Additional principal payment: A payment made by a borrower of more than the scheduled principal amount due in order to reduce the outstanding balance on the loan, to save on interest over the life of the loan and/or pay off the loan early.
Adjustable-Rate Mortgage (ARM): A mortgage in which your interest rate and monthly payments may change periodically during the life of the loan, based on the fluctuation of an index. Lenders may charge a lower interest rate for the initial period of the loan. Most ARMs have a rate cap that limits the amount the interest rate can change, both in an adjustment period, and over the life of the loan. Also called a variable-rate mortgage.
Amortization: The gradual reduction in the principal amount owed on a debt. During the earlier years, most of each payment is applied toward the interest owed. During the final years of the loan, payment amounts are applied almost exclusively to the remaining principal (unless there has been negative amortization).
Amortization Table or Schedule: A timetable or schedule that gives you a breakdown of your monthly payments into principal and interest. You can use this schedule to figure out the amount of principal you’ll be repaying during your mortgage term.
Annual Percentage Rate (APR): The annual cost of a loan to a borrower. Like an interest rate, the APR is expressed as a percentage. Unlike an interest rate, however, it includes other charges or fees (such as mortgage insurance, most closing costs, discounts points and loan origination fees) to reflect the total cost of the loan. The Federal Truth in Lending Act requires that every consumer loan agreement disclose the APR. Since all lenders must follow the same rules to ensure the accuracy of the APR, borrowers can use the APR as a good basis for comparing the costs of similar credit transactions.
Appraisal: An informed estimate of the value of a property. When made in connection with an application for a loan secured by a home, a professional appraiser usually performs the appraisal.
Balloon Loan: A short-term loan with smaller payments for a certain period of time, and one or more large payments for the remaining principal amount, due at a specified time.
Balloon Payment: A lump-sum payment, which is larger than your regular periodic payment, that’s paid at the end of your loan repayment period.
Broker: A third party who arranges funding or negotiates a contract between parties, but does not lend the money.
Broker Fees: Fees charged by a real estate broker or a mortgage broker for providing assistance in a real estate transaction.
Cash Available for Closing: Borrower funds that are available to cover down payment and closing costs. If lending guidelines require the borrower to have cash reserves at the time the loan closes or that the down payment come from specified sources, the borrower’s cash available for closing does not include cash reserves or money from other sources.
Cash to Close: The amount a homebuyer needs in cash at the closing of the loan. Typically, this includes down payment and closing costs.
Cash-out Refinance: A refinance transaction in which the new loan amount exceeds the total of the principal balance of the existing first mortgage and any secondary mortgages or liens, together with closing costs and points for the new loan. This excess is usually given to the borrower in cash and can often be used for debt consolidation, home improvement, or any other purpose. The borrower effectively borrows against the home’s available equity.
Ceiling: The maximum interest rate that can accrue on a variable rate loan or adjustable-rate mortgage (ARM).
Close: The Close step is the date you will sign and execute your new loan documents.
Depending on the location of the property or type of transaction, the three business days right of rescission period may apply before your funds are available to you.
The three business days right of rescission period states that in certain real estate secured transactions that involve the refinance of a primary residence, the Truth in Lending Act allows applicants 3 business days to cancel the transaction and prohibits lenders from disbursing proceeds until after the rescission period has lapsed.
Closing: The time and place, at which all documents for your loan are signed, dated, and notarized. See also: settlement.
Closing Costs: Closing costs, also known as settlement costs, are the costs incurred when obtaining your loan. For new purchases, these costs also include ownership transfer of any collateral property from the seller to you. Costs may include and are not limited to: attorney’s fees, preparation and title search fees, discount points, appraisal fees, title insurance, and credit report charges. They are typically about 3% of your loan amount, and they are often paid at or just before your loan closes.
Funds often needed to close a loan, such as homeowners insurance, property taxes, and escrow impound account funds, aren’t included in closing costs and are considered separate. You should be prepared to pay these costs before your loan closes.
Closing Date: The date you will sign your new loan documents.
Closing Disclosure (CD): A closing document which provides key information such as interest rate, monthly payments, and costs to close the loan. Consumers are required to receive this form no later than 3 business days before they close on the loan.
