We want you to feel comfortable making the decisions that get you into your dream home. A large part of that is speaking the language. This is Part 1 of a brief overview of mortgage vocabulary that you will run into. A basic understanding of these terms will make you feel right at home when working with a loan officer.
Amortization: The gradual reduction of the mortgage debt through regularly scheduled payments over the term of the loan.
Annual Percentage Rate (APR): The measure of the cost of credit stated as a yearly rate; includes such items as the stated interest rate, plus certain charges.
Appraisal: A written estimate or opinion of a property’s value prepared by a qualified appraiser.
Assumption: The act of becoming responsible for the repayment of a loan not originally in your name.
Balloon Mortgage: A mortgage in which the borrower’s monthly payments are amortized over a longer period than the actual term of the mortgage. As a result, at the end of the loan term, the borrower must pay off the remaining balance with a single lump sum payment or refinance the loan.
Bankruptcy: When a debtor yields his or her assets to the bankruptcy court and thereby is relieved of the duty to repay unsecured debts. After claiming this provision of federal law, the debtor is discharged of existing unsecured debt; the unsecured creditors may not continue collection actions. Although they may not take additional action to collect from the debtor, those creditors holding deeds of trust or judgment liens are secured by the property. Not all debts may be discharged.
Broker: A person who coordinates funding or negotiates contracts for a client but does not loan the money him- or herself.
Buy-down: A situation in which the lender subsidizes the mortgage by lowering the interest rate. During the first few years, the loan payments are low, but they will increase when the funding expires.
Cap: For an Adjustable-Rate Mortgage (ARM), a limitation on the amount the interest rate or mortgage payments may increase or decrease.
Certificate of Title: The attorney’s written opinion establishing the status of title for a property as reflected on the public records. The certificate does not address issues not on record and offers no protection unless the writer of the certificate was negligent.
Closing: Also called settlement, a meeting between the buyer, seller and lender and/or their agents during which the property and funds legally transfer.
Closing Costs: Expenses that fall above the price of the property that are incurred by buyers and sellers in the process of transferring ownership of a property. Closing costs usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement. The cost of closing typically is about 3 percent to 6 percent of the mortgage amount. Closing costs will vary according to the area of the country; your PrimeLending loan officer is able to provide estimates of closing costs for you.
Collateral: Property assured to secure a loan.
Commitment: A pledge by a lender to provide a loan on specific terms or conditions to a borrower.
Credit Report: A report with documentation of the borrower’s credit history and current status of credit.
Debt-to-Income Ratio: The relationship between a borrower’s total monthly debt payments (including proposed housing expenses) and his or her gross monthly income; this calculation is used in determining the mortgage amount that a borrower qualifies for.
Deed: The written document conveying real property. The original piece of paper is not needed to convey title in the future once recorded at the county recorder’s office.
Default: The failure to make a schedule payment or otherwise comply with the terms of a mortgage loan or other contract.
Deferred Interest: The amount of interest that is added to the principal balance of a loan when the contractual terms of that loan allow for a scheduled payment to be made that is less than the interest due.
Delinquency: Failure to make payments in a timely fashion. Foreclosure is a possible result.
Department of Veterans Affairs: An independent agency of the federal government that guarantees long-term, low- or no-down payment mortgages to eligible veterans.
Depreciation: A decline in property value.
Discount Point (or POINT): A fee paid by the borrower at closing to reduce the interest rate. A point equals 1 percent of the loan amount.
Down Payment: Money paid up front to make up the difference between the purchase price and the mortgage amount. Down payments usually are 5% to 20% of the sales price on conventional loans.
Earnest Money: Money paid by a buyer to a seller to cement a transaction or ensure payment. Usually between 1 to 5% of the purchase price, the amount becomes a part of the down payment if the offer is accepted. The money is returned to the borrower if the offer is rejected. If the borrower cancels the transaction, the entire amount may be forfeited.
Easement: The right to use the land of another for a specific limited purpose.
Encroachment: The physical intrusion of a structure or improvement (such as a fence) on the land of another.
Equity: The owner’s interest in a property, calculated as the current fair market value of the property less the amount of existing liens.
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 by a borrower with the lender of funds to pay taxes and insurance premiums when they become due, or the deposit of funds or documents with an attorney or escrow agent to be disbursed upon the closing of a sale of real estate.
Federal Home Loan Mortgage Corporation (FHLMC): Also known as “Freddie Mac,” the Federal Home Loan Mortgage Corporation provides a secondary market for mortgage financing by purchasing conventional loans.
Federal Housing Administration (FHA): A division of the Department of Housing and Urban Development. Its main purpose is the insuring of residential mortgage loans made by private lenders. FHA also sets standards for underwriting mortgages.
Federal National Mortgage Association (FNMA): Also known as “Fannie Mae,” this secondary mortgage institution is the largest single holder of home mortgages in the United States. FNMA purchases VA, FHA, and conventional mortgages from primary lenders.
Fixed Rate Mortgage: Throughout the term of the loan, this mortgage interest rate will remain the same for the original borrower.
Float Down Option: The float down option gives you the ability to reduce your interest rate if the market improves after you lock in your rate. The float down option is applied to the interest rate only and is based on the initial lock period; it may be utilized with all conforming loans – both government and conventional.
Foreclosure: Also known as a repossession of property, this occurs when the lender or the seller legally forces a sale of a property because the borrower has not met the terms of the mortgage.
Good Faith Estimate: A list that estimates all fees paid before closing, all closing costs, and any escrow costs the borrower will encounter when purchasing a home. This must be supplied by the lender within three days of the borrower’s application so that the borrower is able to make sound decisions when shopping for a loan.
Guaranty: The pledge of one party to pay a debt or fulfill a responsibility contracted by another if the original party neglects to pay or perform according to terms of the contract.
Hazard Insurance: When an insurance company covers the insured from loss or damage to the property resulting from issues, such as fire, windstorm and the like.
HUD: The U.S. Department of Housing and Urban Development. Established in 1965, HUD develops national policies and programs to address housing needs in the U.S. One of the main missions of HUD is to create a suitable living environment for all Americans by developing and improving the country’s communities and enforcing fair housing laws.
Index: A published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments (such as one- three-, and five-year U.S. Treasury security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average costs-of-funds incurred by savings and loans), which is then used to adjust the interest rate on an adjustable mortgage up or down.