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Definitions of mortgage
terms
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| 1-year ARM |
An
adjustable-rate
mortgage (ARM) that has an initial
interest rate for one year, and thereafter has an adjustment
interval of one year. The adjustment is based on a comparison
of interest caps and
the indexed rate.
|
| 3/1 ARM |
An
adjustable-rate
mortgage (ARM) that has an initial
interest rate for three years, and thereafter has an adjustment
interval of one year. The adjustment is based on a comparison
of interest caps and
the indexed rate.
|
| 5/1 ARM |
An
adjustable-rate
mortgage (ARM) that has an initial
interest rate for five years, and thereafter has an adjustment
interval of one year. The adjustment is based on a comparison
of interest caps and
the indexed rate. |
| 7/1 ARM |
An
adjustable-rate
mortgage (ARM) that has an initial
interest rate for seven years, and thereafter has an adjustment
interval of one year. The adjustment is based on a comparison
of interest caps and
the indexed rate. |
| 10/1 ARM |
An
adjustable-rate
mortgage (ARM) that has an initial interest rate for 10 years,
and thereafter has an adjustment
interval of one year. The adjustment is based on a comparison
of interest caps and
the indexed rate. |
| Abstract of title |
A written
history of all the transactions that bear on the title
to a specific piece of land. An abstract of title covers the time
from when the property was first sold to the present. Used by the
title
company to produce a title
binder. |
| Acceleration clause |
The
section of a mortgage document that allows the lender to speed up
the payment date in the event of a default, making the entire principal
amount due. |
| Acre |
An
area of land that is 43,560 square feet. |
| Adjustable Rate Mortgage, or ARM |
Mortgage in which the rate of interest is adjusted based on
a standard rate index. Most ARMs have caps on
how much the interest rate may increase. |
| Adjustment interval |
How
often the loan's rate can be changed. |
| Alternative mortgage
products |
7/23 and 5/25 mortgages with a one-time rate adjustment after
seven years and five years, respectively. Also known as a hybrid mortgage
or two-step mortgage. |
| Amortization schedule |
A timetable
for the gradual repayment of a mortgage loan. An amortization schedule
indicates the amount of each payment applied to interest and principal,
and also the remaining balance after each payment is made. |
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| Amortization term |
The
amount of time required to amortize (repay) a mortgage loan. The amortization
term is usually expressed in months. A 30-year fixed-rate
mortgage, for example, has an amortization term of 360 months.
|
| Annual Percentage
Rate (APR) |
A standardized
method of calculating the cost of a mortgage, stated as a yearly rate
which includes such items as interest, mortgage insurance, and certain
points
or credit costs. |
| Appraisal |
A written
report by a qualified appraiser
estimating the value of a property. |
| Appraised value |
An
opinion of a property's fair
market value, based on an appraiser's
inspection and analysis of the property. |
| Appraiser |
A person
qualified by education, training and experience to estimate the value
of real property. |
| Appreciation |
An
increase in the value of a property due to changes in market conditions
or improvements to the property. |
| ARM |
See
Adjustable
rate mortgage. |
| Assessed value |
The
value of a property as determined by a public tax assessor for the
purpose of taxation. |
| Assumable mortgage |
A mortgage
that a buyer can assume, or take over, from the seller of the property. |
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| Balloon mortgage |
A loan
that has regular monthly payments which amortize over a stated term
but call for a final lump sum (balloon payment) at the end of a specified
term, or maturity date, such as 10 years. |
| Basis points |
1/100th of 1 percent. If an interest rate changes 50 basis
points, for example, it has moved 1/2 of 1 percent. |
| Binder |
See
title
binder. |
| Biweekly mortgage |
A mortgage
that schedules payments every two weeks instead of the standard monthly
payment. The 26 biweekly payments are each equal to one-half of the
monthly payment. The result for the borrower is a substantial reduction
in interest payments because the mortgage is paid off sooner. See
also prepayment
plan. |
| Bridge loan |
A loan
that "bridges" the gap between the purchase of a new home and the
sale of the borrower's current home. The borrower's current home is
used as collateral and the money is used to close on the new home
before the current home is sold. Some are structured so they completely
pay off the old home's first
mortgage at the bridge loan's closing, while others pile the new
debt on top of the old. They usually run for a term of six months. |
| Broker |
See
mortgage
broker. |
| Broker premium |
Premium paid to mortgage broker as the "middleman" in the mortgage