Closing Statement: An accounting of funds given to both buyer and seller before real estate is sold.
Co-borrower: An additional person who assumes equal responsibility for repayment of a loan and is fully obligated under the terms of the loan. This person also has equal rights to the proceeds of the loan.
Collateral: An asset, such as a car or a home, used for securing the repayment of a loan. The borrower risks losing the asset if the loan is not repaid.
Collection: The efforts used to bring a delinquent loan current and, if necessary, to file legal papers and notices to proceed with foreclosure.
Combined loan-to-value ratio (CLTV): The ratio between the unpaid principal amount of your first mortgage, plus your credit limit if you have a home equity line of credit, and the appraised value of your home. Expressed as a percentage.
Condominium (condo): A building or development with many housing units where each person owns his or her individual unit and shares an interest in the common areas and facilities of the entire project. You go through the same process of buying a condo as you do when buying a house, and have a deed to and a mortgage on your particular unit. You also pay property taxes on your unit.
Conforming Loan: A mortgage loan that has the standard features as defined by and is eligible for sale to Fannie Mae and Freddie Mac.
Consumer Reporting Agency (bureau): An organization that prepares reports that lenders use to determine a potential borrower’s credit history. The agency obtains data for these reports from a credit repository as well as from creditors such as mortgage lenders, credit card companies, department stores, etc.
Co-signer: A second person who signs your loan and assumes equal responsibility for payment of the loan but receives no benefit from the loan proceeds.
Credit: An arrangement in which a borrower receives something of value in exchange for a promise to repay the lender at a later date.
Credit Bureau: An organization that gathers, records, updates and stores financial and public records of individuals who have been granted credit and provides this information to lenders and other authorized users for a fee.
Credit History: A record of an individual’s debts and payment habits over time. It helps a lender determine whether or not a potential borrower is a good business risk.
Credit Report: A record of an individual’s debts and payment habits. It helps a lender determine whether or not a potential borrower is a good business risk.
Debt-to-income ratio: Debt-to-income ratio is the percentage of your gross monthly income (before taxes are taken out) that you pay toward debt (loans, credit cards, court-ordered payments), as well as your projected total monthly home payment. It also will include HOA dues and private mortgage insurance, if applicable.
Deed (warranty or quit-claim): A document that legally transfers ownership of real estate from a seller to a buyer. It’s delivered to the buyer at closing. Before making a loan, a lender will usually require a title search or a title report to make sure the borrower legally owns the real estate that is to secure the loan.
Default: Failure to make mortgage payments on time or to meet other terms of a loan. Default can lead to foreclosure.
Delinquency: Failure to make payments on time.
Department of Veterans Affairs: An agency of the federal government that guarantees residential mortgages made to eligible veterans of the military services. The guarantee protects the lender against loss and thus encourages lenders to make mortgages to veterans.
Disclosures: Information given to consumers about their loans.
Discount Points: Typically, it’s an amount usually paid at closing to the lender in conjunction with a mortgage loan in order to lower or “buy down” the interest rate. One discount point equals one percentage point of the loan amount. For example, two points on a $100,000 mortgage would cost $2,000. Negative points reflect the amount that will be credited to you and reduce the amount of closing costs you will pay. Also called mortgage points or points.
Down Payment: The amount of cash you pay toward the purchase of your home to make up the difference between the purchase price and your mortgage loan. Down payments often range between 5% and 20% of the sales price depending on many factors, including your loan, your lender, your credit history, and so forth.
Earnest Money: A deposit made by the potential home buyer to show that he or she is serious about buying the house.
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.
Fair Market Value: The likely selling price of a home between a willing buyer and a willing seller on the open market. In a mortgage, the fair market value is usually determined by an appraisal.
Fannie Mae: Federal National Mortgage Association, a government-sponsored enterprise that buys and securitizes mortgages for resale in the secondary market.
Federal Housing Administration (FHA): An agency of the Department of Housing and Urban Development. The FHA provides mortgage insurance for certain residential mortgages. It sets standards for underwriting these mortgages and for construction of homes secured by these mortgages.
FHA Home Loan: A mortgage home loan that is insured by the Federal Housing Administration (FHA). Also known as a government loan. FHA mortgage insurance protects the lender (not the borrower) if a borrower defaults on the FHA loan. This insurance enables a lender to provide loan options and benefits often not available through conventional financing.
