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Mortgage Terms
Glossary
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2/1 Buy Down Mortgage
The 2/1 Buy Down Mortgage allows the borrower to qualify at below market rates so they can borrow more. The initial starting interest rate increases by 1% at the end of the first year and adjusts again by another 1% at the end of the second year. It then remains at a fixed interest rate for the remainder of the loan term. Borrowers often refinance at the end of the second year to obtain the best long term rates; however, even keeping the loan in place for three full years or more will keep their average interest rate in line with the original market conditions.
Acceleration Clause
Provision in a mortgage that allows the lender to demand payment of the entire principal balance if a monthly payment is missed or some other default occurs.
Additional Principal Payment
A way to reduce the remaining balance on the loan by paying more than the scheduled principal amount due.
Adjustable-Rate Mortgage (ARM)
A mortgage with an interest rate that changes during the life of the loan according to
movements in an index rate. Sometimes called AMLs (adjustable mortgage loans) or
VRMs (variable-rate mortgages).
movements in an index rate. Sometimes called AMLs (adjustable mortgage loans) or
VRMs (variable-rate mortgages).
Adjusted Basis
The cost of a property plus the value of any capital expenditures for improvements to
the property minus any depreciation taken.
the property minus any depreciation taken.
Adjustment Date
The date that the interest rate changes on an adjustable-rate mortgage (ARM).
Adjustment Period
The period elapsing between adjustment dates for an adjustable-rate mortgage (ARM).
Affordability Analysis
An analysis of a buyers ability to afford the purchase of a home. Reviews income,
liabilities, and available funds, and considers the type of mortgage you plan to use, the
area where you want to purchase a home, and the closing costs that are likely.
liabilities, and available funds, and considers the type of mortgage you plan to use, the
area where you want to purchase a home, and the closing costs that are likely.
Amortization
The gradual repayment of a mortgage loan, both principle and interest, by installments.
Amortization Term
The length of time required to amortize the mortgage loan expressed as a number of
months. For example, 360 months is the amortization term for a 30-year fixed-rate
mortgage.
months. For example, 360 months is the amortization term for a 30-year fixed-rate
mortgage.
Annual Percentage Rate (APR)
The cost of credit, expressed as a yearly rate including interest, mortgage insurance,
and loan origination fees. This allows the buyer to compare loans, however APR should
not be confused with the actual note rate.
and loan origination fees. This allows the buyer to compare loans, however APR should
not be confused with the actual note rate.
Appraisal
A written analysis prepared by a qualified appraiser and estimating the value of a
property.
property.
Appraised Value
An opinion of a property’s fair market value, based on an appraiser’s knowledge,
experience, and analysis of the property.
experience, and analysis of the property.
Asset
Anything owned of monetary value including real property, personal property, and
enforceable claims against others (including bank accounts, stocks, mutual funds, etc.).
enforceable claims against others (including bank accounts, stocks, mutual funds, etc.).
Assignment
The transfer of a mortgage from one person to another.
Assumability
An assumable mortgage can be transferred from the seller to the new buyer. Generally
requires a credit review of the new borrower and lenders may charge a fee for the
assumption. If a mortgage contains a due-on-sale clause, it may not be assumed by a
new buyer.
requires a credit review of the new borrower and lenders may charge a fee for the
assumption. If a mortgage contains a due-on-sale clause, it may not be assumed by a
new buyer.
Assumption Fee
The fee paid to a lender (usually by the purchaser of real property) when an assumption
takes place.
takes place.
Balance Sheet
A financial statement that shows assets, liabilities, and net worth as of a specific date.
Balloon Mortgage
A mortgage with level monthly payments that amortizes over a stated term but also
requires that a lump sum payment be paid at the end of an earlier specified term.
requires that a lump sum payment be paid at the end of an earlier specified term.
Balloon Payment
The final lump sum paid at the maturity date of a balloon mortgage.
Before-tax Income
Income before taxes are deducted.
Biweekly Payment Mortgage
A plan to reduce the debt every two weeks (instead of the standard monthly payment
schedule). The 26 (or possibly 27) biweekly payments are each equal to one-half of the
monthly payment required if the loan were a standard 30-year fixed-rate mortgage. The
result for the borrower is a substantial savings in interest.
schedule). The 26 (or possibly 27) biweekly payments are each equal to one-half of the
monthly payment required if the loan were a standard 30-year fixed-rate mortgage. The
result for the borrower is a substantial savings in interest.
