Adjustable-rate mortgage (ARM)
Also known as Variable Rate Mortgage (VRM), an adjustable-rate mortgage (ARM) is a type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan. With an adjustable-rate mortgage, the initial interest rate is fixed for a period of time, after which it resets periodically, often every year or even monthly.
Ex. His 5/1 ARM featured a fixed rate for 5 years, after which the rate reset once per year up or
down based on the interest rates at that time.
Amortization is the process of spreading out a loan into a series of fixed payments over time with a higher percentage of the flat monthly payment going toward interest early in the loan.
Ex. Most of the mortgages have an amortization of 25 years or less.
Annual percentage rate (APR)
Annual percentage rate is a way of measuring the full cost a lender charges per year for funds. APR combines the total amount of interest payable and the cost of other fees and charges, averaged over the term of the loan and expressed as a percentage.
Ex. Her total additional costs of $9,600 make her loan annual percentage rate 5.7%.
An appraisal is a valuation of property by the estimate of an authorized person to determine the value of the home to ensure that the price reflects the home’s condition, age, location, and features.
Ex. The appraisal helped the lender avoid loaning more money to the borrower than what the
house was worth.
Assumption of mortgage
An assumption of mortgage is an agreement under which the buyer of a property takes over the seller's liability for payment of installments (on the existing mortgage on the property) to save the closing costs or the higher interest rates of a new mortgage.
Ex. He has a cost-saving advantage with the assumption of mortgage as the current interest rates are higher than the interest rate on the assumable loan.
A balloon mortgage is a short-term mortgage in which small periodic payments are made until the completion of the term when the balance is due as a single lump-sum payment.
Ex. He agreed to a balloon mortgage since he expected a large cash infusion to pay off the debt.
Capped rate mortgage
A capped rate mortgage is a type of mortgage in which the interest rate can change, but cannot go above a certain value that is fixed at the time when the loan is taken out.
Ex. With a cap set at 5.0% for 2 years from the start of the mortgage, his capped rate mortgage allowed him to still pay 5.0% though the lender increased the variable for all other customers to 5.50%.
A cash-back mortgage returns a percentage of total annual mortgage payment amounts to the borrower.
Ex. Mortgage lenders may limit total annual cash-back payouts (e.g to $600, or no more than $50 monthly.)
Closing costs are the fees associated with a home purchase that are paid at the closing of a real estate transaction. Such expenses include fees for an attorney, a title search, title insurance, taxes, lender costs and some upfront housing expenses such as homeowners insurance.
Ex. If your home cost $150,000, you might pay between $3,000 and $7,500 in closing costs, that is between about 2 to 5 percent of the purchase price.
A closing disclosure is a five-page form provided to you by your lender three days before your closing and outlining the final terms and costs of your mortgage.
Ex. Reading the closing disclosure carefully reduced his last-minute loan-signing drama.
A combination mortgage is comprised of two separate mortgages that are on the same property, from the same lender for the same borrower.
Ex. They had to agree to a combination mortgage as they couldn’t come up with a 20% down
payment but wanted to avoid paying for PMI.
A conventional mortgage is any type of home buyer’s loan that is not offered or secured by a government entity, such as FHA, VA, or the USDA Rural Housing Service, but instead is available through or guaranteed by a private lender (banks, credit unions, mortgage companies) or the two government-sponsored enterprises, Fannie Mae and Freddie Mac.
Ex. As a conventional mortgage borrower, she had to make a larger down payment.
Credit history is a record of a consumer's ability to repay debts and demonstrated responsibility in repaying debts.
Ex. It takes 7 years for negative information to be wiped from a person's credit history.
A credit report is a detailed breakdown of an individual's credit history prepared by a credit bureau.
Ex. When the bank pulled his credit report, there was over $30,000 of credit card debt on the report.
Credit (fico) score
A credit score is a statistical number that evaluates a consumer's creditworthiness and is based on credit history.
Created by the Fair Isaac Corporation, a FICO score is a type of credit score that takes into account various factors in five areas to determine creditworthiness: payment history, current level of indebtedness, types of credit used, length of credit history, and new credit accounts.
Ex. A FICO Score above 670 is considered a good credit score, and a score above 800
is usually perceived to be exceptional.
