Adjustable rate mortgage (ARM)
– loan on which the monthly payments will increase or decrease over
time. An
ARM’s
interest rate may be tied to the 11th District Cost of Funds, one year
T-note and six-month T-bill. ARM payments are typically adjusted every
six months or once a year.
Amortization – The gradual repayment of a mortgage
through monthly payments. In the early years of a mortgage, most of the
monthly payment goes toward interest. Later in the mortgage, more of the
payment goes toward reducing the loan’s principal balance.
Annual Percentage Rate (APR) –The annual cost of a
mortgage, including interest, loan fees and other costs, stated as a
percentage of the loan amount.
Appraisal/Appraised Value – An opinion of the market
value of a home expressed by a professional real estate appraiser.
Caps – Provisions of an adjustable rate mortgage
which limit how much the interest rate can change at each adjustment
period (i.e. every six months or once a year) or over the life of the
loan (rate cap). A payment cap limits how much the payment due on the
loan can increase or decrease.
Closing costs – Expenses in addition to the price of
the home incurred by buyers and sellers when a home is sold. Common
closing costs include title fees, title insurance fees, document
recording fees and real estate commissions.
Commission – An amount paid to a Realtor for his or
her services, typically set at a percentage of the sales price.
Conventional Mortgage – a loan not guaranteed,
insured or made by the federal or state government
Debt to Income Ratio – the ratio of monthly debt
payments to monthly gross income. Lenders use a debt to income (or DTI)
ratio to determine whether a borrower’s income qualifies him or her
for a mortgage.
Deed – a legal document conveying ownership of
property
Down Payment – The portion of the home’s purchase
price the buyer pays in cash.
Earnest Money – The deposit given by a buyer to a
seller to show that the buyer is serious about purchasing the home.
Earnest money binds the contract. Earnest money usually is refundable to
homebuyers in the event a contingency of the sale contract cannot be
met.
Equity – The difference between a home’s value and
the mortgage amount owed on the home.
Escrow – The holding of documents and money by a
neutral third party until all parties perform.
Fannie Mae and Freddie Mac– The Federal National
Mortgage Association, and the Federal Home Loan Mortgage Corporation are
government sponsored, privately owned entities which purchase mortgages
from lenders and turn the mortgages into securities which are bought by
investors. Fannie Mae and Freddie Mac are the key secondary mortgage
market agencies.
Fixed-rate mortgage (FRM) – a loan on which the
interest rate and monthly payments do not change.
Hazard Insurance – A policy which protects against
damage to a property caused by fire, wind or other hazards.
Homeowner’s Warranty – A policy that covers certain
repairs (such as plumbing or heating) of a newly purchased home for a
certain period of time.
Impound Account – An account established by a lender
to collect a borrower’s property tax and insurance payments. Impound
accounts are normally required on mortgages with down payments of 10
percent or less.
Loan to Value (LTV) Ratio - The ratio of the amount of
money owned on a home to the home’s value. The LTV ratio for a
$100,000 home financed with a $90,000 mortgage would be 90 percent.
Mortgage Banker – A company which originates
mortgages for ale into the secondary mortgage market (for example to
Fannie Mae or Freddie Mac).
Mortgage Broker –A company that, for a fee, matches
borrowers with lenders. Mortgage brokers do not originate loans.
Mortgage Interest Deduction – The ability of mortgage
borrowers to deduct the interest paid on a home loan for purposes of
federal and state income taxes.
Origination Fee – A fee charged by a lender for
making a mortgage.
PITI – Principal, interest, taxes and insurance, the
primary component of a monthly mortgage payment.
Points – One point equals 1 percent of the mortgage
amount. Points are charged by lender to increase the lender’s return
on the mortgage. Typically, lenders may charge anywhere from zero to two
points. Loan points are tax deductible.
Principle – The loan amount borrowed or still owed.
Private Mortgage Insurance – Insurance issued by
private insurers which protects lenders against a loss if a borrower
defaults on a mortgage with a low down payment (less than 20 percent).
Realtor® –A real estate broker or agent who is a
member of the local Board of Realtors, a state Association of Realtors
and the National Association of Realtors. Realtors adhere to a high
standard of professionalism and strict code of ethics.
Seller financing – A financing agreement in which a
seller provides part (or all) of the financing needed by a buyer to
purchase the seller’s home.
Title –The right of ownership in the property.
Title insurance – Insurance to protect the buyer and
lender against losses arising from disputes over the ownership of
property.
Underwriting – The process of evaluating a loan
application to determine if it meets the lender’s standards.
