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| adjustable-rate
mortgage (ARM) |
| A mortgage in which the interest rate
(and therefore the monthly payment) can fluctuate up (or
down) during the life of the loan. Depending on the specific
loan terms, your interest rate may change every six or
12 months. Because the initial interest rate is often
lower for an adjustable-rate loan, the monthly payments
during the first few years may be lower than a fixed-rate
loan. Some homebuyers prefer the adjustable-rate mortgage
if they do not expect to stay in the home for more than
a few years, or if they think interest rates are heading
down. |
| amortization |
| A way that you will you repay your
mortgage gradually through regular equal monthly payments
of principal and interest. The amounts of these payments
are calculated to let you own your home debt-free at the
end of a fixed period of time. During the first few years
of your loan, most of the payment will be applied to interest.
During the final years, most of the payment will be applied
to principal. This type of repayment method is called
amortization. |
| APR (annual percentage rate) |
| The total cost of the mortgage, expressed
as a percentage of the loan amount. Unlike the base interest
rate (which only includes interest), the APR includes
all costs associated with your loan, including points,
origination fees, PMI, etc. Because different lenders
charge different fees, the APR is a good way to compare
the total cost of a loan from various lenders. |
| appraisal |
| An estimate of the value of property,
made by a qualified professional called an "appraiser."
This value is determined by comparing your property to
others which have sold recently in your area. |
| assessment |
| A local tax levied against a property
for a specific purpose, such as the addition of a sewer
or street lights. |
| assumption |
| The agreement between buyer and seller
in which the buyer takes over the payments on an existing
mortgage from the seller. This agreement assumes a loan
may save the buyer money since this is an existing mortgage
debt, unlike a new mortgage where closing costs, and new,
probably higher, market-rate interest charges will apply. |
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| balloon
mortgage |
| A loan which is amortized for a longer
period than the term of the loan. Usually this refers
to a 30-year amortization and a five-year term. At the
end of the term of the loan, the remaining outstanding
principal on the loan is due. This final payment is known
as a balloon payment. |
| borrower (mortgagor) |
| One who applies for and receives a
loan in the form of a mortgage with the intention of repaying
the loan in full. |
| broker |
| An individual in the business of assisting
in arranging funding or negotiating contracts for a client,
but who does not lend money himself. Brokers usually charge
a fee or receive a commission for their services. |
| buy-down |
| A mortgage subsidy that is sometimes
offered by a homebuilder to help buyers afford the property.
The builder pays a portion of the interest payment for
a few months (or sometimes a few years), thereby lowering
the initial monthly payment for the buyer. |
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| caps (interest) |
| Consumer safeguards which limit the
amount the interest rate on an adjustable rate mortgage
which may change per year and/or the life of the loan. |
| caps (payment) |
| Consumer safeguards which limit the
amount that monthly payments on an adjustable-rate mortgage
may change. |
| certificate of eligibility |
| The document given to qualified veterans
entitling them to VA-guaranteed loans. Certificates of
eligibility may be obtained by sending form DD-214 (Separation
Paper) to the local VA office with VA form 1880 (request
for Certificate of Eligibility). |
| certificate of reasonable value
(CRV) |
| An appraisal issued by the Veterans
Administration showing the property's current market value. |
| certificate of veteran status |
| The document given to veterans or reservists
who have served 90 days of continuous active duty (including
training time). It may be obtained by sending DD 214 to
the local VA office with form 26-8261a (request for certificate
of veteran status. This document enables veterans to obtain
lower down payments on certain FHA-insured loans). |
| closing |
| The meeting between the buyer, seller
and lender or their agents where the property and funds
legally change hands. Also called settlement. Closing
costs usually include an origination fee, discount points,
appraisal fee, title search and insurance, survey, taxes,
deed-recording fee, credit report charge and other costs
assessed at settlement. Closing costs are usually about
3 to 6 percent of the mortgage amount. |
| closing costs |
| All upfront fees and charges related
to the home purchase, excluding the down payment. Closing
costs may include points or other origination fees, any
prepaid interest, prorated property taxes (if any), etc.
For most loans, the closing costs are paid by the buyer
at the close of escrow. |
| COFI |
| Adjustable-rate mortgage with rate
that adjusts based on a cost-of-funds index, often the
11th District Cost of Funds. |
| conventional loan |
| A mortgage not insured by FHA or guaranteed
by the VA. |
| credit report |
| A report from an independent credit-rating
service (such as TRW or Equifax) listing a person's current
obligations to various creditors, including credit card
companies, car payments, student loans, etc. The report
shows how much is owed, as well as whether payments are
generally made on time. A credit report is a required
document when applying for a home loan. |
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| debt-to-income
ratio |
| The ratio, expressed as a percentage,
which results when a borrower's monthly-payment obligation
on long-term debts is divided by their gross monthly income.