Bridge Loan
A second trust that is collateralized by the borrower’s present home allowing the
proceeds to be used to close on a new house before the present home is sold. Also
known as “swing loan.”
proceeds to be used to close on a new house before the present home is sold. Also
known as “swing loan.”
Broker
An individual or company that brings borrowers and lenders together for the purpose of
loan origination.
loan origination.
Buydown
When the seller, builder or buyer pays an amount of money up front to the lender to
reduce monthly payments during the first few years of a mortgage. Buydowns can occur
in both fixed and adjustable rate mortgages.
reduce monthly payments during the first few years of a mortgage. Buydowns can occur
in both fixed and adjustable rate mortgages.
Cap
Limits how much the interest rate or the monthly payment can increase, either at each
adjustment or during the life of the mortgage. Payment caps don’t limit the amount of
interest the lender is earning and may cause negative amortization.
adjustment or during the life of the mortgage. Payment caps don’t limit the amount of
interest the lender is earning and may cause negative amortization.
Certificate of Eligibility
A document issued by the federal government certifying a veteran’s eligibility for a
Department of Veterans Affairs (VA) mortgage.
Department of Veterans Affairs (VA) mortgage.
Certificate of Reasonable Value (CRV)
A document issued by the Department of Veterans Affairs (VA) that establishes the
maximum value and loan amount for a VA mortgage.
maximum value and loan amount for a VA mortgage.
Change Frequency
The frequency (in months) of payment and/or interest rate changes in an adjustable-rate
mortgage (ARM).
mortgage (ARM).
Closing
A meeting held to finalize the sale of a property. The buyer signs the mortgage
documents and pays closing costs. Also called “settlement.”
documents and pays closing costs. Also called “settlement.”
Closing Costs
These are expenses – over and above the price of the property- that are incurred by
buyers and sellers when transferring ownership of a property. Closing costs normally
include an origination fee, property taxes, charges for title insurance and escrow costs,
appraisal fees, etc. Closing costs will vary according to the area country and the lenders
used.
buyers and sellers when transferring ownership of a property. Closing costs normally
include an origination fee, property taxes, charges for title insurance and escrow costs,
appraisal fees, etc. Closing costs will vary according to the area country and the lenders
used.
Compound Interest
Interest paid on the original principal balance and on the accrued and unpaid interest.
Consumer Reporting Agency (or Bureau)
An organization that handles the preparation of reports used by lenders to determine a
potential borrower’s credit history. The agency gets data for these reports from a credit
repository and from other sources.
potential borrower’s credit history. The agency gets data for these reports from a credit
repository and from other sources.
Conversion Clause
A provision in an ARM allowing the loan to be converted to a fixed-rate at some point
during the term. Usually conversion is allowed at the end of the first adjustment period.
The conversion feature may cost extra.
during the term. Usually conversion is allowed at the end of the first adjustment period.
The conversion feature may cost extra.
Credit Report
A report detailing an individual’s credit history that is prepared by a credit bureau and
used by a lender to determine a loan applicant’s creditworthiness.
used by a lender to determine a loan applicant’s creditworthiness.
Credit Risk Score
A credit score measures a consumer’s credit risk relative to the rest of the U.S.
population, based on the individual’s credit usage history. The credit score most widely
used by lenders is the FICO® score, developed by Fair, Issac and Company. This
3-digit number, ranging from 300 to 850, is calculated by a mathematical equation that
evaluates many types of information that are on your credit report. Higher FICO®
scores represents lower credit risks, which typically equate to better loan terms. In
general, credit scores are critical in the mortgage loan underwriting process.
population, based on the individual’s credit usage history. The credit score most widely
used by lenders is the FICO® score, developed by Fair, Issac and Company. This
3-digit number, ranging from 300 to 850, is calculated by a mathematical equation that
evaluates many types of information that are on your credit report. Higher FICO®
scores represents lower credit risks, which typically equate to better loan terms. In
general, credit scores are critical in the mortgage loan underwriting process.
