Adjustable Rate: A loan on which the monthly payments will increase or decrease Mortgage (ARM) over time based on changes in its interest rate index. Commonly used indices include 11th District Cost of Funds, one-year T-note and six-month T-bill. ARMs are typically adjusted at six-month or one-year intervals.
Amortization: The gradual repayment of a mortgage through monthly (i.e. installment) payments. Early payments are applied mostly toward interest. As time goes on, payments go increasingly toward reducing the loan’s principal balance.
Annual Percentage: The annual cost of a mortgage including interest, loan fees and other rate costs stated as a percentage of the loan amount.
Appraisal Value: An opinion of the market value of a home expressed by a real estate appraiser. Also referred to as an “appraisal”.
Closing Costs: Expenses in addition to the price of the home incurred by buyers and sellers when a home is sold. Common closing costs include escrow fees, title insurance fees, document recording fees and real estate commissions.
Conventional Mortgage: A loan not guaranteed, insured or made by the federal or state government.
Debt-to-Income: The ratio of monthly debt payments to monthly gross income. (DTI) Ratio Lenders use a housing DTI ratio (house payments divided by monthly income) and a total DTI ratio (total debt payments including the house payment divided by monthly income) to determine whether a borrower’s income qualifies him or her for a mortgage.
Deed: A legal document conveying ownership of property.
Down Payment: The portion of a home’s purchase price the buyer pays in cash.
Earnest Money: The deposit given by a buyer to a seller to show that the buyer is serious about purchasing a home. Earnest money usually is refundable to homebuyers in the event a contingency of the sales contract cannot be met.
Equity: The difference between a home’s value and the mortgage amount still owing on it.
Escrow: The holding of documents and money by a neutral third party prior to closing.
Escrow Account: An account established by a lender to collect a borrower’s property tax and insurance payments. Impound accounts are normally required on mortgages with down payments of 10 percent or less.
Fannie Mae: The Federal National Mortgage Association, a government-sponsored but privately owned entity that converts mortgages bought from lenders into securities which are bought by investors. As such, it represents the chief secondary market for mortgages.
Freddie Mac: The Federal Home Loan Mortgage Corporation, a government-sponsored but privately owned entity that converts mortgages bought from lenders into securities which are bought by investors. As such, it represents the chief secondary market for mortgages.
Fixed-Rate Mortgage: A loan on which the interest rate and monthly payment do not change.
Hazard Insurance: Policies that compensate owners for damage to property from fire, wind and other hazards.
Homeowners Warranty: A policy that covers certain repairs (e.g., plumbing or heating) of a newly purchased home for a certain period of time
Loan-to-Value: The ratio of the amount of money owed on a home to the home’s value. The LTV ratio for a $500,000 home financed with a $450,000 mortgage would be 90 percent for example
Mortgage Banker: A company that originates mortgages for sale into the secondary mortgage market (see FANNIE MAE and FREDDIE MAC).
Mortgage Broker: A company that, for a fee, matches borrowers with lenders.
Mortgage Deed: Companion legal document to promissory note recorded by the county enumerating the lender’s procedure to enforce loan terms.
Mortgage Interest Deduction: The ability of mortgage borrowers to deduct the interest paid on a home loan for purposes of federal and state income taxes.
Note: Promissory note to lender details terms of repayment of amount borrowed.
Origination Fee: A fee charged by a lender for making a mortgage.
PITI: Principal, interest, taxes and insurance – the primary components of a mortgage payment
Point: One percent of the mortgage amount. Points are charged by lenders to increase their return on the mortgage. Typically, lenders charge from zero to two points. Loan points are tax deductible
Principal: The loan amount borrowed or still owing
Private Mortgage Insurance: Policies issued by private companies to insure lenders against loss should a borrower default on a mortgage. PMI is common when the down payment is less than 20 percent.
REALTOR®: A real estate broker or agent who, as a member of a local board of Realtors, a state association of Realtors and the National Association of Realtors, adheres to high standards of professionalism and a strict code of ethics.
Seller Financing: A financing agreement in which a seller provides part or all of the financing needed by the homebuyer.
Title: A legal document establishing the right of ownership of a property.
Title Insurance: A policy to protect the buyer and lender against losses arising from disputes over the ownership of a property.
Underwriting: The process of evaluating a loan application to determine if it meets the lender’s standards.