A-Credit
A consumer with the best credit rating, deserving of the lowest prices that
lenders offer. Most lenders require a
FICO score above 720. There is seldom any payoff for being above
the A-credit threshold, but you pay a penalty for being below
it.
Acceleration clause
A contractual provision that gives the lender the right to demand repayment of the
entire loan balance in the event that the borrower violates one or more clauses
in the note.
Accrued interest
Interest that is earned but not paid, adding to the amount owed. Same as Negative amortization.
Adjustable rate mortgage (ARM)
A mortgage on which the interest rate,
after an initial period, can be changed by the lender. While ARMs in many
countries abroad allow rate changes at the lender's discretion ("discretionary
ARMs"), in the US most ARMs base rate changes on a pre-selected interest rate
index over which the lender has no control. These are "indexed ARMs". There is
no discretion associated with rate changes on indexed ARMs.
Adjustment interval
On an ARM, the time between
changes in the interest rate or monthly payment. The rate adjustment interval
and the payment adjustment interval are the same on a fully amortizing ARM,
but may not be on a negative amortization ARM.
Affordability
A consumer's capacity to afford a
house. Affordability is usually expressed in terms of the maximum price the
consumer could pay for a house, and be approved for the mortgage required to pay
that amount.
Agreement of sale
A contract signed by buyer and seller stating the terms and conditions under which
a property will be sold.
Alt-A
A mortgage risk categorization that falls between prime and sub-prime, but is closer to prime.
Also referred to as "A minus".
Alternative documentation
Expedited and simpler documentation requirements designed to speed up the loan approval
process. Instead
of verifying employment with the applicant's employer and bank deposits with the
applicant's bank, the lender will accept paycheck stubs, W-2s, and the
borrower's original bank statements. Alternative documentation remains “full
documentation”, as opposed to the other documentation options.
Amortization
The repayment of principal from scheduled mortgage payments that exceed the interest due.
The scheduled
payment less the
interest equals amortization. The loan
balance declines by the amount of the scheduled payment, plus the amount of any
extra payment. If the payment is less than the
interest due, the balance rises, which is negative amortization.
Amortization schedule
A table showing the mortgage payment, broken down by interest and amortization,
the loan balance, tax and insurance
payments if made by the lender, and the balance of the tax/insurance escrow
account.
Amount financed
On the Truth in Lending form, the loan
amount less "prepaid finance charges", which are lender fees paid at closing.
For example, if the loan is for $100,000 and the borrower pays the lender $4,000
in fees, the amount financed is $96,000. A useless number.
Annual percentage
See APR.
Application
A request for
a loan that includes the information about the potential borrower, the property
and the requested loan that the solicited lender needs to make a
decision. In a narrower sense, the application refers to a
standardized application form called the "1003" which the borrower is obliged to
fill out.
Application fee
A fee that some lenders charge to accept an application. It may or
may not cover other costs such as a
property appraisal or credit report, and it may or may not be refundable if the
lender declines the loan.
Appraisal
A written estimate of a property's current market value prepared by an
appraiser.
Appraiser
A professional with knowledge of real estate
markets and skilled in the practice of appraisal. When a
property is appraised in connection with a loan, the appraiser is selected by
the lender, but the appraisal fee is usually paid by the
borrower.
Appraisal fee
A fee charged by an appraiser for the appraisal of a
particular property.
APR
The Annual Percentage Rate, which must
be reported by lenders under Truth in Lending regulations. It is a comprehensive
measure of credit cost to the borrower that takes account of the interest rate,
points, and flat dollar charges. It is also adjusted for the time value of
money, so that dollars paid by the borrower up-front carry a heavier weight than
dollars paid ten years down the road. However, the APR is calculated on the
assumption that the loan runs to term, and is therefore potentially deceptive
for borrowers with short time horizons.
Assumption
A method of selling real estate where the buyer of the property agrees to become
responsible for the repayment of an existing loan on the
property. Unless
the lender also agrees, however, the seller remains liable for the
mortgage.
Assumable mortgage
A mortgage contract that allows, or does
not prohibit, a creditworthy buyer from assuming the mortgage contract of the
seller. Assuming a loan will save the buyer money if the rate on the existing
loan is below the current market rate, and closing costs are avoided as well. A
loan with a "due-on-sale" clause stipulating that the mortgage must be repaid
upon sale of the property, is not assumable.
Authorized user
Someone authorized by the original credit
card holder to use the holder’s card. The card-holder is responsible for the
charges of the authorized user, but the authorized user is not responsible for
paying any charges, including his own. But sometimes authorized users are dunned
for the unpaid bills of the card holder.
Automated underwriting
A computer-driven process for informing
the loan applicant very quickly, sometimes within a few minutes, whether the
applicant will be approved, or whether the application will be forwarded to an
underwriter. The quick decision is based on information provided by the
applicant, which is subject to later verification, and other information
retrieved electronically including information about the borrower's credit
history and the subject property
Automated underwriting system
A particular
computerized system for doing automated underwriting. Mortgage
insurers and some large lenders have developed such systems, but the most widely
used are Fannie Mae’s “Desktop Underwriter” and Freddie Mac’s “Loan Prospector”.
Back-end fee or
commission
Mortgage broker
income paid by the lender, same as yield-spread premium and Negative
points.
Balance
The amount of the original loan
remaining to be paid. It is equal to the loan amount less the sum of all prior
payments of principal. See Mortgage
Amortization: How Does it Work?
Balloon
mortgage
A mortgage which is payable
in full after a period that is shorter than the term. In most cases, the
balance is refinanced with the current or another lender. On a 7-year balloon
loan, for example, the payment is usually calculated over a 30-year period, and
the balance at the end of the 7th year must be repaid or refinanced at that
time. Balloon mortgages are similar to ARMs in that the borrower trades off a
lower rate in the early years against the risk of a higher rate later. They are
riskier than ARMs because there is no limit on the extent of a rate increase at
the end of the balloon period. See Balloon
Mortgages.
Balloon
The loan balance remaining at the time
the loan contract calls for full repayment.
Bimonthly
mortgage
A mortgage on which the borrower pays
half the monthly payment on the first day of the month, and the other half on
the 15th. See Alternative
Early Payoff Plans.
A mortgage on which the borrower pays
half the monthly payment every two weeks. Because this results in 26 (rather
than 24) payments per year, the biweekly mortgage amortizes before term. See Biweekly Mortgages.
A short-term loan, usually from a bank,
that "bridges" the period between the closing date of a home purchase and the
closing date of a home sale. To qualify for a bridge loan, the borrower must
have a contract to sell the existing house. Read How Can I
Buy Before I Sell?
Builder-financed
construction
Having the builder finance the
construction. Read Should
the Builder Finance Construction?
Buy-down
A permanent buy-down is the payment of points
in exchange for a lower interest rate. See Points. A
temporary buy-down concentrates the rate reduction in the early years. See Temporary Buy-Down.
Buy-up
Paying a higher interest rate in exchange for
a rebate by the lender which reduces upfront costs. See Negative Points.
Same as Float-down.
Cash Flow Option
Loan
Same as Flexible Payment ARM.