Deed of Trust
The document used in some states instead of a mortgage. Title is conveyed to a
trustee.
trustee.
Default
Failure to make mortgage payments on a timely basis or to comply with other
requirements of a mortgage.
requirements of a mortgage.
Delinquency
Failure to make mortgage payments on time.
Deposit
This is a sum of money given to bind the sale of real estate, or a sum of money given to
ensure payment or an advance of funds in the processing of a loan.
ensure payment or an advance of funds in the processing of a loan.
Discount
In an ARM with an initial rate discount, the lender gives up a number of percentage
points in interest to reduce the rate and lower the payments for part of the mortgage
term (usually for one year or less). After the discount period, the ARM rate usually
increases according to its index rate.
points in interest to reduce the rate and lower the payments for part of the mortgage
term (usually for one year or less). After the discount period, the ARM rate usually
increases according to its index rate.
Down Payment
Part of the purchase price of a property that is paid in cash and not financed with a
mortgage.
mortgage.
Effective Gross Income
A borrowers normal annual income, including overtime that is regular or guaranteed.
Salary is usually the principal source, but other income may qualify if it is significant and
stable.
Salary is usually the principal source, but other income may qualify if it is significant and
stable.
Equity
The amount of financial interest in a property. Equity is the difference between the fair
market value of the property and the amount still owed on the mortgage.
market value of the property and the amount still owed on the mortgage.
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 of funds or documents into an
escrow account to be disbursed upon the closing of a sale of real estate.
the fulfillment of a condition. For example, the deposit of funds or documents into an
escrow account to be disbursed upon the closing of a sale of real estate.
Escrow Disbursements
The use of escrow funds to pay real estate taxes, hazard insurance, mortgage
insurance, and other property expenses as they become due.
insurance, and other property expenses as they become due.
Escrow Payment
The part of a mortgagor’s monthly payment that is held by the servicer to pay for taxes,
hazard insurance, mortgage insurance, lease payments, and other items as they
become due.
hazard insurance, mortgage insurance, lease payments, and other items as they
become due.
Fannie Mae
A congressionally chartered, shareholder-owned company that is the nation’s largest
supplier of home mortgage funds.
supplier of home mortgage funds.
FHA Mortgage
A mortgage that is insured by the Federal Housing Administration (FHA). Also known as
a government mortgage.
a government mortgage.
FICO Score
FICO® scores are the most widely used credit score in U.S. mortgage loan
underwriting. This 3-digit number, ranging from 300 to 850, is calculated by a
mathematical equation that evaluates many types of information that are on your credit
report. Higher FICO® scores represent lower credit risks, which typically equate to
better loan terms.
underwriting. This 3-digit number, ranging from 300 to 850, is calculated by a
mathematical equation that evaluates many types of information that are on your credit
report. Higher FICO® scores represent lower credit risks, which typically equate to
better loan terms.
First Mortgage
The primary lien against a property
Fixed Installment
The monthly payment due on a mortgage loan including payment of both principal and
interest.
interest.
Fixed-Rate Mortgage (FRM)
A mortgage interest that are fixed throughout the entire term of the loan.
Fully Amortized ARM
An adjustable-rate mortgage (ARM) with a monthly payment that is sufficient to amortize
the remaining balance, at the interest accrual rate, over the amortization term.
the remaining balance, at the interest accrual rate, over the amortization term.
GNMA
A government-owned corporation that assumed responsibility for the special assistance
loan program formerly administered by Fannie Mae. Popularly known as Ginnie Mae.
loan program formerly administered by Fannie Mae. Popularly known as Ginnie Mae.
Growing-Equity Mortgage (GEM)
A fixed-rate mortgage that provides scheduled payment increases over an established
period of time. The increased amount of the monthly payment is applied directly toward
reducing the remaining balance of the mortgage.
period of time. The increased amount of the monthly payment is applied directly toward
reducing the remaining balance of the mortgage.
Guarantee Mortgage
A mortgage that is guaranteed by a third party.
Housing Expense Ratio
The percentage of gross monthly income budgeted to pay housing expenses.
HUD-1 statement
A document that provides an itemized listing of the funds that are payable at closing.
