Glossary of Mortgage Terms
Adjustable Rate –
An interest rate that changes periodically in relation to an index. Payments may increase or decrease accordingly.
Amortization -
A repayment method in which the amount you borrow is repaid gradually though regular monthly payments of principal interest. During the first few years, most of each payment is applied toward the interest owed. During the final years of the loan, payment amounts are applied almost exclusively to the remaining principal.
Annual Percentage Rate -
The cost of credit on a yearly basis, expressed as a percentage. Required to be disclosed by the lender under the federal Truth in Lending Act, Regulation Z. Includes upfront costs paid to obtain the loan, and is, therefore, usually a higher amount than the interest rate stipulated in the mortgage note. Does not include title insurance, appraisal, and credit report.
Application -
An initial statement of personal and financial information which is required to approve your loan.
Application Fee -
Fees that are paid upon application. An application fee may frequently include charges for property appraisal ($800.00 - $1200.00) and a credit report ($120.00 - $150.00).
Appraisal -
A fee charged by an appraiser to render an opinion of market value as of a specific date. Required by most lenders to obtain a loan. ($800.00 - $1200.00)
Assumption of Mortgage -
The agreement of a purchaser to become primarily liable for the payments on a mortgage loan. Unless otherwise specified by the lender, the seller may remain secondary liable for payments.
Balloon Payment -
A lump sum payment for the unpaid balance of the loan.
Cap -
The maximum allowable increase, for either payment or interest rate, for a specified amount of time on an adjustable rate mortgage.
Ceiling -
The maximum allowable interest rate over the life of the loan of an adjustable mortgage rate.
Closing Costs
Any fees paid by the borrowers or sellers firing the closing of the mortgage loan. This normally includes an origination fee, discount points, attorney’s fees, title insurance, survey and items which must be prepaid, such as taxes and insurance escrow payments.
Contract of Sale - or Purchase and Sale
The agreement between the buyer and seller on the purchase price, terms, and conditions necessary to both parties to convey the title to the buyer.
Credit Limit -
The maximum amount that you can borrow under the home equity plan.
Debt Service -
The total amount of credit card, auto, mortgage or other debt upon which you must pay.
Deed of Trust -
Used in many western states, the agreement used to pledge your home or other real estate as security for a loan. Similar to a mortgage.
Discount Points (points) -
The amount paid either to maintain or lower the interest rate charged. Each point is equal to one percent (1%) of the loan amount (i.e. two points on a $100,000 would equal $2,000).
Down Payment -
The difference between the purchase price and that portion of the purchase price being financed. Most lenders require the down payment to be paid from the buyer’s own funds. Gifts from related parties are sometimes acceptable, and must be disclosed to the lender.
Due on Sale -
A clause in a mortgage agreement providing that, if the mortgagor (The borrower) sells, transfers, or in some instances encumbers the property, the mortgagee (the lender) has the right to demand the outstanding balance in full.
Effective Interest Rate -
The cost of credit on a yearly basis expressed in the percentage. Includes up-front costs paid to obtain the loan, an is, therefore, usually a higher amount than the interest rate stipulated in the mortgage note. Useful in comparing loan programs with different rates and points.
Encumbrance -
A claim against a property by another party which usually affects the ability to transfer ownership of the property.
Equity -
The difference between the fair market value of your home and your outstanding mortgage balance.
First Mortgage -
A mortgage which is in first lien position, taking priority over all other liens (which are financial encumbrances )
Fixed Rate -
An interest rate which is fixed for the term of the loan.
Payments as well are fixed at one amount.
FHA Loan -
More appropriately termed “FHA Insured Loan”. A loan for which the Federal Housing Administration insures the lender against losses the lender may incur due to your default.
Grace Period -
A period of time during which the loan payment may be paid after its due date but not incur a late penalty. Such late payments may be reported on your credit report.
Gross Income -
For qualifying purposes, the income of the borrower before taxes or expenses are deducted.
Home Equity Credit Line-
A loan providing you with the ability to borrow funds at the time and in the amount you choose, up to a maximum credit limit for which you have qualified. Repayment is secured by the equity in your home. Simple interest (interest only payments on the outstanding balance) is usually tax deductible. Often used for home improvements, such as major purchases or expenses, and debt consolidation.
Home Equity Loan -
A fixed or adjustable rate loan obtained for a variety of purposes, secured by the equity in your home. Interest paid is usually tax-deductible. Often used for home improvement or freeing of equity for investment in other real estate or investment. Recommended by many to replace or substitute for consumer loans whose interest is not tax deductible, such as auto or boat loans, credit car debt, medical debt, and education loans.
Hazard Insurance -
A contract between purchaser and an insurer, to compensate the insured for loss of property due to hazards (fire, hail damage, etc.) for a premium.
Settlement Statement-
A form utilized at loan closing to itemize the costs associated with purchasing the home. Used universally by mandate of HUD, the Department of Housing and Urban Development.
Index -
A number, usually a percentage, upon which future interest rates fir adjustable rate mortgages are based. Common indexes include the Cost of Funds for the Eleventh Federal District of banks or the average rate of a one year Government Treasury Security.