Refinancing for an amount in excess of
the balance on the old loan plus settlement costs. The borrower takes "cash-out"
of the transaction. This way of raising cash is usually an alternative to
taking out a home equity loan. For a discussion of the relative merits of the
two approaches, read Debt
Consolidation With a Cash-Out Refinance.
Closing
On a home
purchase, the process of transferring ownership from the seller to the buyer,
the disbursement of funds from the buyer and the lender to the seller, and the
execution of all the documents associated with the sale and the loan.
On a
refinance, there is no transfer of ownership, but the closing includes repayment
of the old lender.
Closing
costs
Same as Settlement costs.
Closing date
The date on
which the closing occurs. See Mortgage Closing Date: Does it
Matter?
CMG
plan
A technique for repaying a loan
early that involves using the mortgage as a substitute for a checking account.
See The
CMG Plan: Your Mortgage as a Checking Account.
Co-Borrowers
One or more
persons who have signed the note, and are equally responsible for repaying the
loan. Unmarried co-borrowers who live together are advised to agree beforehand
on what happens if they split. See On
Buying a House With a Domestic Partner.
COFI
Cost of funds index. One of many
interest rate indexes used to determine interest rate adjustments on an
adjustable rate mortgage. See What Is a Coffee Loan? and Which Adjustable Rate
Mortgage Index Is the Best?
Conforming
mortgage
A loan eligible for purchase by the two
major Federal agencies that buy mortgages, Fannie Mae and Freddie Mac. See What Do
Fannie Mae and Freddie Mac Do?
Construction
financing
The method of financing used when a
borrower contracts to have a house built, as opposed to purchasing a completed
house. See Pitfalls
in Financing Home Construction .
Contract
knavery
Inserting
provisions into a loan contract that severely disadvantage the borrower, without
the borrower’s knowledge, and sometimes despite oral assurances to the
contrary. Prepayment
penalties are perhaps the most frequently cited subject of such abuse. Read What Is
Predatory Lending?
Conventional
mortgage
A home mortgage that is neither
FHA-insured nor VA-guaranteed.
Conversion
option
The option to convert an ARM to an FRM
at some point during its life. These loans are likely to carry a higher rate or
points than ARMs that do not have the option. See Conversion Option on
an Adjustable Rate Mortgage?
A lender who delivers loans to a
(usually larger) wholesale lender against prior
price commitments the wholesaler has made to the correspondent. The commitment
protects the correspondent against pipeline
risk.
COSI
Cost of savings index. One of many
interest rate indexes used to
determine interest rate adjustments on an adjustable rate mortgage. See Which Adjustable Rate
Mortgage Index Is the Best?
Co-signing a
note
Assuming responsibility for someone
else's loan in the event that that party defaults. A risk not to be taken
lightly. See The Hazards of
Co-signing, and
Co-Signing a
Mortgaage: How Much Help?
Credit report
A report from a
credit bureau containing detailed information bearing on credit-worthiness,
including the individual's credit history. See What Is a Credit
Report? and Credit
Reports and Credit Scores.
A single numerical score, based on an
individual's credit history, that measures that individual's credit worthiness.
Credit scores are as good as the algorithm used to derive them. The most widely
used credit score is called FICO for Fair Issac Co. which developed it. Many of
the columns in Mortgage Credit Issues discuss
factors that affect the FICO score, including Raise
Credit Score by Paying Delinquencies? and Do Credit
Inquiries Hurt Your Credit Credit?
Cumulative
interest
The sum of all interest payments to date
or over the life of the loan. This is an incomplete measure of the cost of
credit to the borrower because it does not include up-front cash payments, and
it is not adjusted for the time value of money. See Interest cost.
The most recently published value of the
index used to adjust the interest rate on an
indexed ARM.
Deadbeat
A borrower who doesn't pay. See When Good
Credit Marries Bad Credit. And Can a Deadbeat Pay
Cash?
Debtaholic
A borrower who cannot handle debt
except by complete abstinence. See Are
Credit Problems Cured by the Passage of Time?
Debt
consolidation
Rolling short-term debt into a home
mortgage loan, either at the time of home purchase or later. For columns on the
subject, see Debt
Consolidation.
Debt
elimination
Scams designed to relieve you of your money
by promising to eliminate your mortgage debt. See Debt Elimination -
Dupes Apply Here.
Deed in lieu of
foreclosure
Deeding the property over to the lender
as an alternative to having the lender foreclose on the property. See Options
When Equity in Your Home is Gone and Mortgage
Payment Problems: What If You Can't Pay?
Default
Failure of the borrower to honor the
terms of the loan agreement. Lenders (and the law) usually view borrowers
delinquent 90 days or more as in default.
Deferred
interest
Same as negative amortization.
Delinquency
A mortgage payment that is more than 30
days late. For articles on payment problems, see Payment Problems. Don't confuse with Late payment.
Demand
clause
A clause in the note that allows the
lender to demand repayment at any time for any reason. See What Is a Demand
Clause?
Direct
lender
Same as lender.
Discount mortgage
broker
A mortgage broker who claims to be
compensated entirely by the lender rather than by the borrower. See Are
Discount Mortgage Brokers Upfront?
Discount
points
Same as points.
Discretionary
ARM
An adjustable rate mortgage on which the
lender has the right to change the interest rate at any time subject only to
advance notice. Discretionary ARMs are found abroad, not in the US. See Can You Have
Peace of Mind With an ARM?
Documentation
requirements
The set of lender requirements that
specify how information about a loan applicant's income and assets must be
provided, and how it will be used by the lender. See What Are
Mortgage Documentation Requirements?
The difference between the value of the
property and the loan amount, expressed in dollars, or as a percentage of the
price. For example, if the house sells for $100,000 and the loan is for $80,000,
the down payment is $20,000 or 20%. To read articles about the down payment, see
Down Payment.
Dual
apper
A borrower who submits applications
through two loan providers, usually mortgage brokers. See Is It
OK to Submit Two Mortgage Loan Applications?
Dual index
mortgage
A mortgage on which the interest rate is
adjustable based on an interest rate index, and the monthly payment adjusts
based on a wage and salary index. See Dual Index
Mortgages.
A provision of a loan contract that
stipulates that if the property is sold the loan balance must be repaid. This
bars the seller from transferring responsibility for an existing loan to the
buyer when the interest rate on the old loan is below the current market. A
mortgage containing a due-on-sale clause is not an assumable mortgage.
A term used in two ways. In one context
it refers to a measure of interest cost to the borrower that is identical to the
APR except that it is calculated over the time horizon specified by the
borrower. The APR is calculated on the assumption that the loan runs to term,
which most loans do not. (See
Does the Annual
Percentage Rate (APR) Help?). In most texts on the mathematics of finance,
however, the "effective rate" is the quoted rate adjusted for intra-year
compounding. For example, a quoted 6% mortgage rate is actually a rate of .5%
per month, and if interest received in the early months is invested for the
balance of the year at .5%, it results in a return of 6.17% over the year. The
6.17% is called the "effective rate" and 6% is the "nominal"
rate.
In connection with a home, the
difference between the value of the home and the balance of outstanding mortgage
loans on the home.
Equity
grabbing
A type of predatory lending where the
lender intends for the borrower to default so the lender can grab the borrower's
equity. Read What Is
Predatory Lending?