Credit risk score
A credit risk score is a three-digit number used by lenders to provide a snapshot of your credit risk picture at a particular point in time.
Ex. The higher one’s credit risk score, the more likely the person is to repay.
Debt-to-Income (DTI) Ratio
The debt-to-income ratio is the percentage of your gross monthly income that goes to paying your monthly debt payments.
Ex. If your DTI ratio is 15%, that means that 15% of your monthly gross income goes to debt
payments each month.
Default is the failure to repay a debt including interest or principal on a loan or security.
Ex. He failed to make his timely mortgage payments, and the loan went into default.
Deferred interest is interest which is charged for a loan but does not have to be paid until a later date as per an agreement.
Ex. John’s deferred interest kept increasing as he could no longer afford to cover the interest and principal payment on his home mortgage.
Discount points, also called mortgage points or simply points, are a form of pre-paid interest when arranging a mortgage where one point equals one percent of the loan amount.
Ex. The borrower offered to pay the lender discount points to reduce the interest rate on the loan and to obtain a lower monthly payment.
Down payment (or downpayment) is an initial up-front partial payment for the purchase of expensive items such as a car or a house.
Ex. In the United States, a 20% down payment on a home is the standard for lenders.
A due-on-sale clause is a provision in a mortgage contract that requires the mortgage to be repaid in full upon a sale or conveyance of partial or full interest in the property that secures the mortgage.
Ex. When the homeowner sold his house, he couldn’t transfer the mortgage to the buyer because of the due-on-sale clause.
Earnest money is a deposit made to a seller that represents a buyer's good faith to buy a home.
Ex. The seller and the buyer wrote up a contract during the exchange of the earnest money.
First mortgage / Second mortgage
A first mortgage (also called first lien) is the primary loan that pays for the property and it has priority over all other liens or claims on a property in the event of default.
Ex. While owing $90,000 on the first mortgage, Kate took out a home equity loan for $20,000 to do some remodeling.
A second mortgage is another loan taken against a property that is already mortgaged to fund other projects and expenditures.
Ex. Many people take out a second mortgage to cover home repairs or renovations, or even to pay off debt.
Home equity line of credit
A home equity line of credit (HELOC) is a revolving line of credit. Once you have paid off the loan, you can borrow it again without applying for another loan. The bank opens the credit line and the equity in your home guarantees the loan.
Ex. In the past, many people used home equity lines as emergency funds.
A first-time buyer (FTB) is a potential house buyer who has not previously owned a property. According to the FHA, you are a first-time buyer if you have not been an owner in a primary residence for at least three years leading up to your purchase.
Ex. There are many assistance programs that are targeted to first-time homebuyers.
A fixed-rate mortgage is a fully amortizing mortgage loan that has a fixed interest rate for the entire term of the loan.
Ex. The predictability of his fixed-rate mortgage makes it easier to plan his budget.
A flexible mortgage is a residential mortgage loan that offers flexibility in the requirements to make monthly repayments.
Ex. As he didn’t have a fixed income, his flexible mortgage allowed him to repay capital early, take back some cash he had paid in or postpone payments.
Foreclosure is the legal process by which a lender takes control of a property, evicts the homeowner and sells the home after a homeowner is unable to make full principal and interest payments on his or her mortgage, as stipulated in the mortgage contract.
Ex. When the borrower defaulted, the foreclosure process began.
Fully Amortized ARM
Fully Amortized ARM is 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.
Ex. A fully amortizing ARM also has a maximum rate that it will not exceed.
A government-backed loan is subsidized by the government, which protects lenders against defaults on payments, thus making it a lot easier for lenders to offer potential borrowers lower interest rates.
Ex. Low income makes it harder to qualify for a home loan but fortunately, there are government-backed mortgages to help low-income individuals break into homeownership.
Graduated payment mortgage (GPM)
A graduated payment mortgage (GPM) is a type of fixed-rate mortgage in which the payments increase gradually from an initial low base level to a higher final level.
Ex. Their graduated payment mortgage allowed them to start off with lower monthly mortgage payments to help them qualify for their loan.
Growing equity mortgage (GEM)
A growing-equity mortgage (GEM) is a fixed rate mortgage on which the monthly payments increase over time according to a set schedule.