Items that appear on the statement include real estate commissions, loan fees, points,
and initial escrow amounts. Each item on the statement is represented by a separate
number within a standardized numbering system. The totals at the bottom of the HUD-1
statement define the seller’s net proceeds and the buyer’s net payment at closing.
Items that appear on the statement include real estate commissions, loan fees, points,
and initial escrow amounts. Each item on the statement is represented by a separate
number within a standardized numbering system. The totals at the bottom of the HUD-1
statement define the seller’s net proceeds and the buyer’s net payment at closing.
Hybrid ARM (3/1 ARM, 5/1 ARM, 7/1 ARM)
A combination fixed rate and adjustable rate loan – also called 3/1,5/1,7/1 – can offer
the best of both worlds: lower interest rates (like ARMs) and a fixed payment for a
longer period of time than most adjustable rate loans. For example, a “5/1 loan” has a
fixed monthly payment and interest for the first five years and then turns into a
traditional adjustable rate loan, based on then-current rates for the remaining 25 years.
It’s a good choice for people who expect to move or refinance, before or shortly after,
the adjustment occurs.
the best of both worlds: lower interest rates (like ARMs) and a fixed payment for a
longer period of time than most adjustable rate loans. For example, a “5/1 loan” has a
fixed monthly payment and interest for the first five years and then turns into a
traditional adjustable rate loan, based on then-current rates for the remaining 25 years.
It’s a good choice for people who expect to move or refinance, before or shortly after,
the adjustment occurs.
Index
The index is the measure of interest rate changes a lender uses to decide the amount
an interest rate on an ARM will change over time.The index is generally a published
number or percentage, such as the average interest rate or yield on Treasury bills.
Some index rates tend to be higher than others and some more volatile.
an interest rate on an ARM will change over time.The index is generally a published
number or percentage, such as the average interest rate or yield on Treasury bills.
Some index rates tend to be higher than others and some more volatile.
Initial Interest Rate
This refers to the original interest rate of the mortgage at the time of closing. This rate
changes for an adjustable-rate mortgage (ARM). It’s also known as “start rate” or
“teaser.”
changes for an adjustable-rate mortgage (ARM). It’s also known as “start rate” or
“teaser.”
Installment
The regular periodic payment that a borrower agrees to make to a lender.
Insured Mortgage
A mortgage that is protected by the Federal Housing Administration (FHA) or by private
mortgage insurance (MI).
mortgage insurance (MI).
Interest
The fee charged for borrowing money.
Interest Accrual Rate
The percentage rate at which interest accrues on the mortgage. In most cases, it is also
the rate used to calculate the monthly payments.
the rate used to calculate the monthly payments.
Interest Rate Buydown Plan
An arrangement that allows the property seller to deposit money to an account. That
money is then released each month to reduce the mortgagor’s monthly payments during
the early years of a mortgage.
money is then released each month to reduce the mortgagor’s monthly payments during
the early years of a mortgage.
Interest Rate Ceiling
For an adjustable-rate mortgage (ARM), the maximum interest rate, as specified in the
mortgage note.
mortgage note.
Interest Rate Floor
For an adjustable-rate mortgage (ARM), the minimum interest rate, as specified in the
mortgage note.
mortgage note.
Late Charge
The penalty a borrower must pay when a payment is made a stated number of days
(usually 15) after the due date.
(usually 15) after the due date.
Lease-Purchase Mortgage Loan
An alternative financing option that allows low- and moderate-income home buyers to
lease a home with an option to buy. Each month’s rent payment consists of principal,
interest, taxes and insurance (PITI) payments on the first mortgage plus an extra
amount that accumulates in a savings account for a downpayment.
lease a home with an option to buy. Each month’s rent payment consists of principal,
interest, taxes and insurance (PITI) payments on the first mortgage plus an extra
amount that accumulates in a savings account for a downpayment.
Liabilities
A person’s financial obligations. Liabilities include long-term and short-term debt.
Lifetime Payment Cap
For an adjustable-rate mortgage (ARM), a limit on the amount that payments can
increase or decrease over the life of the mortgage.
increase or decrease over the life of the mortgage.
Lifetime Rate Cap
For an adjustable-rate mortgage (ARM), a limit on the amount that the interest rate can
increase or decrease over the life of the loan. See cap.
increase or decrease over the life of the loan. See cap.