process between the lender and the borrower. Lenders offer brokers
wholesale rates; brokers add a surcharge to cover the cost of underwriting
to arrive at the rates charged to borrowers. See underwriter. |
| Built-ins |
Cabinets, ranges, ceiling fans and other items permanently
attached to a structure, and which a buyer may assume will remain
with the structure. |
| Buydown |
The
process of trading money for a lower mortgage rate. The borrower "buys
down" the interest rate on a mortgage by paying discount
points up front. It can also be a mortgage in which an initial
lump-sum payment is made to temporarily reduce a borrower's monthly
payments during the first few years of a mortgage. |
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| Caps |
The
maximum amount the interest rate can change annually or cumulatively
over the life of an adjustable-rate
mortgage. For example, if the caps are 2 percent annual and 6
percent life of loan, a mortgage with a first-year rate of 10 percent
could rise to no more than 12 percent the second year, and no more
than 16 percent over the entire loan term. |
| Certificate of title |
A statement
provided by a title
company or attorney stating that the title
to the real estate is legally held by the current owner. |
| Chattel |
Personal property. |
| Clear title |
A title
that is free of liens or legal questions as to ownership of a piece
of property. |
| Closing |
The
meeting at which the sale of a property is finalized. The buyer signs
the lender agreement for the mortgage and pays closing
costs and escrow
amounts. The buyer and seller sign documents to transfer ownership
of the property. Also known as the settlement. |
| Closing costs |
Expenses incurred by buyers and sellers in transferring ownership
of a property. Closing costs normally include an origination
fee, an attorney's fee, taxes, escrow
payments, and charges for title
insurance. Lenders or Realtors®
provide estimates of closing costs to prospective home buyers. |
| Closing statement |
A financial
disclosure accounting for all funds changing hands at the closing.
See also HUD-1
statement. |
| Cloud on title |
Any
fact or condition that could adversely affect the title. |
| Commission |
In
real estate, the broker or salesperson's fee for assisting the transaction,
usually expressed as a percentage of the total paid by the buyer. |
| Commitment letter |
A formal
offer by a lender stating the approved terms for lending money to
a home buyer. |
| Common area assessment |
A levy
against individual unit owners in a condominium
or planned
unit development to pay for upkeep, repairs and improvements to
the property's common areas, such as corridors, elevators, parking
lots, swimming pools and tennis courts. |
| Comparables or "comps" |
Refers to "comparable properties," which are used for comparative
purposes in the appraisal
process. Comps are recently sold properties that are similar in size,
location and amenities to the home for sale. Comps help an appraiser
determine the fair
market value of a property. |
| Condominium |
A real
estate project in which each unit owner has title
to a unit of the project, and sometimes an undivided interest in the
common areas. |
| Conforming loan |
A loan
that conforms to the standard rules for purchase by Freddie
Mac or Fannie
Mae. |
| Contiguous |
Adjoining or touching. |
| Contingency |
A condition
that must be met before a contract
is legally binding. For example, home buyers often include a contingency
that specifies that the contract is not binding until after a satisfactory
report from a qualified home inspector. See home
inspection. |
| Contract |
In
real estate parlance, the contract is the legal document by which
buyer and seller make offers and counteroffers. The real estate contract
describes the property, includes or excludes items in the property,
names the price, apportions the closing
costs between the parties and sets forth a closing date. When
buyer and seller agree on terms and sign the same document, the property
is said to be "under contract." More formally known as agreement for
sale, purchase agreement or earnest money contract. |
| Conventional mortgage |
Usually refers to a fixed-rate, 30-year mortgage that is not
insured by the FHA,
Farmers Home Administration (FmHA) or Veterans
Administration. |
| Convertible ARM |
An
adjustable
rate mortgage (ARM) that can be converted to a fixed-rate
mortgage under specified conditions. |
| Cooperative, or co-op |
A type
of multiple ownership in which the residents of a multiunit housing
complex own shares in the cooperative corporation that owns the property,
giving each resident the right to occupy a specific apartment or unit. |
| Cost-of-funds index, or COFI |
A yield
index based upon the cost of funds to savings & loan institutions
in the San Francisco Federal Home Loan Bank District. It is one of
the indexes commonly used to set the rate of adjustable
rate mortgages. |
| Covenant |
A written
restriction on the use of land, most commonly in use today in homeowners