See housing expenses-to-income ratio. |
| deed of trust |
| In many states, this document is used
in place of a mortgage to secure the payment of a note. |
| default |
| Failure to meet legal obligations in
a contract; specifically, failure to make the monthly
payments on a mortgage. |
| delinquency |
| Failure to make payments on time. This
can lead to foreclosure. |
| department of veterans affairs (VA) |
| An independent agency of the federal
government which guarantees long-term, low or no-down
payment mortgages to eligible veterans. |
| discount point |
| See point. |
| down payment |
| The portion of the purchase price which
a buyer pays before moving in. Often, the down payment
is expressed as a percentage of the total purchase price,
typically between 3 and 20. If you have never owned a
home before, your down payment often comes from personal
savings, an employer-sponsored 401K program, or other
source. If you are selling one home in order to buy another,
then your down payment usually comes from the equity in
your current home. In addition to the down payment, there
are usually other costs and fees called closing costs
which a buyer needs to pay before moving in. See closing
costs. |
| due-on-sale clause |
| A provision in a mortgage or deed of
trust that allows the lender to demand immediate payment
of the balance of the mortgage if the mortgage holder
sells the home. |
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| earnest
money |
| Money given by a buyer to a seller
as part of the purchase price to bind a transaction or
assure payment. |
| entitlement |
| The VA home loan benefit is called
an entitlement (i.e., entitlement for a VA-guaranteed
home loan). This is also known as eligibility. |
| Equal Credit Opportunity Act
(ECOA) |
| A federal law that requires lenders
and other creditors to make credit available without discrimination
based on race, color, religion, national origin, age,
sex, marital status or receipt of income from public assistance
programs. |
| equity |
| The difference between the fair market
value and current debt owed on the property. |
| escrow |
| An account held by a mortgage company
into which the homebuyer pays money for their tax or insurance
payments. |
| escrow period |
| The period between the time when you
sign a purchase contract and when you actually take possession
of the home. During this period, a buyer deposits a series
of payments to a neutral third party (called the Escrow
Company), covering the down payment and closing costs.
At the end of the process, the Escrow Company gives the
payments to the builder, and the buyer takes possession
of the house. Depending on circumstances, this process
typically takes from one week to 45 days. |
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| Fannie
Mae |
| See Federal National Mortgage Association. |
| Farmers Home Administration (FmHA) |
| Provides financing to farmers and other
qualified borrowers who are unable to obtain loans elsewhere. |
| Federal Home Loan Mortgage Corporation
(FHLMC) also called "Freddie Mac" |
| Is a quasi-governmental agency that
purchases conventional mortgage from insured depository
institutions and HUD-approved mortgage bankers. |
| Federal Housing Administration
(FHA) |
| A division of the Department of Housing
and Urban Development. Its main activity is the insuring
of residential mortgage loans made by private lenders.
FHA also sets standards for underwriting mortgages. |
| Federal National Mortgage Association
(FNMA) also called "Fannie Mae" |
| A tax-paying corporation created by
Congress that purchases and sells conventional residential
mortgages as well as those insured by FHA or guaranteed
by VA. This institution, which provides funds for one
in seven mortgages, makes mortgage money more available
and more affordable. |
| FHA loan |
| A loan insured by the Federal Housing
Administration open to all qualified home purchasers.
While there are limits to the size of FHA loans which
vary by region, they are generous enough to handle moderately-priced
homes in most areas. |
| FHA mortgage insurance |
| Requires a fee, which is usually financed
and is currently 1.5% of the loan amount for a 30-year
loan, to be paid at closing to insure the loan with FHA.
In addition, FHA mortgage insurance requires an annual
fee of up to 0.5 percent of the current loan amount, paid
in monthly installments. The lower the down payment, the
more years the fee must be paid. |
| FHLMC |
| The Federal Home Loan Mortgage Corporation
provides a secondary market for savings and loans by purchasing
their conventional loans. Also known as "Freddie
Mac." |
| fixed-rate mortgage |
| A mortgage in which the interest rate
(and therefore the monthly payment) remains the same for
the entire life of the loan. 30-year and 15-year fixed-rate
mortgages are industry standards. Many homebuyers prefer
a fixed-rate loan because the payment amount never changes. |
| FNMA |
| The Federal National Mortgage Association
is a secondary mortgage institution which is the largest
single holder of home mortgages in the United States.