Interest Rate -
The periodic charge, expressed as a percentage, for use of credit.
Jumbo Loan -
Mortgage loans over $546,250.00. Terms and underwriting requirements may vary from conforming loans.
Loan to Value Ratio (LTV) -
A ratio determined by dividing the sales price or appraised value into the loan amount, expressed as a percentage. For example, with a sales price of $100,000 and a mortgage loan of $80,000, your loan to value ratio would be 80%. Loans with an LTV over 80% may require Private Mortgage Insurance, defined below.
Lock or Lock In -
A commitment you obtain from a lender assuring you a particular interest rate or feature for a definite time period. Provides protection should interest rates rise between the time you apply for a loan, acquire loan approval, and, subsequently, close the loan and receive funds you have borrowed.
Margin -
An amount, usually a percentage, which is added to the index to determine the interest rate for adjustable rate mortgages.
Minimum Payment -
The minimum amount that you must pay, usually monthly, on a home equity loan or lone of credit. In some plans, the minimum payment may be “interest only”, (simple interest). In other plans, the minimum payment may include principle and interest (amortized).
Mortgage Broker -
As do mortgage bankers, takes loan application and processes the necessary paperwork. Unlike a mortgage banker, brokers do not fund the loan with their own money, but work on behalf of several investors, such as mortgage bankers, S and L’s, banks, or investment bankers.
Mortgage Insurance -
Insurance purchased by the borrower to insure the lender or the government against loss should you default. MIP or Mortgage Insurance Premium, is paid on government insured loans (FHA or VA loans) regardless of your LTV (loan-to-value). Should you pay off a government insured loan in advance of maturity, you may be entitled to a small refund of MIP. PMI, or Private Mortgage Insurance, is paid on those loans which are not government insured and whose LTV is greater than 80%. When you have accumulated 20% of your home’s value as equity, your lender may waive PMI at your request. Please note that such insurance does not constitute a form of life insurance which pays off the loan in case of death.
Mortgage Loan -
A loan which utilizes real estate as security or collateral to provide for repayment should you default on the terms of your loan. The mortgage or Deed of Trust is your agreement to pledge your home or other real estate as security.
Mortgagee -
The lender in a mortgage loan transaction.
Mortgagor -
The borrower in a mortgage loan transaction.
Mortgage Amortization -
Amortization in which the payment made is insufficient to fund complete repayment of the loan at its termination. Usually occurs when the increase in the monthly payment is limited by a ceiling. The portion of the payment which should be paid is added to the remaining balance owed. The balance owed may increase, rather than decrease over the life of the loan.
PITI -
Principal, interest, taxes, and insurance, which comprise your monthly mortgage payment.
Prepayment Penalty -
A fee paid to the lending institution for paying a loan prior to the scheduled maturity date.
Qualifying Ratios -
Comparisons of a borrower’s debts and gross monthly income.
Right to Rescission -
The legal right to void or cancel your mortgage contract in such a way as to treat the contract as if it never existed. Right of rescission is not applicable to mortgages made to purchase a home, but may be applicable to other mortgages, such as home equity loans.
Security Interest -
An interest that a lender takes in the borrowers property to assure repayment of debt.
Servicing a Loan -
The ongoing process of collecting your monthly mortgage payment, including accounting for and payment of your yearly tax and/or homeowners insurance bills.
Title -
The written evidence that proves the right of ownership of a specific piece of property.
Title Insurance -
Protection for lenders or homeowners against financial loss resulting from legal defects in the title.
Transaction Fee -
A fee which may be charged each time you draw on a home equity credit line.
Underwriting -
The process of verifying data and approving a loan.
Variable Rate -
An interest rate that changes periodically in relation to an index. Payments may increase or decrease accordingly.
VA Loan -
More appropriately termed “VA Insured Loan”. A loan for which the Veteran’s Administration insures the lender against losses the lender may incur due to your default. Available only to veterans possessing a Certificate of Eligibility
Choosing a Mortgage
Choosing among the many houses that may be available is hard enough--then you need to make a choice from the myriad of mortgages that are offered in today's market. So many decisions! Take heart, though, since although there are literally hundreds of different mortgages available, they all fall into only a few basic varieties. Some may fit perfectly into your situation, others may be unwise or unattainable. By narrowing your choices, the process of picking the right mortgage becomes much easier.
Fixed Rate or Adjustable
One of your first decisions should be between a fixed rate (the interest rate remains constant through the life of the mortgage) or an adjustable (the interest rate is adjusted--either up or down--at specified times during the mortgage term). Adjustable Rate Mortgages (ARMs) will have an initial interest rate lower than fixed rates but will adjust upward (unless rates really fall!) usually after the first year. They may be a good choice if you are sure that you will not be owning the home for an extended period (more than 5-7 years) of time.
Advantages and Disadvantages of Fixed and ARM Mortgages
Advantages--Fixed Advantages--ARM
• Since you know what your payment will be for the life of the loan, you can budget more easily.
• Lower initial interest rate and therefore lower monthly payment.
• No possibility of an interest rate change making your mortgage payment suddenly unaffordable.
• If interest rate declines, your payment will also decline.
