There are a lot of words and terms unique to the mortgage financing industry. The following are explained in order to help you understand the refinancing process:
Acceleration clause. The clause in a mortgage or trust deed that stipulates the entire debt is due immediately if the mortgagee defaults under the terms of the contract.
Adjustable Rate Mortgage (ARM). A mortgage in which the interest rate is adjusted periodically based on an index. Also called a variable rate mortgage.
Adjustment date. The date the interest rate changes on an ARM (adjustable rate mortgage).
Adjustment Interval. For an adjustable rate mortgage (ARM), the time between changes in the interest rate charged. The most common adjustment intervals are one, three or five years.
Amortization. Literally to “kill off” (root: mort) the outstanding balance of a loan by making equal payments on a regular schedule (usually monthly). The payments are structured so that the borrower pays both interest and principal with each equal payment.
Annual Percentage Rate (APR). A figure that states the total yearly cost of a mortgage as expressed by the actual rate of interest paid. The APR includes the base interest rate, points and any other add-on loan fees and costs. As a result the APR is invariably higher for the rate of interest that the lender quotes for the mortgage but gives a more accurate picture of the likely cost of the loan. Keep in mind, however, that most mortgages are not held for their full 15 or 30 year terms, so the effective annual percentage rate is higher than the quoted APR because the points and loan fees are spread out over fewer years.
Application. A mortgage application requires borrowers to submit information regarding their income, savings, assets, debts and more.
Application Fee. The fee charged by the lender to the borrower for applying for a loan. Payment of this fee does not guarantee that a loan will be approved. Some lenders may apply the cost of the application fee to certain closing costs.
Appraisal. The determination of property value based on recent sales information of similar properties.
Assessment. Determining a property’s value for the purpose of taxation.
Appreciation. An increase in the value of a property. Appreciation must be the result of an increased demand for property, any improvements or additions made, improvements to the neighborhood, etc.
Balloon Mortgage. Behaves like a fixed-rate mortgage for a set number of years (usually five or seven) and then must be paid off in full in a single “balloon” payment. Balloon loans are popular with those expecting to sell or refinance their property within a definite period of time.
Bankruptcy. A tactic that individuals use to relieve themselves of debts and/or liabilities when they are no longer able to repay. The most common form of individual bankruptcy is a Chapter 7, when an individual frees himself from most of his/her debts. Borrowers who have undergone bankruptcy usually cannot qualify for “A” paper loans until after two years after declaration and a re-establishment of credit.
Best Faith Estimate. An estimate of the total costs for securing a real estate loan that is given to borrowers prior to closing.
Broker. An individual in the business of assisting in arranging funding or negotiating contracts for a client but who does not loan the money himself. Brokers usually charge a fee or receive a commission for their services.
Caps (Interest). Consumer safeguards which limit the amount the interest rate on an adjustable rate mortgage may change per year and/or the life of the loan. For adjustable loans, caps are usually quoted as two numbers as in 2/6. The first number indicates how much a loan may adjust at each adjustment period while the second number indicates how much a loan may adjust over its lifetime.
Loans like the 3/1 and 5/1 adjustable, which have an initial fixed period, are quoted with 3 numbers as in 3/2/6 that would mean that the first adjustment may be as much as 3%, subsequent adjustments are capped at 2% each and the lifetime cap is 6%.
Two-Step loans are quoted with a single cap, which is the amount by which the loan may adjust at its single adjustment date.
Caps (Fees). Maximum fees that can be charged for certain loans such as a reverse mortgage.
Caps (Payment) Consumer safeguards which limit the amount monthly payments on an adjustable rate mortgage may change.
Caps. A set percentage amount by which an adjustable rate mortgage may adjust each adjustment period or caps (maximums) may refer to fees charged for certain loans.
Clear Title. A title that is free of liens or any legal question as to the ownership of the property.
Closing. Final arrangements to transfer title of property as well as allocate charges and credits.
Closing Costs. Closing costs are mortgage fees over and above the price of the property that are paid by the borrower when a property is purchased or refinanced. Costs incurred include a loan origination fee, discount points, appraisal fee, title search, title insurance, survey, taxes, deed recording fee and credit report charges. All closing costs are separated into “non-recurring,” and “pre-paid.” Non-recurring charges are any items that are paid only once because a loan was obtained or a property bought, such as a loan origination fee. Pre-paid charges are those that recur over time, like insurance and property taxes. These are summarized in the Good Faith Estimate.
Conventional Mortgage. A mortgage loan that is obtained without any additional guarantees for repayment, such as FHA insurance, VA guarantees or private insurance. This is usually given at an 80% loan-to-value ratio.