Line of Credit
An agreement by a commercial bank or other financial institution to extend credit up to a
certain amount for a certain time.
certain amount for a certain time.
Liquid Asset
A cash asset or an asset that is easily converted into cash.
Loan
A sum of borrowed money (principal) that is generally repaid with interest.
Loan-to-Value (LTV) Percentage
The relationship between the principal balance of the mortgage and the appraised value
(or sales price if it is lower) of the property. For example, a $100,000 home with an
$80,000 mortgage has an LTV of 80 percent.
(or sales price if it is lower) of the property. For example, a $100,000 home with an
$80,000 mortgage has an LTV of 80 percent.
Lock-In Period
The guarantee of an interest rate for a specified period of time by a lender, including
loan term and points, if any, to be paid at closing. Short term locks (under 21 days), are
usually available after lender loan approval only. However, many lenders may permit a
borrower to lock a loan for 30 days or more prior to submission of the loan application.
loan term and points, if any, to be paid at closing. Short term locks (under 21 days), are
usually available after lender loan approval only. However, many lenders may permit a
borrower to lock a loan for 30 days or more prior to submission of the loan application.
Margin
The number of percentage points the lender adds to the index rate to calculate the ARM
interest rate at each adjustment.
interest rate at each adjustment.
Maturity
The date on which the principal balance of a loan becomes due and payable.
Monthly Fixed Installment
That portion of the total monthly payment that is applied toward principal and interest.
When a mortgage negatively amortizes, the monthly fixed installment does not include
any amount for principal reduction and doesn’t cover all of the interest. The loan
balance therefore increases instead of decreasing.
When a mortgage negatively amortizes, the monthly fixed installment does not include
any amount for principal reduction and doesn’t cover all of the interest. The loan
balance therefore increases instead of decreasing.
Mortgage
A legal document that pledges a property to the lender as security for payment of a
debt.
debt.
Mortgage Banker
A company that originates mortgages exclusively for resale in the secondary mortgage market.
Mortgage Broker
An individual or company that brings borrowers and lenders together for the purpose of loan origination.
Mortgage Insurance
A contract that insures the lender against loss caused by a mortgagor’s default on a
government mortgage or conventional mortgage. Mortgage insurance can be issued by a private company or by a government agency.
government mortgage or conventional mortgage. Mortgage insurance can be issued by a private company or by a government agency.
Mortgage Insurance Premium (MIP)
The amount paid by a mortgagor for mortgage insurance.
Mortgage Life Insurance
A type of term life insurance In the event that the borrower dies while the policy is in
force, the debt is automatically paid by insurance proceeds.
force, the debt is automatically paid by insurance proceeds.
Mortgagor
The borrower in a mortgage agreement.
Negative Amortization
Amortization means that monthly payments are large enough to pay the interest and
reduce the principal on your mortgage. Negative amortization occurs when the monthly
payments do not cover all of the interest cost. The interest cost that isn’t covered is
added to the unpaid principal balance. This means that even after making many
payments, you could owe more than you did at the beginning of the loan. Negative
amortization can occur when an ARM has a payment cap that results in monthly
payments not high enough to cover the interest due.
reduce the principal on your mortgage. Negative amortization occurs when the monthly
payments do not cover all of the interest cost. The interest cost that isn’t covered is
added to the unpaid principal balance. This means that even after making many
payments, you could owe more than you did at the beginning of the loan. Negative
amortization can occur when an ARM has a payment cap that results in monthly
payments not high enough to cover the interest due.
Net Worth
The value of all of a person’s assets, including cash.
Non Liquid Asset
An asset that cannot easily be converted into cash.
Note
A legal document that obligates a borrower to repay a mortgage loan at a stated interest
rate during a specified period of time.
rate during a specified period of time.
Origination Fee
A fee paid to a lender for processing a loan application. The origination fee is stated in
the form of points. One point is 1 percent of the mortgage amount.
the form of points. One point is 1 percent of the mortgage amount.
Owner Financing
A property purchase transaction in which the party selling the property provides all or
part of the financing.
part of the financing.