Escrow
An agreement that money or other objects
of value be placed with a third party for safe keeping, pending the performance
of some promised act by one of the parties to the agreement. It is common for
home mortgage transactions to include an escrow agreement where the borrower
adds a specified amount for taxes and hazard insurance to the regular monthly
mortgage payment. The money goes into an escrow account out of which the lender
pays the taxes and insurance when they come due. For articles on this subject,
see Escrows.
Fallout
Loan applications that are withdrawn by
borrowers, sometimes because they have found a better deal. See Why
Is Locking Unique to Mortgages?
One of two Federal agencies
that purchase home loans from lenders. (The other is Freddie Mac). Both
agencies finance their purchases primarily by packaging mortgages into pools,
then issuing securities against the pools. The securities are guaranteed by the
agencies. They also raise funds by selling notes and other liabilities. See What Do
Fannie Mae and Freddie Mac Do?
Fees
The sum of all upfront cash payments
required by the lender as part of the charge for the loan. Origination fees and points
are expressed as a percent of the loan. Junk fees
are expressed in dollars.
FHA
mortgage
A mortgage on which the lender is
insured against loss by the Federal Housing Administration, with the borrower
paying the mortgage insurance premium. The major advantage of an FHA mortgage is
that the required down payment is very low, but the maximum loan amount is also
low. For articles on FHA, see FHA
Mortgages.
FICO
Score
See Credit
Score.
Financing
points
Including points in the loan amount.
Read Can Mortgage Points Be
Financed?
First
mortgage
A mortgage
that has a first-priority claim against the property in the event the borrower
defaults on the loan.
For
example, a borrower defaults on a loan secured by a property worth $100,000 net
of sale costs. The property has a first
mortgage with a balance of $90,000 and a second mortgage with a balance of
$15,000. The first mortgage lender can
collect $90,000 plus any unpaid interest and foreclosure costs. The second mortgage lender can collect only
what is left of the $100,000.
A mortgage on which the interest rate
and monthly mortgage payment remain unchanged throughout the term of the
mortgage.
Same as Option
ARM.
Float
Allowing the rate and points to vary
with changes in market conditions. The borrower may elect to lock the rate and points at any time but must do so a few days
before the closing. Allowing the rate to float exposes the borrower to market
risk, and also to the risk of being taken advantage of by the loan provider.
See Is it Wise to
Float?
A rate lock, plus an option to reduce the
rate if market interest rates decline during the lock period. Also called a cap. A float-down
costs the borrower more than a lock because it is more costly to the lender.
Float-downs vary widely in terms of how often the borrower can exercise (usually
only once), and exactly when the borrower can exercise. See What Is a
Float-Down? Do not confuse with interest rate increase caps and payment increase
caps.
Foreclosure
The legal process by which a lender
acquires possession of the property securing a mortgage loan when the borrower
defaults. See Can a
Mortgage Lender Profit From Foreclosure?
Forbearance agreement
An
agreement by the lender not to exercise the legal right to foreclose in exchange
for an agreement by the borrower to a payment plan that will cure the borrower’s
delinquency. See
Mortgage
Payment Problems: What If You Can't Pay?
Freddie
Mac
One of two
Federal agencies that purchase home loans from lenders. The other is Fannie Mae.
Front-end
fee
Mortgage broker income paid by the borrower, as
distinguished from the fee paid by the lender, which is
"back-end".
The monthly mortgage payment which, if
maintained unchanged through the remaining life of the loan at the then-existing
interest rate, will pay off the loan over the remaining life. See Mortgage
Amortization: How Does It Work? On FRMs the payment is always fully
amortizing, provided the borrower has made no prepayments. (If the borrower
makes prepayments, the monthly payment is more than fully amortizing). On GPMs,
the payment in the early years is always less than fully amortizing. On ARMs,
the payment may or may not be fully amortizing, depending on the type of ARM.
See How
Does Negative Amortization on a Mortgage Work?
The current index value plus the margin on an ARM. Usually, initial interest rates on ARMs are below the
fully indexed rate. If the index does not change from its initial level, after
the initial rate period ends the interest rate will rise to the fully indexed rate
after a period determined by the interest
rate increase cap. For example, if the initial rate is 4% for 1 year, the
fully indexed rate 7%, and the rate adjusts every year subject to a 1% rate
increase cap, the 7% rate will be reached at the end of the third year. See What Is an Adjustable Rate
Mortgage? and What Is the Real
Price of an Adjustable Rate Mortgage?
Prices that assume a more or less
standardized set of transaction characteristics that generally command the
lowest prices. Generic prices are distinguished from transaction specific
prices, which pertain to the characteristics of a specific transaction. See What
Mortgage Market Niche Are You In?
Gift of
equity
A sale price below market value, where
the difference is a gift from the sellers to the buyers. Such gifts are usually
between family members. Lenders will
usually allow the gift to count as down payment. See Avoiding
Taxes on a Gift of Equity.
Good fairy
syndrome
A belief that somewhere out there is a good
fairy who will solve all our financial (and other) problems. See Mortgage
Fraud and Belief in a Good Fairy.
The form that
lists the settlement charges the borrower must pay at closing, which the lender
is obliged to provide the borrower within three business days of receiving the
loan application.
See Why Do
Lenders Itemize Loan Charges? and How to Shop
Settlement Costs.
Government National Mortgage Association
(GNMA)
A Federal
agency that guarantees mortgage securities that are issued against pools of FHA
and VA mortgages.
The period after the payment due date
during which the borrower can pay without being hit for late fees. Grace periods
apply only to mortgages on which interest is calculated monthly. Simple interest
mortgages do not have a grace period because interest accrues daily. See What Are Simple Interest
Mortgages?
Graduated payment mortgage
(GPM)
A mortgage on which the payment rises by
a constant percent for a specified number of periods, after which it levels out
over the remaining term and amortizes fully. For example, the payment might
increase by 7.5% every 12 months for 60 months, after which it is constant for
the remaining term at a fully amortizing level. See What is a
Graduated Payment Mortgage (GPM)?
Graduation
period
The interval at which the payment rises
on a GPM.
Graduation
rate
The percentage increase in the payment
on a GPM.
Guaranteed Mortgage Price
Agreement
A proposal by HUD in 2002 to allow
lenders and others to offer packages of loans and settlement services at a
single price. See HUD's
Proposals For Reform.
Hazard
insurance
Insurance purchased by the borrower, and
required by the lender, to protect the property against loss from fire and other
hazards. Also known as "homeowner insurance", it is the second "I" in PITI. See Questions
About Home Owners Insurance.
Historical
scenario
The assumption that the index value to
which the rate on an ARM is tied follows the same pattern as in some prior
historical period. In meeting
their disclosure obligations in connection with ARMs, some lenders show how the
mortgage payment would have changed on a mortgage originated some time in the
past. That is not very useful. Showing how a mortgage originated now
would change if the index followed a historical pattern would be useful, but
nobody does it.
Homebuyer protection
plan
A plan purporting to protect FHA
homebuyers against property defects. See Is FHA Responsible
For the Leaky Roof?
Homeowner's
equity
See Equity.
Homeowners
insurance
Insurance purchased by the borrower, and
required by the lender, to protect the property against loss from fire and other
hazards. It is the second "I" in PITI. See Questions
About Home Owners Insurance.