Credit Rating. Borrowers are rated by lenders according to the borrower’s creditworthiness or risk profile. Credit ratings are expressed as letter grades such as A, B, or C+. These ratings are based on various factors such as a borrower’s payment history, foreclosures, bankruptcies and charge-offs. There is no exact science to rating a borrower’s credit, and different lenders may assign different grades to the same borrower.
Credit Ratio. The ratio, expressed as a percentage, which results when a borrower’s monthly payment obligation on long-term debts is divided by his or her net effective income (FHA/VA loans) or gross monthly income (Conventional loans). Also referred to as Housing Expenses-to-Income Ratio.
Credit Report. A report to a prospective lender on the credit standing of a prospective borrower. Used to help determine creditworthiness. Information regarding late payments, defaults or bankruptcies will appear here.
Deed. A legal document that affects the transfer of ownership of real estate from the seller to the buyer.
Default. The failure to make payments on a loan.
Delinquency. Late- or non-payments of principal, interest, taxes or insurance.
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.
Depreciation. In real estate and mortgage terms, the decline in the property value.
Discount Points. Interest charges paid up-front when a borrower closes a loan. Each point is equal to 1% of the loan amount. Generally, by paying more points at closing, the borrower reduces the interest rate of the loan and thus future monthly payments.
Down Payment. Money paid by a buyer from his or her own funds to make up the difference between the purchase price and mortgage amount. Down payments usually are 10% to 20% of the sales price on Conventional loans, and no money down up to 5% on FHA and VA loans.
Equity. The current market value of a home minus the outstanding mortgage balance. Home equity is essentially the amount of ownership that has been built up by the holder of the mortgage through payments and appreciation. Typically, residential property is bought through a mortgage, which is then paid off over a number of years, often 15 or 30. After the mortgage has been fully repaid, the property then belongs to the buyer. In the interim, however, the buyer simply builds up equity in the home. This is what a home equity loan borrows against. Although that equity cannot be sold, banks will lend money against it.
Escrow Account (impound account). The portion of a borrower’s monthly payment that is set aside by the lender in an escrow account to pay the taxes, hazard insurance, mortgage insurance, ground rents and other special items as they come due.
Federal Housing Administration (FHA). An agency under the U.S. Department of Housing and Urban Development (HUD), it insures loans made by approved lenders to qualified borrowers, in accordance with its regulations.
Federally-insured Reverse Mortgages. Also known as Home Equity Conversion Mortgages (HECMs), are backed by the U.S. Department of Housing and Urban Development (HUD). These are the most popular reverse mortgages designed to allow elderly homeowners to supplement retirement income using the equity in their homes.
Fair Credit Reporting Act. A law that protects consumer that regulates the reporting of consumer credit by agencies and establishes procedures for correcting errors on an individual record.
FHA Loan. A loan insured by the Federal Housing Administration (FHA) and the Department of Housing and Urban Development (HUD) open to all qualified home purchasers. While there are limits to the size of FHA loans, they are generous enough to handle moderate-priced homes almost anywhere in the country.
Finance Charge. The total dollar amount your loan will cost you. It includes all interest payments for the life of the loan, any interest paid at closing, your origination fee and any other charges paid to the lender and/or broker. Appraisal, credit report and title search fees are not included in the finance charge calculation.
First Mortgage. A mortgage that has priority over other mortgages.
Fixed-Rate Mortgage. A mortgage where the interest rate does not change for the life of the loan.
Float. Between the time of application and closing, a borrower may choose to bet on interest rates decreasing by electing to float. Floating is essentially choosing not to lock the interest rate. Since it is the borrower’s responsibility to lock his or her rate before (or at) closing, choosing to float is considered risky and may result in a higher interest rate.
Good Faith Estimate. An estimate of charges that a borrower is likely to incur in connection with a loan closing.
Home Equity Conversion Mortgage (HECM). Also known as the reverse mortgage. This mortgage provides that instead of making payments to a lender, the lender makes payments to the individual. Older homeowners are able to convert home equity into cash this way, in the form of monthly payments. Borrowers don’t qualify on the basis of income, but on the value of his or her home. Such a loan does not have to be repaid until the borrower no longer occupies the property.
Home equity line of credit. A mortgage loan in second position that allows a borrower to obtain cash drawn against home equity, up to a certain amount.
Home Equity Loan. A loan where a property owner uses his or her residence as collateral and can then draw funds up to a prearranged amount against the property.
Housing Expenses-to-Income Ratio. The ratio, expressed as a percentage, which results when a borrower’s housing expenses are divided by his/her net effective income (FHA/VA loans) or gross monthly income (Conventional loans). Also referred to as Credit Ratio.