associations. |
| Credit report |
A report
on a person's credit history prepared by a credit bureau and used
by a lender in determining a loan applicant's record for paying debts
in a timely manner. |
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| Debt-to-income ratio |
The
percentage of a person's monthly earnings used to pay off all debt
obligations. Lenders consider two ratios, constructed in slightly
different ways. The first, called the front-end ratio, the ratio of
the monthly housing expenses – including principal, interest property
taxes and insurance (PITI)
is compared to the borrower's gross, pretax monthly income. In the
back-end ratio, a borrower's other debts, such as auto loans and credit
cards, are also figured in. Lenders usually take both into account
and set an acceptable ratio, which might be expressed as 33/39. Some
lenders, and some lending qualifying agencies such as FHA,
take only the back-end ratio into account. |
| Deed |
The
legal document conveying title
to a property. |
| Depreciation |
A decline
in the value of property; the opposite of appreciation. |
| Discount points |
A type
of point
(1 percent of a loan) paid by the borrower to reduce the interest
rate. |
| Down payment |
The
amount of a property's purchase price that the buyer pays in cash
and does not finance with a mortgage. |
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| Earnest money deposit |
A deposit
made by potential home buyers during negotiations with the seller.
The sum shows a seller that a buyer is serious about purchasing the
property. |
| Easement |
The
right of another to use property. The most common easements are for
utility lines. |
| 80-10-10 loan |
A combination
of an 80 percent loan-to-value first
mortgage, a 10 percent down
payment and a 10 percent home equity
loan. It would eliminate the need for private mortgage
insurance, and for expensive homes it could eliminate the need
for a jumbo
mortgage by reducing the first mortgage to the conventional $252,700
limit ($379,050 in Alaska and Hawaii). |
| Encumbrance |
A lien,
charge or liability against a property. |
| Equal Credit Opportunity Act |
A federal
law that requires lenders and other creditors to make credit equally
available without discrimination based on race, color, religion, national
origin, age, sex, marital status or receipt of income from public
assistance programs. |
| Eminent domain |
The
right of public agencies to take land for public use. |
| Equity |
The
value of a homeowner's unencumbered interest in real estate. Equity
is the difference between the home's fair
market value and the unpaid balance of the mortgage and any
outstanding liens.
Equity increases as the mortgage is paid down or as the property
enjoys appreciation.
|
| Escrow payment |
The
portion of a homeowner's monthly mortgage payment that is held by
the loan servicer
to pay for taxes and insurance. Also known as reserves. The loan servicer
holds the escrow funds separately from money meant to pay off principal
and interest. |
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| Fair Credit Reporting
Act |
A consumer
protection law that regulates the disclosure of consumer credit
reports by credit reporting agencies and establishes procedures
for correcting mistakes on a person's credit record. |
| Fair market value |
A fair
price for a home based on recent sales of properties of similar size
and quality in the neighborhood. |
| Fannie Mae |
Nickname for Federal National Mortgage Association. It is a
government-chartered non-bank financial services company and the nation's
largest source of financing for home mortgages. It was started to
make sure mortgage money is available in all areas of the country. |
| Federal Housing
Administration (FHA) |
An
agency of the U.S. Department of Housing and Urban Development (HUD)
that insures residential mortgage loans made by private lenders. The
FHA sets standards for construction and underwriting
but does not lend money. |
| FHA mortgage |
A mortgage
insured by the Federal Housing Administration (FHA). |
| First mortgage |
A mortgage
that is the primary lien against
a property. |
| Fixed-rate mortgage |
A mortgage
in which the interest rate does not change during the entire term
of the loan, most often 15 years or 30 years. |
| Flood insurance |
Insurance that compensates for physical property damage resulting
from rising water. It is required for properties located in federally
designated flood areas. |
| Foreclosure |
The
legal process by which a homeowner in default on a mortgage is deprived
of interest in the property. This usually involves a forced sale of
the property at public auction with the proceeds of the sale being
applied to the mortgage debt. |
| Freddie Mac |
Nickname for Federal Home Loan Mortgage Corp. A financial corporation
chartered by the federal government to buy pools of mortgages from
lenders and sell securities backed by these mortgages. |
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