Home equity line of credit (HELOC)
A mortgage
set up as a line of credit against which a borrower can draw up to a maximum
amount, as opposed to a loan for a fixed dollar
amount. For example, using a standard mortgage you might borrow
$150,000, which would be paid out in its entirety at closing. Using a HELOC instead, you receive the
lender’s promise to advance you up to
$150,000, in an amount and at a time of your choosing. You can draw on the line by writing a check,
using a special credit card, or in other ways. See What Is a HELOC and How Do You
Shop For a HELOC?
Home Equity Conversion
Mortgage (HECM)
A reverse mortgage program administered
by FHA. See Reverse
Mortgages.
Home equity
line
Same as HELOC.
Home equity
loan
Same as second mortgage.
Home
Keeper
A reverse mortgage program administered
by Fannie Mae. See Reverse
Mortgages.
Home Owners Loan
Corporation
A Federal Government agency
established by Congress in 1933 to help families avoid having their homes
foreclosed. See Home
Owners Loan Corporation II - a Fable.
Housing
bank
A government-owned or affiliated housing
lender. With minor exceptions, government in the US has never loaned directly
to consumers, but housing banks are widespread in many developing countries.
Read Government
as Mortgage Lender.
Housing
bubble
A marked increase in house
prices fueled partly by expectations that prices will continue to rise. See A Look at
Housing Bubbles.
The sum of mortgage payment, hazard
insurance, property taxes, and homeowner association fees. Same as PITI and "monthly housing expense."
The ratio of housing expense to borrower
income, which is used (along with the total
expense ratio and other factors) in qualifying borrowers. See Qualifying for a
Mortgage.
Housing investment
The amount
invested in a house, equal to the sale price less the loan amount. See How Much
House Should You Buy?
HUD1 form
The form a
borrower receives at closing that details all the payments and receipts among
the parties in a real estate transaction, including borrower, lender, home
seller, mortgage broker and various other service
providers.
Hybrid ARM
An ARM on which the initial rate holds for
some period, during which it is "fixed-rate", after which it becomes adjustable
rate. Generally, the term is applied to ARMs with initial rate periods of 3
years or longer.
An ARM on which the interest rate
adjusts mechanically based on changes in an interest rate index, as opposed to a
"discretionary ARM" on which the lender can change the rate at any time subject
only to advance notice. All ARMs in the US are indexed. See Peace of Mind
With an Adjustable Rate Mortgage?
The interest rate that is fixed for some
specified number of months at the beginning of the life of a an ARM. The
initial rate is sometimes referred to as a "teaser" when it is below the fully indexed interest rate. See Information to
Evaluate an Adjustable Rate Mortgage.
The number of months for which the
initial rate holds, ranging from 1 month to 10 years. See Information to
Evaluate an Adjustable Rate Mortgage.
Interest accrual period
The
period over which the interest due the lender is calculated. If the interest
accrual period on a 6 % mortgage for $100,000 is a year, as it is on some loans
in the UK and India, the interest for the year is .06($100,000) = $6,000. If interest accrues monthly, as it does on
most mortgages in the US, the monthly interest is .06/12($100,000) = $500. If interest accrues biweekly, as on a few
programs in the US, the biweekly interest is .06/26($100,000) = $230.77. And if interest accrues daily, as HELOCs and
some other mortgages in the US do, the daily interest is .06/365($100,000) = $16
.44.
A time-adjusted measure of cost to a
mortgage borrower. It is calculated in the same way as the APR except that the
APR assumes that the loan runs to term, and is always measured before taxes.
The formula is shown in Mortgage Formulas. Interest
cost is measured over the individual borrower's time horizon, and it may be
measured after taxes at the individual borrower's tax rate. In addition, the
cost items included in interest cost may be more or less inclusive than those
included in the APR. See Annual
Percentage Rate Versus Interest Cost.
The amount of interest, expressed in
dollars, computed by multiplying the loan balance at the end of the preceding
period times the annual interest rate divided by the interest accrual period.
It is the same as interest payment except when the scheduled mortgage payment is less than
the interest due, in which case the difference is added to the balance and
constitutes negative
amortization.
Interest-only
mortgage
A mortgage on which for some
period the monthly mortgage payment consists
of interest only. During that period,
the loan balance remains unchanged. See Interest Only
Mortgages.
Interest
payment
The dollar amount of interest paid each
month. It is the same as interest due so long as
the scheduled mortgage payment is
equal to or greater than than the interest due. Otherwise, the interest payment
is equal to the scheduled payment.
The rate charged the borrower each
period for the loan of money, by custom quoted on an annual basis. A rate of 6%,
for example, means a rate of 1/2% per month. A mortgage
interest rate is a rate on a loan secured by a specific property. See Mortgage Interest Rates.
The frequency of rate adjustments on an
ARM after the initial rate period is over.
The rate adjustment period is sometimes but not always the same as the initial
rate period. As an example, a 3/3 ARM is one in which both periods are 3 years
while a 3/1 ARM has an initial rate period of 3 years after which the rate
adjusts every year. See Information to
Evaluate an Adjustable Rate Mortgage.
The highest interest rate possible under an ARM contract; same as
"lifetime cap." It is often expressed as a specified number of percentage points
above the initial interest rate. See Information to
Evaluate an Adjustable Rate Mortgage.
Interest rate
floor
The lowest interest rate possible under
an ARM contract. Floors are less common than ceilings. See Information to
Evaluate an Adjustable Rate Mortgage.
The maximum allowable increase in the
interest rate on an ARM each time the rate is adjusted. It is usually 1 or 2
percentage points, but may be 5 points if the initial rate period is 5 years or
longer. See Information to
Evaluate an Adjustable Rate Mortgage.
Interest rate decrease
cap
The maximum allowable decrease in the
interest rate on an ARM each time the rate is adjusted. It is usually 1 or 2
percentage points. See Information to
Evaluate an Adjustable Rate Mortgage.
The specific interest rate series to
which the interest rate on an ARM is tied, such as "Treasury Constant
Maturities, 1-Year," or "Eleventh District Cost of Funds." All the indices are
published regularly in readily available sources. For a listing and discussion
of various indices, see Adjustable Rate
Mortgage Indexes and Which Adjustable Rate
Mortgage Index Is the Best?
Interim
refinance
An ill-advised scheme to avoid a
prepayment penalty by refinancing twice instead of once. Read The Interim Mortgage
Refinance Scam.
Internet mortgages
Mortgages delivered using the internet as a major part of
the communication process between the borrower and the lender. See Using the Internet.
Investor
In real estate, a borrower who owns or
purchases a property as an investment rather than as a
residence.
Jumbo
mortgage
A mortgage larger than the maximum
eligible for purchase by the two Federal agencies, Fannie Mae and Freddie Mac,
$333,700 in 2004 (see Non-conforming
mortgage). However, some lenders use the term to refer to programs for even
larger loans, such as, e.g., greater than $500,000.
A derogatory term for lender fees
expressed in dollars rather than as a percent of the loan amount. See What Are Junk Fees on
a Mortgage?, Is the Term
"Junk Fees" Unfair?, and How to Estimate
Junk Fees.