Index. A published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments (such as one- three-, and five-year U.S. Treasury Security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average Costs-of-Funds incurred by savings and loans), which is then used to adjust the interest rate on an adjustable mortgage up or down.
Interest. Consideration in the form of money paid for the use of money, usually expressed as an annual percentage. Also, a right, share or title in property.
Intermediate-Term Mortgage. A mortgage loan with a stated maturity at the time of purchase that it is equal to or less than 20 years.
Jumbo Loan. A loan which is larger (more than $240,000) 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.
Lender. The bank, mortgage company or mortgage broker offering the loan. Many institutions only “originate” loans and then resell the obligation to third parties.
Lien. A legal claim by one party against the property of another as security for a debt. Must be paid off when property is sold. A mortgage or a first trust deed is a lien.
Loan. The principal, or amount of total borrowed money, that is repaid with interest.
Loan Amount. The amount of money that you intend on borrowing from a financial institution for the purchase of your home. Subtracting the down payment from the purchase price of the home will provide you with the loan amount.
Loan Officer. An intermediary between lending institutions and borrowers, loan officers solicit loans, represent creditors to borrowers and represent borrowers to creditors.
Loan-To-Value Ratio. The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage. A Loan-To-Value (LTV) ratio of 90 means that a borrower is borrowing 90% of the value of the property and paying 10% as a down payment. For purchases, the value of the property is assumed to be the purchase price, for refinances the value is determined by an appraisal.
Lock (noun). The period, expressed in days, during which a lender will guarantee a rate. Some lenders will lock rates at the time of application while others will allow the borrower to lock the rate after the application is taken.
Lock (verb). The act of committing to a mortgage rate. This action, taken by a borrower some time between the application and the closing dates, is sometimes accompanied by a payment by the borrower to the lender.
Low Doc Loan Programs. For those persons who do not wish to document his or her income or assets. There are programs where this information is not required but most of the time the rate is higher since the risk is higher for the lender.
Margin. The amount a lender adds to the index 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.
Maturity. The “Due Date” of a loan.
Merged Credit Report. A credit report that reports data from two or more major credit repositories.
Modification. Any change to the original terms of a mortgage.
Monthly Housing Expense. Total principal, interest, taxes and insurance paid by the borrower on a monthly basis. Used with gross income to determine affordability.
Mortgage. A legal document that pledges property to a creditor for the repayment of the loan, and is the term used to describe the loan itself. Some states use the term First Trust Deeds to refer to mortgage loans.
Mortgage Broker. An individual or company in the business of assisting in arranging funding or negotiating contracts for a client but who does not loan the money himself. Brokers usually charge a fee or receive a commission for their services.
Mortgage Insurance. Insurance that covers the lender against losses incurred as a result of a default on a home loan. This is usually required on all loans that have a loan-to-value higher than 80%. Mortgages that have an 80% LTV that do not require mortgage insurance have higher interest rates. The lenders then pay the mortgage insurance themselves. In addition, FHA loans and some first-time homebuyer programs require mortgage insurance regardless of the loan-to-value.
No-Cost Loan. A no-cost loan can either be: 1) a loan that has no “lender costs” associated with it or, 2) a loan that also covers purchases or refinancing costs, which may be incurred in buying a home, obtaining and/or refinancing a loan, but are not directly charged by the lender. The interest rate on this type of loan is higher.
Origination Fee. Covers the lender’s work in evaluating and processing the loan. This fee may be expressed in “points,” with each point equaling 1% of the mortgage. This may also be billed as “documentation preparations.”
PITI. Principal, interest, taxes and insurance. Also called monthly housing expense.
Points. A point is equal to 1% of the loan amount. Origination points may be charged by a lender to cover certain processing expenses in connection with making a real estate loan. Discount points represent interest charges paid up-front when a borrower closes a loan. Generally, by paying more points at closing, the borrower reduces the interest o the loan and thus future monthly payment.
Pre-Paids. Expenses such as taxes, insurance and assessments, which are paid in advance of their due date, and on a pro-rated basis at closing.
Pre-Payment. Any amount paid so as to reduce the principal before the due date.
Prepayment Penalty. The practice of charging money for an early pay-off of existing mortgage loan. Prepayment penalties vary by state, type of lender and type of loan.
Prime Rate. Interest charged by financial institutions to top-rate borrowers.
Principal. The amount of debt, not counting interest, left on a loan.
Private Mortgage Insurance (PMI). Paid by a borrower to protect the lender in case of default. PMI is typically charged to the borrower when the Loan-to-Value Ratio is greater than 80%.