FICO®: An acronym for Fair Isaac Corporation, which develops the mathematical formulas used to produce credit scores for assessing credit risk. FICO scores fall between a low of 300 and a high of 850. The higher the FICO score, the lower credit risk a consumer presents.
Fixed-Rate Mortgage: A home loan with a predetermined fixed interest rate for the entire term of the loan.
Flood Certification: A determination by a reputable source about whether property is located within a special flood hazard zone.
Flood Insurance: Insurance that protects against loss due to floods. When available, this type of insurance is required by law when a property is located within a special flood hazard zone.
Foreclosure: A legal procedure in which property securing a defaulted loan is sold by the lender in order to repay a borrower’s loan. The amount paid by a buyer at the foreclosure may not be enough to fully repay the loan and the borrower may continue to owe the lender the difference.
Freddie Mac: A government-sponsored enterprise that buys and securitizes mortgages for resale in the secondary market.
Fully Amortized Loan: A mortgage loan where the borrower makes payments that are applied first to interest and then to principal, and that gradually reduce the principal balance to zero.
Funding Date: The date on which the proceeds from a loan are available to or disbursed for the benefit of the borrowers.
Gift Funds: The funds a borrower receives that do not have to be paid back. The gift is often from a family member to be used towards a down payment on a home purchase.
Good Faith Estimate (GFE): An itemized, detailed list of certain estimated costs associated with a home loan that the lender is required to provide to the borrower within three business days of the application.
Government Loan: A loan that is insured by the Federal Housing Administration (FHA), guaranteed by the Department of Veterans Affairs (VA), or the Rural Housing Service (RHS). The insurance protects the lender (not the borrower) if a borrower defaults on the loan. This insurance enables a lender to provide loan options and benefits often not available through conventional financing.
Government National Mortgage Association (GNMA or Ginnie Mae): A government-owned corporation within the U.S. Department of Housing and Urban Development (HUD). Created by Congress on September 1, 1968, GNMA assumed responsibility for the special assistance loan programs formerly administered by Fannie Mae.
Hazard Insurance: Insurance to protect your home against damage from fire, hurricanes and other catastrophes. Usually, hazard insurance also covers you against theft and vandalism, as well as personal liability in case someone is hurt or injured on your property. A lender will likely require you to name it as a payee under the insurance if you need to make a claim. Also called homeowners insurance.
Home equity line of credit (HELOC): A line of credit secured by the borrower’s residence. The typical HELOC term is 30 years: a 10-year draw period followed by a 20-year repayment period. A HELOC is often used for home improvements, debt consolidation or other major expenses. In most cases, you can withdraw funds up to your available credit limit for the first 10 years (your “draw period”) using convenience checks, debit cards or money transfer via Online Banking.
Home Inspection: An inspection of the condition of a property. A third party conducts the inspection, which includes all major appliances and structural elements. If an inspector finds something wrong, and your sales contract allows you to, you can request that the seller pay for the repairs. If the seller refuses, and your sales contract allows you to, you may not have to proceed with the purchase of the home.
Home payment: The total amount a homeowner spends on their home loan each month, including all required payments. This will consist of principal, interest, property taxes, and homeowner’s insurance (or PITI), plus any private mortgage insurance or homeowner’s association dues that may apply.
Home Warranty: A type of insurance that covers repairs to specified parts of a house for a specific period of time. The builder or property seller as a condition of the sale may provide it, but homeowners can also purchase it.
Homeowners Association: An organization of property owners that administers the rules and upholds the covenants of a subdivision, development, or condominium complex.
Homeowners Insurance: Insurance to protect your home against damage from fire, hurricanes and other catastrophes. Usually, hazard insurance also covers you against theft and vandalism, as well as personal liability in case someone is hurt or injured on your property. A lender will likely require you to name it as a payee under the insurance if you need to make a claim. Also called Hazard Insurance.
HUD: An acronym for the U.S. Department of Housing and Urban Development. HUD is a government agency that is responsible for the implementation and administration of housing and urban development programs.
HUD-1 Settlement Statement: A closing document, which provides an itemized list of the credits and charges, for both the buyer and the seller, based on the contract terms.