FNMA buys VA, FHA, and conventional mortgages from primary
lenders. Also known as "Fannie Mae." |
| foreclosure |
| A legal process by which the lender
forces a sale of a mortgaged property because the borrower
has not met the terms of the mortgage. Also known as a
repossession of property. |
| Freddie Mac |
| see Federal Home Loan Mortgage Corporation. |
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| Ginnie
Mae |
| see Government National Mortgage Association. |
| good-faith estimate |
| A line item estimate from a lender
of total closing costs. |
| Government National Mortgage
Association (GNMA) |
| Also known as "Ginnie Mae,"
provides sources of funds for residential mortgages, insured
or guaranteed by FHA or VA. |
| guaranty |
| A promise by one party to pay a debt
or perform an obligation contracted by another if the
original party fails to pay or perform according to a
contract. |
| hazard
insurance |
| A form of insurance in which the insurance
company protects the insured from specified losses, such
as fire, windstorm and the like. |
| homeowner's insurance |
| Insurance including hazard coverage
that insures for damages that may affect the value of
a house, in addition to personal liability and theft coverage.
Available through KB Home Insurance Agency, Inc. |
| housing expenses-to-income ratio |
| The ratio, expressed as a percentage,
which results when a borrower's housing expenses are divided
by his/her gross monthly income. See debt-to-income ratio. |
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| impound
account |
| Depending on the type of the loan,
some lenders increase the size of the monthly payment
to cover important bills such as property taxes and insurance.
This extra amount is deposited into an interest-earning
Impound Account. At the end of the year, when the taxes
or insurance premiums are due, the lender automatically
pays the bill from the buyer's account. |
| index |
| A published interest rate which is
used to adjust the interest rate on an adjustable mortgage
up or down. |
| indexed rate (also known as fully
indexed rate) |
| The sum of the published index plus
the margin. For example if the index were 5% and the margin
2.75%, the indexed rate would be 7.75%. Often, lenders
charge less than the indexed rate the first year of an
adjustable-rate mortgage. |
| interest |
| The amount that is added onto your
loan (in dollars) to cover the cost of borrowing money
to finance your home. The "interest payment"
is the portion of your monthly payment that is applied
against the interest owed. At the beginning of your loan
period, the majority of your monthly payment is applied
against the interest. But over time, more and more of
the payment is used to reduce the amount of principal
owed. |
| interest rate |
| The cost of borrowing, expressed as
an annual percentage of the principal. Many factors influence
the interest rate you will be charged, including the overall
state of the economy, the cost the lender is charged to
borrow the funds, etc. |
| investor |
| A money source for a lender. |
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| jumbo
loan |
| A loan which is larger (more than $322,700
as of 1/3/2003 for a one-family home) than the limits
set by the Federal National Mortgage Association and the
Federal Home Loan Mortgage Corporation. Because jumbo
loans cannot be funded by these two agencies, they usually
carry a higher interest rate. |
| lien |
| A claim upon a piece of property for
the payment or satisfaction of a debt or obligation. |
| loan-to-value ratio |
| The ratio of the amount of money owed
on a home to the home's value. The difference between
these two figures initially is the down payment. |
| lock |
| Lender's guarantee that the mortgage
rate quoted will be good for a specific number of days
from day of application. |
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| margin |
| The amount (usually fixed) that a lender
adds to the index (which varies) on an adjustable-rate
mortgage to establish the adjusted interest rate. |
| market value |
| The highest price that a buyer would
pay and the lowest price a seller would accept on a property.
Market value may be different from the price a property
could actually be sold for at a given time. |
| MIP (Mortgage Insurance Premium) |
| A type of insurance from FHA which
protects a lender against incurring a loss on an account
because of a borrower's default. |
| mortgage analysis |
| A calculation of how much home you
can afford, based on your income, your current credit
obligations, etc. |
| mortgage insurance |
| Money paid to insure the mortgage when
the down payment is less than 20 percent. See private
mortgage insurance, FHA mortgage insurance. |
| mortgagee |
| The mortgage company (the lender). |
| mortgagor |
| The borrower or homeowner. |
| negative
amortization |
| Occurs when your monthly payments are
not large enough to pay all the interest due on the loan.
This unpaid interest is added to the unpaid balance of
the loan. The danger of negative amortization is that
the homebuyer ends up owing more than the original amount
of the loan. This type of loan is rarely used now and
is illegal in some states. |
| net effective income |
| The borrower's gross income minus federal
income tax. |
| nonassumption clause |
| A statement in a mortgage contract
forbidding the assumption of the mortgage without the
prior approval of the lender. |
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| one-year
adjustable-rate mortgage |
| Mortgage whose annual rate changes
yearly. The rate is usually based on movements of a published
index plus a specified margin. |
| origination fee |
| The fee charged by a lender computed
as a percentage of the face value of the loan. |
| PITI |
| The total amount of your monthly payment.
Principal and interest (P&I) are due on every loan.