Proprietary Reverse Mortgage. Private loans developed for elderly homeowners to supplement retirement income using the equity in their homes. These loans are backed by the companies that develop them and have some advantages for higher-valued homes. Similar to Home Equity Conversion Mortgages (HECMs)
Qualifying Ratio. The ratio of the borrower’s fixed monthly expenses to his gross monthly income. Ratios are expressed as two numbers like 28/36 where 28 would be the Front-End Ratio and 36 would be the Back-End Ratio.
The Front-End Ratio is the percentage of a borrower’s gross monthly income (before income taxes) that would cover the cost of PITI (Mortgage Principal Payment + Mortgage Interest Payment + Property Taxes + Homeowners Insurance). In the case of a 28% Front-End Ratio, a borrower could qualify if the proposed monthly PITI payments were 28% or less than the borrower’s gross monthly income.
The Back-End Ratio is the percentage of a borrower’s gross monthly income that would cover the cost of PITI plus any other monthly debt payments like car or personal loans and credit card debt.
Please note that qualifying ratios are only a rough guideline in determining a potential borrower’s creditworthiness. Many factors such as excellent or poor credit history, amount of down payment and size of loan will influence the decision to approve or disapprove a particular loan.
Rate Lock. A commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified interest rate for a specified period of time at a specific cost.
Recision. The cancellation of a contract. With respect to mortgage refinancing, the law that gives the homeowner three days to cancel a contract in some cases once it is signed if the transaction uses equity in the home as security.
Recording Fees. Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records.
Refinancing. The process of paying off one loan with the proceeds from a new loan, using the same property as security.
Reverse Mortgage. A system developed for an elderly property owner featuring the reverse of a traditional “forward” mortgage. Instead of paying the lender, the lender pays the homeowner (from the home’s equity) as long as the owner continues to live in the home. Repayment is required at death or when the owner sells the property or is no longer able to live on the property.
Second Mortgage. A mortgage that has a lien position subordinate to the first mortgage.
Service Fee Set-Aside (for Reverse Mortgages).The service fee set-aside is an amount of money deducted from the available loan proceeds at closing to cover the projected costs of servicing the reverse mortgage account.
Federal regulations allow the loan servicer (which may or may not be the same company as the originating lender) to charge a monthly fee that usually ranges between $30-$35. The amount of money set-aside is largely determined by the borrower’s age and life expectancy. Generally, the set-aside can amount to several thousand dollars. Note: The servicing set aside is just a calculation and not a charge. The only amount added to the loan balance is the monthly servicing fee.
Servicing. All the steps and operations a lender perform to keep a loan in good standing, such as collection of payments, payment of taxes, insurance, property inspections and the like.
Single-purpose Reverse Mortgage. Offered by some state and local government agencies and nonprofit organizations to assist elderly homeowners. They can only be used for specific purposes such as home repairs or property taxes. In most cases only low to moderate income persons qualify.
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 building.
Third-party Closing Costs. These fees are not controlled or determined by the lender, and vary by state. These costs could include title insurance, survey, attorney, transfer tax or Doc stamps, recording fees or state tax and intangible (county) tax to record the deed/mortgage in the county records.
Title. A legal document showing a person’s right to or ownership of a property.
Title Insurance. Title Insurance policies typically insure a homebuyer against any title-search errors or mistakes, and against loss due to disputes over property ownership. Title Insurance can additionally offer protection to the lender under similar circumstances. The cost of title insurance is usually a set value per $1000 of the total loan amount.
Title Search. An examination of municipal records to determine the legal ownership of property. Usually is performed by a title company.
Total Annual Loan Cost (TALC). Expresses all of a reverse mortgage’s various costs as an annual percentage. This formula serves a purpose similar to that of the Annual Percentage Rate (APR) that is often used to compare forward mortgages.
Total Debt Ratio. Monthly debt and housing payments divided by gross monthly income. Also known as Back-End Ratio.
Truth-in-Lending Law. Provision that requires lenders to reveal the actual costs of borrowing.
Two-Step Mortgage. A loan where the interest rate is fixed for the first seven years and then is adjusted one time for the balance of the loan period.
Underwriting. In mortgage lending, the process of approving or denying a loan based on an evaluation of the property and the applicant’s creditworthiness and ability to repay the loan. The underwriter analyzes the risks involved and selects an appropriate loan term and interest rate.
VA Loan. A government-backed mortgage loan supported by the US Veterans Administration.
Variable Rate Mortgage. A loan that allows the lender to adjust the borrower’s interest rate and payments at prescribed times and sometimes with prescribed limits. Lower interest rates are customary.
Verification of Employment. A document signed by the borrower’s employer verifying his/her position and salary.