Impound Account (escrow account): An account specifically set up by a lender to hold funds that are set aside for the payment of property taxes and insurance. These funds are held in escrow until disbursed on behalf of the borrower to the appropriate parties.
Impounding: The collection and placement of monies by a lender into a fund in order to pay the borrower’s property taxes and insurance premiums when they become due.
Income: Regular income from earnings, commissions, investments, rental payments or other sources.
Interest-only Loan: A loan for which you pay only the interest due for a portion of the loan term. This lowers your periodic payment but does not decrease your principal balance on the loan.
Interest Payment: The portion of a monthly payment that goes to interest based on the amortization schedule.
Interest Rate: The annual cost of a loan to a borrower, usually expressed as a percentage. The interest rate does not include fees charged for the loan. See also: Annual percentage rate (APR).
Interest-only Payments: Some lenders permit you to pay only the interest due on a loan for a portion of the loan term, which lowers your periodic payment during that period, but does not decrease your principal balance on the loan. Making interest-only payments will result in larger payments being due (“payment shock”) at the end of the interest-only payment period. See also: balloon loan and balloon payment.
Jumbo Loan: Also known as a nonconforming loan. The amount of the loan exceeds standards that would make it eligible for sale to Fannie Mae and Freddie Mac. Certain geographical areas have temporary conforming loan limits higher than typical conforming limits. Lenders may charge additional fees and place certain restrictions due to the large loan amounts.
Late Charge (fee): The penalty charged to the borrower when a payment is made past the due date or any allowable grace period.
Lender: An individual or business entity making a loan (i.e. LHM Financial dba CNN Mortgage)
Loan Amount: The amount of debt, not including interest.
Loan Application: The process of providing financial and other information (such as employment history and proposed collateral) by a prospective borrower in conjunction with a request for credit.
Loan Commitment: A formal notification from a lender stating that the borrower’s loan has been conditionally approved and specifying the terms under which the lender agrees to make the loan.
Loan Origination: The process by which a mortgage lender makes a home loan and records a mortgage against the borrower’s real property as security for repayment of the loan.
Loan Term: The period of time during which a loan must be repaid. For example, a 30-year fixed loan has a term of 30 years. Also called term. See also: maturity date.
Loan-to-Value Ratio (LTV ratio): The ratio between the unpaid principal amount of your loan, or your credit limit in the case of a line of credit, and the appraised value of your collateral. Expressed as a percentage.
Mortgage Insurance: For conventional loans, insurance that protects the lender if you default on your loan. If your down payment is less than 20%, most lenders will require you to pay mortgage insurance. Also called private mortgage insurance (PMI).
Mortgage Points: Typically, it’s an amount usually paid at closing to the lender in conjunction with a mortgage loan in order to lower the interest rate. One discount point equals one percentage point of the loan amount. For example, two points on a $100,000 mortgage would cost $2,000. Negative points reflect the amount that will be credited to you and reduce the amount of closing costs you will pay. Also called discount points or points.
Mortgage Type: There are three basic mortgage programs: Federal Housing Administration (FHA) loans, Department of Veterans Affairs (VA) loans and conventional mortgage loans. VA loans are only offered to qualifying veterans and surviving spouses, while FHA loans are available to all qualifying borrowers. Both VA and FHA loans are guaranteed/insured by the federal government. This insurance protects the lender (not the borrower) should the borrower default and the lender sustains a loss. Conventional loans are available to all qualifying borrowers and are not insured or guaranteed by the federal government.
Mortgagee: The lender or other party named in the mortgage as the party who’s entitled to receive repayment of the home loan.
Mortgagor: The borrower, or other party named in the mortgage as the party obligated to repay the home loan.
Note: A written agreement in which the signer promises to pay to a named person or company a specific sum of money at a specified date or on demand.
P & I: An abbreviation meaning principal and interest. Principal and interest accounts for the majority of your mortgage payment, but it doesn’t include escrow payments for taxes, insurance and any other costs that are paid monthly, or fees that periodically come due.
PMI: An acronym for private mortgage insurance. If your down payment is less than 20% on a conventional loan, most lenders will require you to get private mortgage insurance. This is insurance that protects the lender if you default on your loan. Also called mortgage insurance.