Fees that lenders are entitled to
collect from borrowers who don't pay within the grace
period. Most
mortgage notes offer borrowers a 10 or 15-day grace period, with a late charge
of about 5% on payments received on the 16th or later. Read Are These Mortgage Late
Fees Kosher?
A payment received after the grace
period stipulated in the note. Most mortgage grace periods are 10 or 15
days.
A mortgage web site designed to
provide leads (potential customers) to lenders. Where a referral site
provides information about lenders to consumers, with consumers contacting the
lenders, a lead-generation site provides information about the consumers
to the lenders, and the lenders contact the consumers. They are sometimes
called "auction sites" because lenders post their prices directly to the
consumer. See Mortgage Auction (or
Lead Generation) Sites .
Lease-to-own
purchase
A transaction in which a hopeful home
buyer leases a home with an option to buy it within a specified period. See Lease-to-Own
House Purchases.
See Mortgage
lender.
Lien
The lender’s right to claim the
borrower’s property in the event the borrower defaults. If there is more than
one lien, the claim of the lender holding the first lien will be satisfied
before the claim of the lender holding the second lien, which in turn will be
satisfied before the claim of a lender holding a third lien,
etc.
Loan
amount
The amount the borrower promises to
repay, as set forth in the mortgage contract. It differs from the amount of cash
disbursed by the lender by the amount of points and other upfront costs included
in the loan.
Loan
"churning"
The process of raising cash periodically through successive cash-out
refinancings.
It is a scam initiated by
mortgage brokers that victimizes wholesale lenders, with the connivance of
borrowers. See Periodic Mortgage
Refinacings: Who Gets Conned?
Loan discount
fee
The term used to describe points on the Good Faith
Estimate.
Loan
modification
A change in the terms of a loan,
usually the interest rate and/or term, in response to the borrower's inability
to make the payments under the existing term. See See Mortgage
Payment Problems: What If You Can't Pay?
Loan
officer
Employees of lenders or mortgage brokers who find
borrowers, sell and counsel them, and take applications. See Mortgage
Lenders, Mortgage Brokers and Loan Officers.
Loan
provider
A lender or a mortgage broker.
The loan amount divided by the lesser of
the selling price or the appraised value. Also referred to as LTV. The LTV and
down payment are different ways of expressing the same set of facts. See What Is the Down
Payment?
An option exercised by the borrower, at
the time of the loan application or later, to "lock in" the rates and points
prevailing in the market at that time. The lender and borrower are committed to
those terms, regardless of what happens between that point and the closing
date. See Locking the Price of a Mortgage
Loan.
Lock commitment
letter
A written statement from a lender
verifying that the price and other terms of a loan have been locked. Borrowers
who lock through a mortgage broker should always demand to see the lock
commitment letter. See Did
You Pay For Insurance You Didn't Get?
Lock
failure
The inability or unwillingness of a
lender to honor a mortgage price that a borrower had believed was guaranteed.
See Questions
About the Failure of Mortgage Locks.
Lock
jumper
A borrower, usually refinancing rather
than purchasing a home, who allows a lock to expire when interest rates go down
in order to lock again at the lower rate. See Is
the Borrower Committed by a Mortgage Lock?
Lock
period
The number of days for which any lock or
float-down holds. Ordinarily, the longer the period, the higher the price to
the borrower.
Mandatory
disclosure
The array of laws and regulations
dictating the information that must be disclosed to mortgage borrowers, and the
method and timing of disclosure. See Mandatory Mortgage
Disclosure.
Manufactured
housing
A house built entirely in a factory,
transported to a site and installed there. They are usually built without
knowing where they will be sited, and are subject to a Federal building code
administered by HUD. See Manufactured
Housing: a Messy Picture.
The amount added to the interest rate index, ranging generally from 2 to
3 percentage points, to obtain the fully
indexed interest rate on an ARM. See Information to
Evaluate an Adjustable Rate Mortgage.
A particular combination of loan, borrower and property characteristics that
lenders use in setting prices and underwriting requirements. These
characteristics are believed to affect the default risk or cost of the loan. As
examples, borrowers who don't intend to occupy the house they purchase pay more
than those who do, and borrowers who refinance only the balance on their
existing loan pay less than those who take "cash out". Read What
Mortgage Market Niche Are You In?
The period until the last payment is
due. This is usually but not always the term, which is the period used to
calculate the mortgage payment.
Maximum loan
amount
The largest loan size permitted on a
particular loan program. For programs where the loan is targeted for sale to
Fannie Mae or Freddy Mac, the maximum will be the largest loan eligible for
purchase by these agencies. On FHA loans, the maximums are set by the Federal
Housing Administration, and vary somewhat by geographical area. On other loans,
maximums are set by lenders.
Maximum loan to value
ratio
The maximum allowable loan-to-value ratio on the selected loan
program.
Maximum
lock
The longest period for which the lender
will lock the rate and points on any program. The most common maximum lock
period is 60 days, but on some programs the maximum is 90 days; only a few go
beyond 90 days. See Why
Is Locking Unique to Mortgages?
Minimum down
payment
The minimum allowable ratio of down
payment to sale price on any program. If the minimum is 10%, for example, it
means that you must make a down payment of at least $10,000 on a $100,000 house,
or $20,000 on a $200,000 house. For articles on down payment, see Down Payment.
Monthly housing
expense
Same as Housing expense.
Monthly payments required on credit
cards, installment loans, home equity loans, and other debts but not including
payments on the loan applied for.
Monthly total
expenses
Same as Total housing expense.
A written document evidencing the lien
on a property taken by a lender as security for the repayment of a loan.
The term “mortgage” or
“mortgage loan” is used loosely to refer both to the lien and the loan. In most cases, they are defined in two
separate documents: a mortgage and a note.
Mortgage auction
site
See Lead
generation site.
Mortgage
bank
Same as mortgage company.
An independent contractor who offers the
loan products of multiple lenders, termed wholesalers. A mortgage broker counsels on the
loans available from different wholesalers, takes the application, and usually processes the loan.
When the file is complete, but sometimes sooner, the lender underwrites the loan. In contrast to a correspondent, a mortgage broker does not fund a
loan. For articles on mortgage brokers and how to deal with them, see Mortgage Brokers.
A mortgage lender who sells all loans in
the secondary market. As distinguished from a portfolio lender, who retains loans in its
portfolio. Mortgage companies may or may not service the loans they
originate.
Mortgage
formulas
Equations used
to derive common measures used in the mortgage market, such as monthly payment,
balance, and APR. See Mortgage
Formulas.
Insurance against loss provided to a
mortgage lender in the event of borrower default. In most cases, the borrower
pays the premiums. For articles on mortgage insurance, see Mortgage Insurance.
Mortgage insurance
disclosure
Read Disclosure Rules About
Mortgage Insurance.
Mortgage insurance
premium
The up-front and/or periodic charges
that the borrower pays for mortgage insurance. There are different mortgage
insurance plans with differing combinations of up-front, monthly and annual
premiums. The most widely used premium plan is a monthly charge with no upfront
premium. For a sample of monthly premiums, see Sample Mortgage
Insurance Premiums.
Mortgage insurance
cancellation
Canceling a mortgage insurance policy.
Read Canceling Private
Mortgage Insurance (I), and Canceling Private Mortgage
Insurance (II).