Taxes and insurance (T&I) are also included if the
lender requires an impound account. |
| points (loan discount points) |
| An upfront fee charged by a lender
to process a mortgage. Each point represents 1% of the
loan amount. So a $120,000 loan with one point means a
fee of $1,200. For most (but not all) loans, the points
must be paid at the close of escrow, and cannot be added
to the amount of the loan. |
| power of attorney |
| A legal document authorizing one person
to act on behalf of another. |
| prepaid expenses |
| Necessary to create an escrow account
or to adjust the seller's existing escrow account. Can
include taxes, hazard insurance, private mortgage insurance
and special assessments. |
| prepayment |
| A clause in a mortgage that permits
the borrower to make payments in advance of the due date,
which are applied directly to the principal balance of
the loan. |
| prepayment penalty |
| A fee charged for an early repayment
of debt. Prepayment penalties are limited in many states. |
| prequalification |
| Another name for a mortgage analysis. |
| principal |
| The amount of your loan (in dollars),
excluding interest. The "principal payment"
is the portion of your monthly payment that is applied
against the principal. In the first several years of your
loan, only a small amount of the payment is applied to
the principal. As time goes on, more and more of the payment
is used to reduce the amount of principal owed. |
| private mortgage insurance (PMI) |
| Insurance purchased by the lender to
protect them in case a buyer cannot make their loan payments.
PMI typically costs from $50–$200 per month, depending
on the size of the mortgage. This monthly amount is paid
by the homebuyer as part of their monthly mortgage payment.
Buyers can avoid a PMI payment if their down payment is
large enough (typically 20% of the home price). |
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| REALTOR® |
| A real estate broker or an associate
holding active membership in a local real estate board
affiliated with the National Association of Realtors. |
| recording fees |
| Money paid to a lender, title company
or escrow agent for recording a home sale with the local
authorities, thereby making it part of the public records. |
| refinance |
| Obtaining a new mortgage loan on a
property already owned. Often to replace existing loans
on the property. |
| RESPA |
| Short for the Real Estate Settlement
Procedures Act. RESPA is a federal law that allows consumers
to review information on settlement costs and regulates
certain activities of lenders, title companies, Realtors,
and escrow agents. |
| satisfaction
of mortgage |
| The document issued by the mortgagee
when the mortgage loan is paid in full. Also called a
"release of mortgage." |
| second mortgage |
| A mortgage made subsequent to another
mortgage and subordinate to the first one. |
| secondary mortgage market |
| The place where primary mortgage lenders
sell the mortgages they make to obtain more funds to originate
more new loans. It provides liquidity for lenders. |
| servicing |
| All the steps and operations a lender
performs to keep a loan in good standing, such as collection
of payments, payment of taxes, insurance, property inspections,
etc |
| settlement/settlement costs |
| See closing/closing costs. |
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| simple interest |
| Interest which is computed only on
the principal balance. |
| survey |
| A measurement of land prepared by a
registered land surveyor, showing the location of the
land with reference to known points, its dimensions, and
the location and dimensions of any buildings. |
| sweat equity |
| Equity created by a purchaser performing
work on a property being purchased. |
| title |
| A document that gives evidence of an
individual's ownership of property. |
| title company |
| Firm that ensures that the title, or
actual legal document of ownership, on a property is clear
and provides title insurance. |
| title insurance |
| A policy, usually issued by a title
insurance company, which insures a homebuyer against errors
in the title search. The cost of the policy is usually
a function of the value of the property, and is often
borne by the purchaser and/or seller. |
| title search |
| An examination of municipal records
to determine the legal ownership of property. Usually
is performed by a title company. |
| truth-in-lending |
| A federal law requiring disclosure
of the annual percentage rate (APR) to homebuyers shortly
after they apply for the loan. Also known as Regulation
Z. |
| underwriting |
| The decision whether to make a loan
to a potential homebuyer based on credit, employment,
assets and other factors and the matching of this risk
to an appropriate rate and term or loan amount. |
| usury |
| Interest charged in excess of the legal
rate established by law. |
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| VA loan |
| VA loans are available to active members
of the armed forces, as well as to veterans and unremarried
surviving widows of veterans. VA loans are backed by the
Veterans Administration, which offers several benefits
to buyers including no-down-payment-required and lower
closing costs. |
| VA Mortgage-Funding Fee |
| A premium paid on a VA-backed loan
usually added to the amount financed. |
| variable-rate mortgage (VRM) |
| Another name for an adjustable-rate
mortgage (ARM). |
| verification of deposit (VOD) |
| A document verifying the status and
balance of the borrower's financial accounts, signed by
their financial institution. |
| verification of employment (VOE) |
| A document verifying the borrower's
position and salary, signed by their employer. |