Points: Typically, it’s an amount usually paid at closing to the lender in conjunction with a mortgage loan in order to lower the interest rate. One discount point equals one percentage point of the loan amount. For example, two points on a $100,000 mortgage would cost $2,000. Negative points reflect the amount that will be credited to you and reduce the amount of closing costs you will pay. Also referred to as discount points or mortgage points.
Preapproval: A lender’s conditional agreement to lend a specific amount on specific terms, to a homebuyer.
Prepaid Interest: The interim interest that’s collected at closing of a first mortgage, covering the period from the date of disbursement to the start of the next payment period.
Prepayment Penalty: A penalty assessed by some lenders if a loan is paid off before the specified term. This is a lump-sum amount due and payable in addition to the loan balance, and is usually limited to the early years of a mortgage. A prepayment penalty is called a “hard” penalty if it applies when you sell or refinance your home or a “soft” penalty if it applies only to refinancing. Not all loans have prepayment penalties.
Primary Applicant: The applicant whose name appears first on the application.
Primary Residence: This is the home in which a borrower resides most of the time.
Principal: The amount of money borrowed on a loan.
Principal and Interest: The principal is the amount of money borrowed on a loan. The interest is the charge paid for borrowing money. Principal and interest accounts for the majority of your mortgage payment, but it doesn’t include escrow payments for property taxes, homeowners insurance, mortgage insurance and any other costs that are paid monthly, or fees that may come due.
Principal Balance: The unpaid portion of the loan amount. The principal balance does not include interest or any other charges.
Private Mortgage Insurance (PMI): If your down payment is less than 20%, most lenders will require you to get private mortgage insurance. This is insurance that protects the lender if you default on your loan. This insurance usually costs from 0.15% to 2.5% of the loan amount. Also called mortgage insurance.
Processing Fee: A fee charged to cover the administrative costs of processing a loan request.
Promissory Note: A written promise to repay a specified amount over a specified period of time.
Property Tax: A fixed percentage based on the appraised value of your home that you pay to the county in which the home is located. The specific percent varies dramatically from county to county in every part of the country. You pay this tax annually, semiannually or as part of your monthly mortgage payments. Depending on when you actually close your loan, some of this property tax may be due at the time of closing. The local county assessor’s office can give you the rate for your county.
Quitclaim Deed: A deed that transfers, without warranty of ownership, whatever interest or title a grantor may have at the time the conveyance is made.
Rate: The rate of interest on a loan, expressed as a percentage.
Rate Lock: A commitment issued by a lender to a borrower guaranteeing a specific interest rate for a specified period of time.
Refinance: Paying off your existing loan with the proceeds from a new loan, generally using the same property as collateral, in order to take advantage of lower monthly payments, lower interest rates, or save on financing costs.
Reverse Mortgage: A mortgage product available to homeowners who are at least 62 years of age that enables them to remain in their home and receive periodic payments secured by the home’s equity. Rather than paying a monthly mortgage payment to the lender, the homeowner receives funds from the lender.
Title: Written evidence of ownership in property.
Title Company: The agency that will investigate a property’s title (or deed) for discrepancies or undiscovered liens and that will issue title insurance to the lender after the title is deemed clear. Also see Title insurance.
Truth in Lending Act: A federal law requiring disclosure of credit terms using a standard format. This is intended to facilitate comparisons between the lending terms of different financial institutions.
Types of Loans: Major types of loans include:
- Purchase money loan—a loan used to pay for your home
- Home equity line of credit—money borrowed against the equity in your home
- Consolidation loan—a loan used to pay off more than one debt
- Refinance loan—a loan used to repay an existing mortgage loan
Underwriter: The person who approves or denies a home loan, based on the lender’s underwriting and approval criteria.
Underwriting: The lender’s process of deciding whether to make a loan to a potential borrower based on credit, employment, assets, and other factors, and the matching of this risk to an appropriate rate, term, and loan amount.
Upfront Costs: The costs you must pay when applying for a loan. Typically these include loan application fees. Some lenders require some of your closing costs also be paid when you apply.
VA Loan: A mortgage that is guaranteed by the Department of Veterans Affairs (VA) for qualified veterans of U.S. military forces. Also known as a government loan.