The party who disburses funds to the
borrower at the closing table. The lender receives the note evidencing the
borrower's indebtedness and obligation to repay, and the mortgage which is the
lien on the subject property.
The monthly payment of interest and
principal made by the borrower. The formula used to calculate it is shown in Mortgage Formulas.
Mortgage
price
The interest rate, points and
fees paid to the lender and/or mortgage broker. On ARMs, the price also
includes the fully indexed rate and
the maximum rate. Read What
Is the "Price" of a Mortgage?
Mortgage
program
A bundle of mortgage characteristics
that lenders see fit to distinguish as a distinct instrument. These include
whether it is an FRM, ARM, or Balloon; the term; the initial rate period on an
ARM; whether it is FHA-insured or VA-guaranteed; and if is not FHA or VA,
whether it is "conforming" (eligible for purchase by Fannie Mae or Freddie Mac)
or "non-conforming".
Mortgage
referrals
Advice on where to go to get a
mortgage. See Mortgage
Referrals: Who Can You Trust?
Mortgage
scams
Deceptive and exploitative schemes by
lenders, brokers, home sellers and sometimes even borrowers. See Mortgage Scams.
Mortgage
shopping
Trying to find the best deal on a
mortgage. See How
to Shop For a Mortgage.
Mortgage
spam
Offers for great mortgage deals that appear
unbidden in your email. See What
Should I Do With Mortgage Spam?
A rise in the loan balance when the
mortgage payment is less than the interest due.
Sometimes called "deferred interest." It is explained in detail in How Does
Negative Amortization on a Mortgage Work? Negative amortization arises most
frequently on ARMs. See Should You Fear
Negative Amortization and Is a 3.95%
Adjustable Rate Mortgage a Good Deal?
The maximum amount of negative
amortization permitted on an ARM, usually expressed as a percentage of the
original loan amount (e.g., 110%). Reaching the cap triggers an automatic
increase in the payment, usually to the fully amortizing payment level, overriding
any payment increase
cap.
Points paid by a lender for a
loan with a rate above
the rate on a zero point loan. For example, a wholesaler quotes the following
prices to a mortgage broker. 8%/0 points, 7.5%/3 points, 8.75%/-3 points. On
mortgage web sites, negative points are usually referred to as "rebates" because
they are used to reduce a borrower's settlement costs. When negative points are
retained by a mortgage broker, they are called a "yield spread premium". Read
Can Mortgage Points Be
Negative? and Ignore
Lender Payments to My Broker? On policy issues connected to negative
points, see HUD and
Yield Spread Premiums, and A
Better Approach to YSPs?
Net
branch
A facility offered by some
lenders to mortgage brokers where de jure the brokers become employees of the
lender but de facto they retain their independence as brokers. One of the
advantages of this arrangement to brokers is that they need not disclose yield
spread premiums received from lenders. See Must
Mortgage Brokers Reveal All Their Charges?
Net jumping
Using a broker's time and expertise to become informed
and creditworthy, then jumping to the internet to get the loan. See How About
Borrowers' Tricks?
Niche
See Market niche.
Nichification
Proliferation in the number of loan,
borrower and property characteristics used by lenders to set mortgage prices and
underwriting requirements. Read What
Mortgage Market Niche Are You In?
No change
scenario
On an ARM, the assumption that the value
of the index to which the rate is tied does not change from its initial
level.
No-Cost
mortgage
A mortgage on which all settlement costs
except per diem interest, escrows, homeowners insurance and transfer taxes are
paid by the lender and/or the home seller. See Does "No-Cost"
Mortgage Refinance Make Sense?, Another Look at
No-Cost Mortgage Refinance, and No-Cost
Mortgages.
A mortgage that does not meet the
purchase requirements of the two Federal agencies, Fannie Mae and Freddie Mac,
because it is too large or for other reasons such as poor credit or inadequate
documentation.
Non-Permanent resident
alien
A non-citizen without a green card who
is employed in the US. As distinct from a permanent resident alien, who has a
green card and who lenders do not distinguish from US citizens. Non-permanent
resident aliens are subject to somewhat more restrictive qualification
requirements than US citizens.
No asset
loan
A documentation requirement where
the applicant's assets are not disclosed. See What Are
Mortgage Documentation Requirements?
No income
loan
A documentation requirement where
the applicant's income is not disclosed. See What Are
Mortgage Documentation Requirements?
Non-warrantable
condo
A condominium that does not meet
meet lender requirements, see Warrantable
condos.
No-Surprise adjustable rate
mortgage
An ARM with a preset graduated payment
combined with variable term. See The No-Surprise
Adjustable Rate Mortgage.
Nominal interest
rate
A quoted interest rate that is not
adjusted for either intra-year compounding, or for inflation. A quoted rate of
6% on a mortgage, for example, is nominal. Adjusted rates are called "effective"
see Effective rate.
No ratio
loan
A documentation requirement where the
applicant's income is disclosed and verified but not used in qualifying the
borrower. The conventional maximum ratios of expense to income are not
applied. See What Are
Mortgage Documentation Requirements?
A document that evidences a debt and a
promise to repay. A mortgage loan transaction always includes both a note
evidencing the debt, and a mortgage evidencing the lien
on the property, usually in two documents.
An adjustable rate mortgage with
flexible payment options, monthly interest rate adjustments, and very low
minimum payments in the early years. They carry a risk of very large payments in
later years. See Option (Flexible Payment)
ARMs.
An upfront fee charged by some lenders,
usually expressed as a percent of the loan amount. It should be added to points in determining the total fees charged by the lender
that are expressed as a percent of the loan amount. Unlike points, however, an
origination fee does not vary with the interest rate.
Overage
The difference between the price posted to
its loan officers by a lender or mortgage broker, and the price charged the
borrower. See
What Is a
Mortgage Overage?
Partial
prepayment
Making a payment larger than the scheduled
payment as a way of paying off the loan earlier. See Prepayment.
Paydown
magic
Belief that there is a special way to
pay down the balance of a home mortgage faster, if you know the secret. See Are
Some Mortgage Prepayment Methods Better? and Save With a
Large Payment at Closing?
Payment adjustment
interval
The period between payment changes on an
ARM, which may or may not be the same as the interest rate adjustment period.
Loans on which the payment adjusts less frequently than the rate may generate negative amortization.
The maximum percentage increase in the
payment on an ARM at a payment adjustment date. A 7.5% cap is
common.
Payment decrease
cap
The maximum percentage decrease in the
payment on an ARM at a payment adjustment date.
Payment
period
The period over which the borrower is
obliged to make payments. On most mortgages, the payment period is a month, but
on some it is biweekly.
Payment
power
A program begun by Fannie Mae in
2003-4 that allows a borrower to
skip up to 2 mortgage payments in any 12 month period, and up to 10 over the
life of a loan. See Mortgage
Payment Flexibility Under "Payment Power" and How Would a
Truly Flexible Mortgage Work?
Payment
rate
The interest rate used to calculate the
mortgage payment, which is usually but not
necessarily the interest rate.
Payment
shock
A very large increase in the payment on
an ARM that may surprise the borrower. Also used to refer to a large difference
between the rent being paid by a first-time home buyer, and the monthly housing
expense on the purchased home.
