The Mortgage Dictionary
Here are some key terms and definitions to familiarize yourself with when starting to look for a home.
Adjustable Rate Mortgage (ARM) - Mortgage in which the rate of interest is adjusted based on a standard rate index. Most ARM's have a cap on how much the rate may increase.
Amortization - The process which the mortgage debt is altered, usually declining, as payments are made to the lender. "Negative Amortization" occurs when monthly payments are too small to cover either the principal or interest reductions.
Annual Percentage Rate (APR) - APR is the rate of interest to be paid on a loan projected life; sometimes referred to as the true rate of interest.
Appraisal - A professional evaluation of the value of a home or other piece of property. It is often required by the lender.
Balloon Mortgage - A real estate loan in which some portion of the debt will remain unpaid at the end of the term of the loan. A balloon will usually result in a single large payment due when the loan ends.
CAP - A limit on how much a mortgage interest rate may increase or decrease for an adjustable rate mortgage.
Conventional Mortgage - This is a mortgage loan with terms and conditions that meet funding criteria of Fannie Mae or Freddie Mac. Rates can be fixed or adjustable. Also known as a conforming loan.
Debt-To-Income Ratio - A ratio used by lending institutions to determine whether a person is qualified for a mortgage. Debt-to-income is the total amount of debt, including credit cards and other loans, divided by the total gross monthly income.
Default - Failure to pay the mortgage payments over a specified period of time.
Discount Points - A percentage of the mortgage paid to the lender to lower the interest rate on a loan. One point equals one percent of the mortgage.
Equity - The difference between the market value of a house and the amount still owed on the mortgage.
Escrow - Money and documents deposited in a trust account to be held by one party for another. Often used by brokers to hold deposit money prior to closing. Also used by lenders to hold money for taxes and insurance on a home.
FHA Loan - A loan guaranteed by the Federal Housing Administration. FHA issues specific guidelines for mortgages.
Loan-To-Value Ratio (LTV) - LTV is the amount of the loan divided by the purchase price of the house. If a refinance, the loan is divided by appraised value.
Margin - A set number of percentage points a lender adds to the index to determine the interest rate for an ARM.
Mortgage Insurance (MI) - Insurance designed to cover the lender should the borrower default on the loan. Depending on the loan to value, this may be required by the lender.
Paper Trail - Copies of all paperwork to cover the lender should the borrower default on the loan.
PITI - PITI stands for principal, interest, taxes and insurance. These are the four mortgage categories in which money is held in ESCROW.
Points - An interest fee charged by the lender. One point is equal to one percent of the mortgage. The use of points allows the lender to raise its yield above the apparent interest rate.
Prepayment Penalty - A fee imposed on a borrower who pays off a mortgage before it is due.
Prequalification - A process by which a potential homebuyer qualifies for a home mortgage before making an offer on a house. A lending institution agrees to make a loan in a specified amount to the person it has pre-qualified.
Principal - The amount of the loan.
Second Mortgage - This is an additional mortgage on a property. It often carries a shorter term and a higher interest rate than the original mortgage.
Title Company - A company that searches for titles and insurance claims. Your loan will close at a title company.
Truth In Lending Act - A federal law that requires lenders to reveal all the terms of the mortgage.
VA Loan - A lower cost loan guaranteed by the Veterans Administration to help veterans and their families obtain home financing. VA loan borrowers must have served in the Armed Forces or be a surviving spouse of a Vet who has not remarried.
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