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Glossary of Home Loan Terminology

What do all these mortgage terms mean? We explain them below.

Adjustable Rate Mortgage (ARM)

A mortgage where the interest rate is not fixed for the life of the loan. These mortgages adjust periodically based on an index that changes with market conditions. The rate of interest is the sum of the index plus a margin. The margin remains fixed for the life of the loan. Most ARMs have periodic interest rate and payment caps as well as a life cap.

Annual Percentage Rate (APR)

A measure of the cost of credit expressed as a yearly rate. It includes interest as well as other charges. Because all lenders follow the same rules to ensure the accuracy of the Annual Percentage Rate, it provides consumers with a good basis for comparing the cost of loans, including mortgage plans.

Appraised Value

An opinion of the value of a property at a given time based on facts regarding the location, improvements, etc., of the property and surroundings.

Assumption

New owner takes over the responsibility of repaying an existing mortgage. Both FHA and VA loans are fully assumable. Some adjustable rate mortgages may be partially assumable, but the new owners may be required to re-qualify for the loan.

Automated Valuation Analysis

An electronic report used to determine the value of real estate based on closed sales of similar homes in the neighborhood.

Balloon Note

A note calling for periodic payments which are insufficient to fully amortize the face amount of the note prior to maturity so that a principal sum known as a Balloon is due at maturity.

Cap

Caps are used in adjustable rate mortgages (ARMs) to limit the interest rate and/or the payment. Most ARMs have a periodic cap that is around 2% per year and a life cap of around 5%-6% over the life of the loan. Payment only caps sometimes create negative amortization where the principal balance of the loan increases rather than decreases over time.

Certificate of Occupancy

Document issued by a local governmental agency that states a property meets the local building standards for occupancy.

Closing

Conclusion of a real estate sale, where the title of the property is transferred to the new owners and funds are transferred to the appropriate parties (seller, old lender, real estate broker, etc.). Usually takes 30 days from date of signing sales contract before closing on a home.

Closing Costs

Expenses incurred by the buyer/borrower and the seller in a real estate or mortgage transaction. There can be non-recurring costs that include points, appraisal fees, etc. that are a one-time charge or recurring cost such as taxes and insurance that incur while the new buyer/borrower owns the real estate.

Commitment

A written promise to make or insure a loan for a specified amount and on specified items.

Condominium

A structure of two or more units, the interior space of which are individually owned.

Contract of Sale

A purchase transaction in which the buyer receives possession of the property but the seller retains title.

Conventional Loan

A mortgage loan that is not guaranteed or issued by the government. FHA and VA loans are not conventional loans.

Convertible ARMs

ARMs that have a provision allowing the borrower to convert the mortgage to a fixed rate term. The conversion feature is outlined in the mortgage note and has certain restrictions.

Deed or Trust/Mortgage

An instrument given by the borrower to a third party (trustee) vesting title to the property in the trustee as security for the borrower’s repayment of the mortgage loan.

Documentary Tax Stamps

Stamps, affixed to a deed, and/or mortage showing the amount of transfer tax.

Equity

The difference between the market value of the property and the homeowner’s mortgage debt.

Escrow

It can be the delivery of a deed by a grantor to a third party for delivery to the grantee upon the occurrence of a contingent event. Escrows include funds given to a third party to be held until a specific occurrence; may refer to earnest money deposit; can also include a lender collecting and paying the taxes and insurance on behalf of the borrower.

First Mortgage

Mortgage holding priority over the claims of subsequent lenders against the same property.

Hazard Insurance

Insurance on a property against fire and similar risk.

Homeowners Association

An association of people who own homes in a given area for the purpose of improving or maintaining the quality of the area.

Interest Rate

The percentage of an amount of money which is paid for its use for a specified time.

Loan Discount/Premium Fees

Fees that borrowers pay (sometimes seller will pay for borrower) that adjust to the yield requirement of the investor. Loan discount denotes an investor yield requirement higher than the note rate. Loan premium denotes an investor yield requirement lower than the note rate.

Loan Origination Fees

The cost to obtain a loan that is paid to the originating lender or broker.

Loan to Value

A percentage of the loan versus the value of the collateral. The loan to value is calculated by dividing the loan by the value of the collateral. For example, a loan amount of $80,000 divided by a home worth $100,000 equals 80% Loan to Value.

Margin

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

Mortgage Insurance/PMI

Private Mortgage Insurance required for loans with a loan amount above 80.01%. Mortgage insurance is not required for our Affordable Home Loan Program. Insurance issued by a company which insures the lender against loss in the event that the borrower defaults on the mortgage.

PITI

Abbreviation for principal, interest, taxes and insurance, often lumped together in a monthly payment.

Prepaid interest

Prepaid interest is the interest charged to borrowers at loan closing to pay for the cost of borrowing for a partial month. For example, if a loan closed on the 15th of the month, and the 1st payment is due 45 days later, the lender will charge 15 days of prepaid interest.

Title Insurance

An insurance policy which protects the insured (purchaser and lender) against loss arising from defects in title.

Truth in Lending Statement (Regulation Z)

A federal government regulation that provides the details of the cost of obtaining a mortgage loan. Lenders must provide this shortly after the loan application has been completed.

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