Payoff
month
The month in which the loan balance is
paid down to zero. It may or may not be the term.
Per diem
interest
Interest from the day of closing to the
first day of the following month. In some cases, however, the borrower can get a
credit at closing by making the first payment a month earlier. See Mortgage Closing Date: Does It
Matter?
Periodic
refinancing
An ill-advised scheme to tap into equity
for cash advances through periodic refinancings. See Periodic Mortgage
Refinancing: Who Gets Conned?
Permanent
buydown
Paying points as a
way of reducing the interest rate.
Pick a Payment
ARM
Same as Flexible Payment
ARM.
Piggyback
mortgage
A combination of a first mortgage for
80% of property value, and a second for 5%, 10%, 15%, or 20% of value. These
combinations are designated as 80/5/15, 80/10/10, 80/15/5, and 80/20/0,
respectively. Piggybacks are a substitute for mortgage insurance for borrowers
who cannot put 20% down. See Piggyback
Loans: Two Mortgages Cost Less than One?
The lender's risk that between the time
a lock commitment is given to the borrower and the time the loan is closed,
interest rates will rise and the lender will take a loss on selling the loan.
See Why
Is Locking Unique to Mortgages?
Shorthand for principal, interest, taxes
and insurance, which are the components of the monthly housing
expense.
PMI
Private mortgage insurance, as
distinguished from insurance provided by government under FHA and VA. See Mortgage insurance.
An upfront cash payment required by the
lender as part of the charge for the loan, expressed as a percent of the loan
amount; e.g., "3 points" means a charge equal to 3% of the loan balance. It is
common today for lenders to offer a wide range of rate/point combinations,
especially on fixed rate mortgages
(FRMs), including combinations with negative
points. On a negative point loan the lender contributes cash toward meeting
closing costs. Positive and negative points are sometimes termed "discounts" and
"premiums," respectively. See Mortgage Points and
Rebates.
Portable
mortgage
A mortgage that can be moved from one
property to another. These were introduced in the US by E*TRADE Mortgage in
2003. See Portable Mortgages: A Useful
Option?
A lender that holds the loans it
originates in its portfolio rather than selling them, as a temporary lender does.
Pre-approval
A commitment by a lender to make a
mortgage loan to a specified borrower, prior to the identification of a specific
property. It is designed to make it easier to shop for a house. Unlike a
pre-qualification, the lender checks the applicant's credit. See Mortgage
Qualification Versus Mortgage Approval.
Predatory
lending
A variety of unsavory lender practices
designed to take advantage of unwary borrowers. See the articles on Predatory Mortgage Lending.
A payment made by the borrower over and
above the scheduled mortgage payment.
If the additional payment pays off the entire balance it is a "prepayment in
full"; otherwise, it is a "partial prepayment." For articles on prepayment, see
Mortgage Prepayment (Paying Off
Early).
Prepayment
penalty
A charge imposed by the lender if the
borrower pays off the loan early. The charge is usually expressed as a percent
of the loan balance at the time of prepayment, or a specified number of months
interest. Read Mortgage
Prepayment Penalties.
Pre-qualification
Same as qualification.
Price-gouging
Charging interest rates and/or fees that are excessive relative to what the
same borrowers could have found had they shopped the market. Read What Is
Predatory Lending? and Is
This a Good Definition of Predatory Lending?
Primary
residence
The house in which the borrower will
live most of the time, as distinct from a second home or an investor property
that will be rented. See What Is a "Primary"
Residence?
Principal
The portion of the monthly
payment that is used to reduce the loan balance. See Amortization.
Principal
limit
The present value of a house, given the
elderly owner's right to live there until death or voluntary move-out, under the
FHA reverse mortgage program. See Which
Reverse Mortgage Plan Do I Choose?
Private mortgage
insurance
Mortgage insurance provided by private
mortgage insurance companies, or PMIs. See Mortgage Insurance.
Compiling and maintaining the file of
information about a mortgage transaction, including the credit report,
appraisal, verification of employment and assets, and so on. The processing file
is handed off to underwriting for the loan
decision.
Property
flipping
Successive sham home sales at
progressively higher prices as part of a scheme to defraud FHA. See What Is
Predatory Lending?
Purchase money
mortgage
A mortgage offered by a house buyer as
partial payment for the house. From the seller's point of view, it is seller financing.
The process of determining whether a
prospective borrower has the ability, meaning sufficient assets and income, to
repay a loan. Qualification is sometimes referred to as "pre-qualification"
because it is subject to verification of the information provided by the
applicant. Qualification is short of approval because it
does not take account of the credit history of the borrower. Qualified borrowers
may ultimately be turned down because, while they have demonstrated the capacity
to repay, a poor credit history suggests that they may be unwilling to pay. For
articles on qualification, see Qualifying For a
Mortgage.
Qualification
rate
The interest rate used in calculating
the initial mortgage payment in qualifying a borrower. The rate used in this
calculation may or may not be the initial rate on the mortgage. On ARMs, for
example, the borrower may be qualified at the fully indexed rate rather than the initial rate.
Qualification
ratios
Requirements stipulated by the
lender that the ratio of housing expense to borrower income, and housing expense
plus other debt service to borrower income, cannot exceed specified maximums,
e.g., 28% and 35%. These may reflect the maximums specified by Fannie Mae and
Freddie Mac; they may also vary with the loan-value ratio and other factors.
See Qualifying For a
Mortgage.
Standards imposed by lenders as conditions
for granting loans, including maximum ratios of housing expense and total
expense to income, maximum loan amounts, maximum loan-to-value ratios, and so
on. Less comprehensive than underwriting
requirements, which take account of the borrower's credit record. See
Qualifying For a
Mortgage.
Rate
See Interest
Rate.
Rate/point
breakeven
The period you must retain a mortgage in
order for it to be profitable to pay points to reduce the rate. See The
Break-Even Period For Paying Points on a Mortgage
Rate/point
options
All the combinations of interest rate
and points that are offered on a particular loan program.
On an ARM, rates and points may also vary with the margin
and interest rate
ceiling.
Rate
protection
Protection for a borrower against the
danger that rates will rise between the time the borrower applies for a loan and
the time the loan closes. This protection can take the form of a "lock" where the rate and points are frozen at their initial
levels until the loan closes; or a "float-down" where
the rates and points cannot rise from their initial levels but they can decline
if market rates decline. In either case, the protection only runs for a
specified period. If the loan is not closed within that period, the protection
expires and the borrower will either have to accept the terms quoted by the
lender on new loans at that time, or start the shopping process anew. See Locking the Price of a Mortgage
Loan.
Rate
sheets
Tables of interest rates and
points that lenders distribute daily to their loan officer employees or mortgage
brokers. See Questions
About Rate Sheets.
Rebate
Same as Negative points.
Recast
payment
Raising the mortgage payment to the fully amortizing payment. Periodic recasts
are sometimes used on ARMs in lieu of or in addition to negative amortization
caps.
Referral
fees
Payments made by service providers to
other parties as quid pro quo for referring customers. For example, a title
company provides something of value to a Realtor or lender for sending a
customer who requires title insurance. See Questions About Referral
Fees.
Referral
power
The ability to direct a client to a
specific vendor. Referral power is based on information and authority
of the referrer, and ignorance of the client. See
Questions About Referral
Fees.