Ex. She was offered a growing-equity mortgage as she was not able to afford the upfront costs of purchasing a home.
A guaranteed mortgage is a home loan guaranteed by a third party, often a government agency that will buy the debt from the lender and take responsibility for the loan if the borrower defaults.
Ex. Being a risky borrower who did not qualify for a mortgage but needed the financial help he was offered a guaranteed mortgage.
Housing expense ratio
Housing expense ratio is a ratio comparing housing expenses to pre-tax income and often used by lenders in qualifying borrowers for loans.
Ex. The housing expense ratio threshold for mortgage loan approvals is typically 28%.
Initial interest rate
The initial interest rate (also known as the teaser rate or start rate) is the introductory rate on an adjustable or floating rate loan.
Ex. A one-year ARM has an initial interest rate for only one year, while a 5/1 ARM will have an initial interest rate for five years.
Interest is the charge for the privilege of borrowing money, typically expressed as an annual percentage rate (APR).
Ex. The bank charges 1.2% interest monthly on the unpaid balance of a credit card.
An interest rate is the percentage of principal charged by the lender for the use of its
Ex. Their interest rate is between 10-20 percent.
Your credit scores influence your mortgage interest rate.
An interest-only mortgage is a type of mortgage in which the mortgagor is required to pay only interest with the principal repaid in a lump sum at a specified date.
Ex. Most interest-only mortgageshave a 30-year term with a 10-year interest-only period.
Interest rate ceiling
An interest rate ceiling, also known as an interest rate "cap," is the maximum interest rate that a lender can charge a borrower when negotiating a loan.
Ex. He took out a mortgage with a lifetime interest rate ceiling of 10% which meant his rate would never go beyond the 10% rate over the life of the mortgage.
Interest rate floor
An interest rate floor is an agreement between the seller or provider of the floor and an investor which guarantees that the investor’s floating rate of return will not fall below a specified level over an agreed period of time.
Ex. Contracts and loan agreements often include interest rate floors.
Jumbo loan (jumbo mortgage)
A jumbo loan is a type of financing that exceeds the limits set by the Federal Housing Finance Agency and cannot be purchased, guaranteed, or securitized by Fannie Mae or Freddie Mac.
Ex. Traditionally jumbo mortgages used to carry higher interest rates than conventional
A lease purchase mortgage is a financing option that allows potential homebuyers to lease a property with the option to buy that very property at the end of the set term.
Ex. A lease purchase mortgage allowed them to pay up the rest of the house and become the actual homeowner after 3 years.
A lien is a legal right granted by the owner of property, by a law or otherwise acquired by a creditor.
Ex. A lien serves to guarantee an underlying obligation, such as the repayment of a loan.
Loan-to-Value (LTV) ratio
The loan-to-value (LTV) ratio is an assessment of lending risk that financial institutions and other lenders examine before approving a mortgage. An LTV ratio is calculated by dividing the amount borrowed by the appraised value of the property, expressed as a percentage.
Ex. A home with a purchase price of $200,000 and a total mortgage loan for $180,000 results in a LTV ratio of 90%.
Market value (also known as OMV, or "open market valuation") is the price an asset would fetch in the marketplace, or the value that the investment community gives to a particular equity or business.
Ex. He would never sell his house at $330,000 as its market value was $250,000.
(n.) a legal arrangement by which you borrow money from a bank or similar organization in order to buy a house, and pay back the money over a period of years.
Ex. They have a 30-year mortgage on a small house in LA.
(v.) convey (a property) to a creditor as security on a loan.
Ex. He mortgaged his house to start a new business.
A mortgage banker is a company, individual, or institution that originates mortgages using their own or borrowed funds.
Ex. She got an offer for a mortgage from a mortgage banker.
A mortgage commitment is a written confirmation from a buyer's bank to a seller of a property that the bank will advance the specified sums (usually as a mortgage loan) enabling the buyer to complete the purchase.
Ex. John presented himself as a qualified buyer by obtaining a mortgage commitment from his bank.
Mortgage insurance premium
Mortgage insurance premium (MIP) is an insurance policy used in FHA loans if your down payment is less than 20 percent.
Ex. He had to pay MIP throughout the life of his loan as his LTV was greater than 90 percent.