Payment Change Date
The date when a new monthly payment amount takes effect on an adjustable-rate
mortgage (ARM) or a graduated-payment mortgage (GPM). Generally, the payment
change date occurs in the month immediately after the adjustment date
mortgage (ARM) or a graduated-payment mortgage (GPM). Generally, the payment
change date occurs in the month immediately after the adjustment date
Periodic Payment Cap
A limit on the amount that payments can increase or decrease during any one
adjustment period.
adjustment period.
Periodic Rate Cap
A limit on the amount that the interest rate can increase or decrease during any one
adjustment period, regardless of how high or low the index might be.
adjustment period, regardless of how high or low the index might be.
PITI Reserves
A cash amount that a borrower must have on hand after making a down payment and
paying all closing costs for the purchase of a home. The principal, interest, taxes, and
insurance (PITI) reserves must equal the amount that the borrower would have to pay
for PITI for a predefined number of months (usually three).
paying all closing costs for the purchase of a home. The principal, interest, taxes, and
insurance (PITI) reserves must equal the amount that the borrower would have to pay
for PITI for a predefined number of months (usually three).
Points
A point is equal to one percent of the principal amount of your mortgage. For example, if
you get a mortgage for $165,000 one point means $1,650 to the lender.Points usually
are collected at closing and may be paid by the borrower or the home seller, or may be
split between them.
you get a mortgage for $165,000 one point means $1,650 to the lender.Points usually
are collected at closing and may be paid by the borrower or the home seller, or may be
split between them.
Prepayment Penalty
A fee that may be charged to a borrower who pays off a loan before it is due.
Pre-Approval
The process of determining how much money you will be eligible to borrow before you
apply for a loan.
apply for a loan.
Prime Rate
The interest rate that banks charge to their preferred customers. Changes in the prime
rate influence changes in other rates, including mortgage interest rates.
rate influence changes in other rates, including mortgage interest rates.
Principal
The amount borrowed or remaining unpaid. The part of the monthly payment that
reduces the remaining balance of a mortgage.
reduces the remaining balance of a mortgage.
Principal Balance
The outstanding balance of principal on a mortgage not including interest or any other
charges.
charges.
Principal, Interest, Taxes, and Insurance (PITI)
The four components of a monthly mortgage payment. Principal refers to the part of the
monthly payment that reduces the remaining balance of the mortgage. Interest is the
fee charged for borrowing money. Taxes and insurance refer to the monthly cost of
property taxes and homeowners insurance, whether these amounts that are paid into an
escrow account each month or not.
monthly payment that reduces the remaining balance of the mortgage. Interest is the
fee charged for borrowing money. Taxes and insurance refer to the monthly cost of
property taxes and homeowners insurance, whether these amounts that are paid into an
escrow account each month or not.
Private Mortgage Insurance (PMI)
Mortgage insurance provided by a private mortgage insurance company to protect
lenders against loss if a borrower defaults. Most lenders generally require MI for a loan
with a loan-to-value (LTV) percentage in excess of 80 percent.
lenders against loss if a borrower defaults. Most lenders generally require MI for a loan
with a loan-to-value (LTV) percentage in excess of 80 percent.
Qualifying Ratios
Calculations used to determine if a borrower can qualify for a mortgage. They consist of
two separate calculations: a housing expense as a percent of income ratio and total
debt obligations as a percent of income ratio.
two separate calculations: a housing expense as a percent of income ratio and total
debt obligations as a percent of income ratio.
Rate Lock
A commitment issued by a lender to a borrower or other mortgage originator
guaranteeing a specified interest rate and lender costs for a specified period of time.
guaranteeing a specified interest rate and lender costs for a specified period of time.
Real Estate Agent
A person licensed to negotiate and transact the sale of real estate on behalf of the
property owner.
property owner.
Real Estate Settlement Procedures Act (RESPA)
A consumer protection law that requires lenders to give borrowers advance notice of
closing costs.
closing costs.
Real Estate Agent®
A real estate broker or an associate who is an active member in a local real estate
board that is affiliated with the National Association of Real Estate Agents.
board that is affiliated with the National Association of Real Estate Agents.