• No anxiety over interest rate fluctuations.
• Easier to qualify for due to lower initial interest rate and payment amount.
Disadvantages--Fixed Disadvantages--ARM
• More income needed to qualify because of higher initial mortgage rate.
• If interest rate increases, your payment will also increase.
• If interest rates decrease appreciably, it will be necessary to refinance to get a lower payment.
• A large increase in interest rates--and payment--could make your house unaffordable.
Terms: 15, 20 or 30 years
You will probably want to shoot for the shortest term that is comfortable (and for which you will qualify). The interest savings are enormous as the term decreases. Always make a comparison between a 15 year term payment and a 30 year term payment. The difference is often surprisingly smaller than anticipated. The savings over the term of the loan, however, can be substantial.
For example, comparing a 15 year term to a 30 year term, $100,000 mortgage at an 8 1/2% fixed rate yields the following results.
15 Year 30 Year
Principal and Interest Payment (per month) $985 $769
Total paid over term in P&I $177,300 $276,840
Total interest over term $77,300 $176,840
**HINT: If you can't qualify for a shorter term try to add at least the amount of 1 additional payment per year--this will knock nearly 10 years off a 30 year loan.
Common Loan Types: Conventional, FHA, VA and "No-Document"
Conventional:
A "traditional" mortgage, not directly insured by the Federal Government. Most conventional loans under $546,250.00 are administered through Fannie Mae or Freddie Mac (private corporations but regulated by the government). Those loans over that amount are designated "jumbo loans" and are funded by the private investment market.
FHA:
Insured by (but not funded by) the Federal Housing Administration (FHA) a division of the U.S. Department of Housing and Urban Development (HUD), and designed for, in general, low- and middle-income borrowers and many first-time buyers. There are, however, limits (which vary from county to county) to the maximum loan amount. FHA loans have somewhat more relaxed qualifying standards and ratios than conventional loans and have the availability of both 15 and 30 year fixed as well as 1 year adjustable mortgages.
VA:
For those qualified by military service, the Veterans Administration (VA) insures (but does not fund) 15 and 30 year fixed as well as 1 year adjustable mortgages with lower down payment requirements (as low as 0 down) and somewhat more lenient qualifying ratios.
No-Document ("No-doc) Loans:
No-doc mortgages are generally not available to borrowers in Washington.
Mortgage Comparisons
Once you have a general idea of the type of mortgage that best suits your situation, the next step is to begin to make comparisons among the lenders that are available. Weekend newspapers will often have the rates of individual local lenders posted in their Real Estate section. To get the specifics of each lender's rate and term, you can contact the bank or mortgage company directly. Another source is a mortgage broker in your area, who will often represent a number of sources of mortgage funds and can assist you in your choice. A third source, and the most recent, is an online source such as , where you can submit a single, quick online application and get up to 4 offers from lenders competing for your business.
Mortgage Prequalification and Preapproval
Why get prequalified and then preapproved for a mortgage before you begin your search for a home? Because there are 3 people who will benefit from your preapproval: You, your Agent, and the seller from whom you eventually buy a home!
You:
The most important beneficiary, of course, is you. One of the most common questions we get from users of this site goes something along the lines of "Please let us know how much house we can afford." We're stumped! Why? There are simply too many variables--credit history, income, debt, special mortgage programs and variations in qualifying guidelines between different mortgage types--to answer that question. The only sure way of getting the question answered is through prequalification. The mortgage prequalification step is a relatively simple one, but it is an important one. It begins the process of formally applying for a mortgage, and it gives everyone involved--especially you--a clear sense of the direction they should be headed.
Your Agent:
By knowing what your financial parameters are, your Agent can spend more time looking for houses that "fit" and less time pursuing dead ends. No matter how much you might want a 4000 square foot home for $275,000, if your qualifications say $125,000, your qualifications say $125,000. When it comes to mortgages, "yes, but" doesn't carry much weight!
The Seller:
Want to strengthen your bargaining position? Get prequalified. Want your offer to stand out in a case of multiple offers for the same house? Get prequalified. Look at it from the seller's perspective. If you had 2 offers on the table for your house, one from a fully prequalified buyer and the other from an "I'll get around to that soon" buyer--to which offer would you devote the most attention? Even if the prequalified buyer's offer was $1000 less, would you take the chance on the buyer that perhaps may not be qualified? When it comes to a seller evaluating offers, "a bird in the hand..." definitely applies.
It is important to remember that the amount of mortgage you will qualify for is the maximum. It is the amount that the lender feels you can afford, but it is not necessarily the amount that you want to pay. It sometimes is advantageous to be conservative here. For example, if you qualify for a $100,000 mortgage and you have $15,000 available in cash for downpayment and closing costs, you are qualified to buy homes with a maximum selling price of $115,000. So as to not push yourself to the limit, you may want to look at homes that sell in the $100,000 to $110,000 range. Too many buyers simply rush off to the $115,000 level and some find themselves strapped when it comes time to purchase necessary items (such as draperies, additional furniture and lawn and garden tools, for example) or when they forget to factor in increases in monthly expenses (for example utilities and maintenance and repair costs).
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