A mortgage note is a written promise to repay a specified sum of money plus interest at a specified rate and length of time to fulfill the promise.
Ex. Your mortgage note will state details such as your loan amount, interest rate, due dates, late charges and other loan terms.
Mortgage rate lock
A mortgage rate lock is an agreement between a borrower and a lender that guarantees the current rate of interest on a home loan while a home buyer proceeds through the purchase and closing process.
Ex. A mortgage rate lock period is typically 30 to 60 days.
An open-end mortgage is a type of mortgage that allows the borrower to increase the amount of the mortgage principal outstanding at a later time.
Ex. He took out an open-end mortgage for $300,000 and used $200,000 to purchase the home.
PITI — Principal, Interest, Taxes and Insurance
Principal, interest, taxes, insurance (PITI) is the sum of a mortgage payment that includes the principal amount, loan interest, property tax, and homeowner's property and private mortgage insurance premiums.
Ex. Generally, mortgage lenders prefer PITI to be equal to or less than 28% of a borrower's gross monthly income.
A piggyback mortgage can include any additional mortgage loan beyond a borrower’s first mortgage loan that is secured with the same collateral. Common types of piggyback mortgages include home equity loans and home equity lines of credit.
Ex. A piggyback mortgage helped the borrower with his down payment.
Pledged account mortgage (PAM)
Pledged account mortgage (PAM) is a type of mortgage loan in which the repayment settlements are supplemented by the interest income and/or funds drawn from a savings account, pledged as an additional collateral. The savings account is established with part of the downpayment.
Ex. With her pledged account mortgage her payments are reduced in the first 3 years by drawing upon the $5,000 pledged account.
Prepayment is the early repayment of a loan by a borrower, in part or in full, often as a result of optional refinancing to take advantage of lower interest rates.
Ex. His loan balance declines more rapidly as he has made a prepayment.
Primary mortgage market
The primary mortgage market is the market where borrowers can obtain a mortgage loan from a primary lender.
Ex. A bank is a primary lender and is part of the primary mortgage market.
Principal is the initial size of a loan or the amount still owed on a loan.
Ex. Paying down the principal of a loan is the only way to reduce the amount of interest that accrues each month.
Private Mortgage Insurance (PMI)
Private Mortgage Insurance (PMI) is a type of insurance required mortgages where the buyer’s down payment is less than 20% of the purchase price of the home.
Ex. He applied for a VA loan to avoid PMI.
Sales and Purchase Agreement (SPA)
A sales and purchase agreement (SPA) is a binding and legal contract between the buyer and the seller of real estate.
Ex. They finalized the terms and conditions of the sale in a SPA.
Refinancing occurs when a previous loan has been revised in terms of the interest rate, payment schedule, and terms.
Ex. He was considering refinancing his home loan with the best lending company and the lowest rates.
Renegotiable rate mortgage (rollover mortgage)
A renegotiable rate mortgage is a type of home mortgage for which monthly payments stay constant for a term, usually of three to five years, and the interest rate is renegotiated at the end of every such term until the loan is paid off.
Ex. The initial fixed interest rate of renegotiable rate mortgage is usually lower than that of a standard fixed-rate mortgage.
Shared Appreciation Mortgage (SAM)
A shared appreciation mortgage (SAM) is when the borrower or purchaser of a home shares a percentage of the appreciation in the home's value with the lender. In return for this additional compensation, the lender agrees to charge an interest rate which is below the prevailing market interest rate.
Ex. The borrower paid the bank 25% of the $60,000 appreciation in value under the SAM guidelines.
Title insurance is a form of indemnity insurance that protects the holder from financial loss sustained from defects in the title to a property.
Ex. Prior to the invention of title insurance, buyers in real estate transactions bore sole responsibility for ensuring the validity of the land title held by the seller.
A two-step mortgage is a long term mortgage (30 years), where the borrower gets a lower than market rate of interest for the first 5-7 years and then has the prevailing rate for the remainder of time.
Ex. His two-step loan helped John during the construction of his property.
A wraparound mortgage is used to refinance a property and is a junior loan that includes the current note on the property, plus a new loan to cover the purchase price of the property.
Ex.The buyer had to use a wraparound mortgage as she would not qualify for a traditional mortgage loan.