Recording
The noting in the registrar’s office of the details of a properly executed legal document,
such as a deed, a mortgage note, a satisfaction of mortgage, or an extension of
mortgage, thereby making it a part of the public record.
such as a deed, a mortgage note, a satisfaction of mortgage, or an extension of
mortgage, thereby making it a part of the public record.
Refinance
Paying off one loan with the proceeds from a new loan using the same property as
security.
security.
Revolving Liability
A credit arrangement, such as a credit card, that allows a customer to borrow against a
pre-approved line of credit when purchasing goods and services.
pre-approved line of credit when purchasing goods and services.
Secondary Mortgage Market
Where existing mortgages are bought and sold.
Security
The property that will be pledged as collateral for a loan.
Seller Carry-back
An agreement in which the owner of a property provides financing, often in combination with an assumable mortgage. See Owner Financing.
Servicer
An organization that collects principle and interest payments from borrowers and
manages borrowers’ escrow accounts. The servicer often services mortgages that have
been purchased by an investor in the secondary mortgage market.
manages borrowers’ escrow accounts. The servicer often services mortgages that have
been purchased by an investor in the secondary mortgage market.
Standard Payment Calculation
The method used to determine the monthly payment required to repay the remaining
balance of a mortgage in substantially equal installments over the remaining term of the
mortgage at the current interest rate.
balance of a mortgage in substantially equal installments over the remaining term of the
mortgage at the current interest rate.
Step-Rate Mortgage
A mortgage that allows for the interest rate to increase according to a specified
schedule (i.e., seven years), resulting in increased payments as well. At the end of the
specified period, the rate and payments will remain constant for the remainder of the
loan.
schedule (i.e., seven years), resulting in increased payments as well. At the end of the
specified period, the rate and payments will remain constant for the remainder of the
loan.
Third-party Origination
When a lender uses another party to completely or partially originate, process,
underwrite, close, fund, or package the mortgages it plans to deliver to the secondary
mortgage market.
underwrite, close, fund, or package the mortgages it plans to deliver to the secondary
mortgage market.
Total Expense Ratio
Total obligations as a percentage of gross monthly income including monthly housing
expenses plus other monthly debts.
expenses plus other monthly debts.
Treasury Index
An index used to determine interest rate changes for certain adjustable-rate mortgage
(ARM) plans. Based on the results of auctions that the U.S. Treasury holds for its
Treasury bills and securities or derived from the U.S. Treasury’s daily yield curve, which
is based on the closing market bid yields on actively traded Treasury securities in the
over-the-counter market.
(ARM) plans. Based on the results of auctions that the U.S. Treasury holds for its
Treasury bills and securities or derived from the U.S. Treasury’s daily yield curve, which
is based on the closing market bid yields on actively traded Treasury securities in the
over-the-counter market.
Truth-in-Lending
A federal law that requires lenders to fully disclose, in writing, the terms and conditions
of a mortgage, including the annual percentage rate (APR) and other charges.
of a mortgage, including the annual percentage rate (APR) and other charges.
Two-step Mortgage
An adjustable-rate mortgage (ARM) with one interest rate for the first five or seven
years of its mortgage term and a different interest rate for the remainder of the
amortization term.
years of its mortgage term and a different interest rate for the remainder of the
amortization term.
Underwriting
The process of evaluating a loan application to determine the risk involved for the
lender. Underwriting involves an analysis of the borrower’s creditworthiness and the
quality of the property itself.
lender. Underwriting involves an analysis of the borrower’s creditworthiness and the
quality of the property itself.
VA Mortgage
A mortgage that is guaranteed by the Department of Veterans Affairs (VA). Also known
as a government mortgage.
as a government mortgage.
“Wrap Around” Mortgage
A mortgage that includes the remaining balance on an existing first mortgage plus an
additional amount requested by the mortgagor. Full payments on both mortgages are
made to the “Wrap Around” mortgagee, who then forwards the payments on the first
mortgage to the first mortgagee. These mortgages may not be allowed by the first
mortgage holder, and if discovered, could be subject to a demand for full payment.
additional amount requested by the mortgagor. Full payments on both mortgages are
made to the “Wrap Around” mortgagee, who then forwards the payments on the first
mortgage to the first mortgagee. These mortgages may not be allowed by the first
mortgage holder, and if discovered, could be subject to a demand for full payment.