Referral
site
A mortgage web site that introduces potential borrowers to participating
lenders, in some cases to multiple hundreds of them. The principal lure to the
consumer is information on generic prices posted
by the lenders. See Are Are
Mortgage Referral Sites on the Internet Useful?
Refinance
Paying off an old loan while
simultaneously taking a new one. This may be done to reduce borrowing costs
under conditions where the borrower can obtain a new loan at an interest rate
below the rate on the existing loan. It may be done to raise cash, as an
alternative to a home equity loan. Or it may be done to reduce the monthly payment. For articles on
refinancing, see Mortgage
Refinancing.
Required
cash
The total cash required of the home
buyer to close the transaction, including down payment, points and fixed dollar
charges paid to the lender, any portion of the mortgage insurance premium that
is paid up-front, and other settlement charges associated with the transaction
such as title insurance, taxes, etc. The total required cash is shown on the Good Faith Estimate of Settlement that every
borrower receives.
RESPA
The Real Estate Settlement Procedures
Act, a Federal consumer protection statute first enacted in 1974. RESPA was
designed to protect home purchasers and owners shopping for settlement services
by mandating certain disclosures, and prohibiting referral fees and
kickbacks.
A lender who offers mortgage
loans directly to the public. As distinct from a wholesale lender who operates through mortgage brokers and correspondents.
Reverse
mortgage
A loan to an elderly home owner on which
the balance rises over time, and which is not repaid until the owner dies, sells
the house, or moves out permanently. See Reverse Mortgages.
Right of
rescission
The right of refinancing borrowers,
under the Truth in Lending Act, to cancel the deal at no cost to themselves
within 3 days of closing. See Rescinding a
Mortgage Refinance.
Scenario
analysis
Determining how the interest rate and
payment on an ARM will change in response to specified future changes in market
interest rates, called "scenarios". See Choosing Between Fixed and
Adjustable Rate Mortgages.
The amount the borrower is obliged to
pay each period, including interest, principal, and mortgage insurance, under
the terms of the mortgage contract. Paying
less than the scheduled amount results in delinquency. On most mortgages, the
scheduled payment is the fully amortizing
payment throughout the life of the loan. On some mortgages, however, the
scheduled payment for the first 5 or 10 years is the interest payment (see Interest Only Mortgages). And on option
(flexible payment) ARMs, it can be the "minimum" payment as defined by the
program (see Option (Flexible Payment)
ARMs).
A loan with a second-priority claim
against a property in the event that the borrower defaults. The lender who holds
the second mortgage gets paid only after the lender holding the first mortgage
is paid. For articles on second mortgages, also known as "home equity loans," see Second
Mortgages.
Secondary
markets
Markets in which mortgages or
mortgage-backed securities are bought and sold. See Will My Mortgage Loan Be
Sold?, and Do
Secondary Mortgage Markets Help Borrowers?
Self-employed
borrower
A borrower who must document
income using tax returns rather than information provided by an employer. This
complicates the process somewhat. See Difficult For
Self-employed To Qualify For a Mortgage?
Seller
contribution
A contribution to a borrower's
down payment or settlement costs made by a home seller, as an alternative to a
price reduction. See Are House
Seller Contributions Kosher?
Provision of a mortgage by the seller of a
house, often a second mortgage, as a condition of the sale.
Servicing
Administering loans between the
time of disbursement and the time the loan is fully paid off. This includes
collecting monthly payments from the borrower, maintaining records of loan
progress, assuring payments of taxes and insurance, and pursuing delinquent
accounts. See articles on Mortgage Servicing
Problems.
Servicing
agent
The party who services a loan,
who may or may not be the lender who originated it. See Is There
Recourse Against Bad Mortgage Servicing?
Servicing release
premium
A payment made by the purchaser of a mortgage
to the seller for the release of the servicing on the mortgage. It has no direct
relevance to borrowers.
Servicing
transfer
When one servicing agent is
replaced by another. Read When Your
Mortgage Lender Goes Bankrupt.
Costs that the borrower must pay
at the time of closing, in addition to the down payment. For articles on
settlement costs, see Settlement
Costs.
Shared appreciation
mortgage
A mortgage on which the borrower gives
up a share in future price appreciation in exchange for a lower interest rate
and/or interest deferral. Read Is
This Shared Appreciation Mortgage a Good Deal?
Shopping
site
A type of multi-lender web site that offers borrowers the capacity to shop
among multiple competing lenders. See Recent
Developments in Mortgage Web Sites.
Short
sale
An agreement between a mortgage
borrower in distress and the lender that allows the borrower to sell the house
and remit the proceeds to the lender. It is an alternative to foreclosure, or a
deed in lieu of foreclosure. See Options
When Equity in Your Home is Gone
Silent
second
A second mortgage offered at
preferential (subsidized) terms to those who qualify. For example, a labor
union may offer members who are first-time home buyers a silent second to
finance closing costs or the down payment. The second might bear no interest,
and might not be repayable until the first mortgage is repaid or the property is
sold.
Simple interest
mortgage
A mortgage on which interest is
calculated daily based on the balance at the time of the last payment.
The daily interest charge within the month is constant -- interest
is not charged on the interest charges of prior days. See What Are Simple Interest
Mortgages?
Simple interest biweekly
mortgage
A biweekly mortgage on which the
biweekly payment is applied to the balance every two weeks, rather than held in
an account as on a conventional biweekly. See Alternative
Early Payoff Plans. Also, The Simple Interest Biweekly
Scam.
Single file mortgage
insurance
A type of mortgage insurance on which the
lender pays the premium and prices it in the interest rate. See Single File
Mortgage Insurance: An Advance?
Single-lender web
site
A web site of an individual
lender or mortgage broker who wants users to select a loan from them. They are
easy to identify because the name of the lender or broker will be prominently
displayed on the screens. Single-lender sites account for the majority of all
mortgage web sites. See Single-Lender
Mortgage Web Sites.
Stated
assets
A documentation requirement where
the borrower discloses her assets but they are not verified by the lender. See
What Are
Mortgage Documentation Requirements?
Stated
income
A documentation requirement where the
lender verifies the source of the income but not the amount. See What Are
Mortgage Documentation Requirements? and Stated
Income Loans: Lie to Get a Better Rate?
Streamlined
refinancing
Refinancing that omits some of the
standard risk control measures, and is therefore quicker and less
costly.
Subordinate
financing
A second mortgage on the property which
is not paid off when a new loan is taken out. The second mortgage lender must
allow subordination of the second to the new first mortgage.
Subordination
policy
The policy of a second mortgage lender
for allowing a borrower to refinance the first mortgage while leaving the second
in place. See Subordination
Policy of Second Mortgage Lenders
Sub-prime
borrower
A borrower with poor credit, who can
borrow only from sub-prime lenders who specialize in dealing with borrowers who
have poor credit. Such borrowers pay more than prime borrowers, and are
sometimes taken advantage of. Not all borrowers who deal with sub-prime
lenders, however, are sub-prime borrowers. Some could obtain loans from
mainstream lenders if they properly shop the market. Read Should
Mortgage Borrowers With Poor Credit Shop?
Sub-prime
lender
A lender who specializes in lending to
sub-prime borrowers. See | 