and interest, by installments.
An appraisal is a written analysis prepared by a qualified appraiser estimating the value of a property.
The appraised value is an opinion of a property’s fair market value, based on an appraiser’s knowledge, experience and analysis of the property. In some cases you may pay more or less than the appraised value of the home.
The cost of credit, expressed as a yearly rate including interest, mortgage insurance and loan origination fees. This allows a buyer to compare loans. The APR should not be confused with the actual Note rate.
A document issued by the federal government certifying a veteran’s eligibility for a Department of Veterans Affairs (VA) mortgage.
A document issued by the Department of Veterans Affairs (VA) that establishes the maximum value and loan amount for a VA mortgage.
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 region and loan type.
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.
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.
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.
The document used in some states instead of a mortgage. Title is conveyed to a trustee.
Failure to make mortgage payments on a timely basis or to comply with other requirements of a mortgage.
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.
Part of the purchase price of a property that is paid in cash and not financed with a mortgage.
This is the difference between what you owe on your mortgage loan and the appraised value of the home. Your equity increases if your home goes up in value.
A congressionally chartered, shareholder-owned company that is the nation's largest supplier of home mortgage funds.
A mortgage that is insured by the Federal Housing Administration (FHA). Also known as a government mortgage.
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.
To obtain a mortgage, homeowner’s insurance is required based on the value and contents of your home. Your lender or real estate agent may be able to help you estimate typical payments in your area.
The percentage of gross monthly income budgeted to pay housing expenses.
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.
The part of your monthly payment that is held by your mortgage servicer to pay for real estate taxes, , homeowner's insurance and mortgage insurance.
The penalty a borrower must pay when a payment is made a stated number of days (usually 15) after the due date.
A person's financial obligations. Liabilities include long-term and short-term debt.
The relationship between the principal balance of the mortgage and the appraised value (or purchase price if it is lower) of the property. For example, a $100,000 home with an $80,000 mortgage has an LTV of 80.
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
A legal document that pledges a property to the lender as security for payment of a debt.
A company that originates mortgages exclusively for resale in the secondary mortgage market.
Mortgage insurance, commonly called "Private Mortgage Insurance" (PMI), protects the lender from loss if you stop making payments. Mortgage insurance can be issued by a private company or a government agency. You may not have to pay mortgage insurance if your down payment is more than 20% of the appraised value (or purchase price if it is lower) of your home.
A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.
This is the lender’s charge to you for the loan and is disclosed on your Good Faith Estimate.
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.
The process of determining how much money you will be eligible to borrow before you apply for a loan.
Paid at closing, this is the amount of interest – usually calculated daily – that you owe from the day your loan closes to the end of the month. For example, if you close on January 15 and your interest is $21 per day, you would pay interest through January 31 ($21 X 16). After that, when you make your monthly mortgage payment, interest is always paid for the previous month. So you would not make your first payment until March 1, which pays principal and interest for the month of February.
The amount borrowed or remaining unpaid. The part of the monthly payment that reduces the remaining balance of a mortgage.
The outstanding balance of principal on a mortgage not including interest or any other charges.
The four 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 monthly cost of property taxes and homeowners insurance, whether these amounts that are paid into an escrow account each month or not.
Property taxes vary by municipality and are typically calculated from a millage rate set by the municipality. Some property taxes also include "special" taxes or community development fees. Your lender will collect at least one month of property taxes at your closing to set up an account so that they can pay your taxes when they are due.
Calculations used to determine if a borrower can qualify for a mortgage. They consist of two separate calculations: a housing expense as a percent of income ratio and total debt obligations as a percent of income ratio.
Where existing mortgages are bought and sold.
The property that will be pledged as collateral for a loan
An organization that collects principal and interest payments from borrowers and manages borrowers’ escrow accounts. The servicer often services mortgages that have been purchased by an investor in the secondary mortgage market.
You are encouraged to speak with an accountant or tax advisor on any tax savings you may benefit from having a home mortgage.
Total obligations as a percentage of gross monthly income including monthly housing expenses plus other monthly debts.
A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the annual percentage rate (APR) and other charges.
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.
A mortgage that is guaranteed by the Department of Veterans Affairs (VA). Also known as a government mortgage.