Glossary of Terms

 

Adjustable Rate

Mortgage (ARM)

A mortgage in which the interest rate is adjusted periodically based on a pre-selected index and

margin, also referred to as the renegotiable rate mortgage.

 

Amortization

Means of loan payment by equal periodic payments calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance.

 

Annual Percentage Rate (APR)

The interest rate that reflects the cost of a mortgage as a yearly rate. This rate is likely to be higher than the stated note rate or advertised rate on the mortgage, because it takes into account points and other credit or closing costs. The APR allows home buyers to compare different types of mortgages based on the annual cost for each loan, however not all lenders calculate APR the same way.

 Buy down

This is when the lender and/or home builder subsidizes the mortgage by lowering the interest rate during the first few years of the loan. While the payments are initially low, they increase when the subsidy expires.

 Construction Loan

This is a short-term interim loan for financing the cost of construction. The lender advances funds to the builder at periodic intervals as the work progresses.

 Discount Points

Prepaid interest assessed at closing by the lender. Each point is equal to 1% of the loan amount, i.e., two points on a $100,000 mortgage would equal $2,000. Discount points are charged to reduce the interest rate.

 

Down Payment Assistance Program (DPA)

Down Payment Assistance Programs are funds given to buyers to assist with the purchase of a home. Buyers do not have to repay these funds. There are two types of DPAs: those involving seller contributions and those provided by the government which are usually local programs. Most of these programs disappeared in 2008.

 

Earnest Money

Money given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment.

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, they are generous enough to handle moderately-priced homes almost anywhere in the country.

 

FHA Mortgage Insurance

All types of Mortgage Insurance protect the lender in the event of default. There are two types of FHA Mortgage Insurance. Up-front Mortgage Insurance (MIP), paid at closing and Monthly Mortgage Insurance, paid monthly with the mortgage payment. Upfront premiums range from 1.25% to 2.25% of the

loan amount and monthly premiums range from 0.50% to 0.55%, depending on the borrower’s credit score and the loan-to-value.

 

First Time Home Buyer Program

Mortgage loans with special qualifying terms for those who have never owned real estate or have not in the previous 3 years. Although the programs and terms vary by state, they often offer down payment and closing cost assistance.

 

Impound/Escrow Account

That portion of a borrower’s monthly payments held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also known as reserves.

 

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-year, three-year, and five-year US 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.

 

Loan Level Price Adjustments (LLPAs)

Loan-Level Price Adjustments are automatic, cumulative fees based on credit scores and the amount of your down payment. Fannie Mae (FNMA) and Freddie Mac (FHLMC) levy these fees on borrowers with credit scores below 720. They have nothing to do with the mortgage company or its various products and cannot be negotiated away.

 Margin

The amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate.

 

Mortgage Insurance (MI)

Money paid to insure the mortgage when the down payment is less than 20%. See Private Mortgage Insurance or FHA Mortgage Insurance.

Origination Fee

Fee charged by a loan originator to provide the borrower with a lower interest rate. Usually charged as a percentage, each point is equal to 1% of the loan amount.

 

PITI

Also known as total monthly housing expense, this is an acronym for the principal, interest, taxes and insurance.

Private Mortgage Insurance

In the event that you do not have a 20% down payment, the lender may allow a smaller down

payment, sometimes as low as 3%. However, with a smaller down payment, borrowers are usually

required to carry private mortgage insurance on the loan. Private mortgage insurance comes in two forms: upfront, paid at closing, and monthly. A lender may require some combination of both upfront and monthly mortgage insurance. The amount required is determined based on program type, property type, credit score and loan-to-value.

 

Title Insurance

Title insurance protects a real estate owner or lender against any loss or damage they might experience because of liens, encumbrances, or defects in the title to the property, or the incorrectness of the related search. It protects against claims from various defects such as another person claiming an ownership interest, improperly recorded documents, fraud, forgery, liens, encroachments, easements and other items that are specified in the actual policy.

 Underwriting

Approves (or declines) funding to potential home buyers, based upon factors such as credit, employment, assets, etc., and matches approved risks with appropriate rates, terms and loan amounts.

 VA Loan

Mortgage loans available to eligible US veterans. VA guaranteed loans are made by private lenders, such as banks or mortgage companies, for the purchase of a home for a buyer’s own personal occupancy. These loans offer competitive rates and require little or no down payment.

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