Adjustable Rate Mortgage (ARM) A mortgage where the interest rate may increase or decrease (with limits up and down) based on a specified index rate. This kind of mortgage usually starts with a lower interest rate and usually easier to qualify for than a fixed-rate mortgage. Amortization The reduction of a loan by payments made at periodic intervals that covers principal and interest. Annual Percentage Rate (APR) The interest rate that includes the mortgage rate along with fees, insurance and costs involved in obtaining the loan. Appraisal The value of a property determined by a qualified person or "appraiser" based on various factors (examples being location, condition/upkeep and market variables). Balloon Mortgage A mortgage with set periodic payments but does not amortize over a set term. A lump sum, known as a balloon payment, is made at the maturity of the loan. Bankruptcy A process of legal action where an individual (or organization) declares insolvency to protect themselves from creditors. Any remaining equitable assets are distributed to creditors by courts in order to meet debt obligations. Basis Point Basis point is used to describe one one-hundredth (1/100) of a percent. For example one hundred (100) basis points is equivalent to one percent (1%). Broker A professional who assists borrowers in finding lenders, arranges and negotiates mortgages in their behalf. Buy Down A fee paid to the lender in order to receive a lower mortgage rate. A 'temporary buy down' is a fee in order to reduce monthly payments the first few years of a mortgage. Call Option A mortgage provision that allows a lender to require payment in full at the end of a specified period. Cap A limit on an adjustable rate mortgage (ARM) that states how much the interest rate may increase or decrease during an adjustment period. Cash Out A situation where the borrower refinances a mortgage for more than the amount of the original loan and receives money beyond the first loan and all closing costs. The cash received may be used in any fashion, commonly consolidating other debts and home improvement. Closing (Settlement) The finalization between the buyer, seller and lender where the sale of real property legally changes hands. Closing Costs Describes the costs involved in closing the mortgage loan process. This includes (but not limited to) origination fees, points paid, insurances, appraisals and taxes. Some of these may be pre-paid before the actual point of closing. Typically closing costs will amount to three to six percent of the loan amount. Closing Statement A statement in which discloses costs incurred (and expected) at the closing. Cloud on Title A claim, lien or legal action that affects an owners title. Collateral An object that is offered as security in obtaining a loan. The borrower is then obligated to repaying the loan as agreed or else the lender may take possession or foreclose on the collateral. In a mortgage loan, the collateral will be 'real property' as opposed to personal property. Combined Loan to Value (CLTV) The ratio derived by combining all liens (total of all owed/mortgages) verses the appraised or sales value (whichever is lower). For example, if a property is appraised at $200,000.00 and sold for $210,000.00 and $160,000.00 is owed on the home, it would have a CLTV of 80%. Conforming Loan A mortgage loan meeting guidelines set by FNMA and FHLMC ('Fannie Mae' and 'Freddie Mac' respectively) most notably the maximum price for loans that the two organizations may buy. Commission Fee paid to a listing real estate agent or broker by the seller to the property. Commonly at six percent (6%) of the sale price. Convertible ARM A loan that begins as an Adjustable Rate Mortgage and includes options to be converted to a fixed rate mortgage at predetermined times. Cost of Funds Index (COFI) An index that is commonly used in determining rates for Adjustable Rate Mortgages. It is a weighted average of interest paid by members (institutions) of the 11th Federal Home Loan Bank District of San Francisco. Credit Bureau Organization which tracks consumer credit history and information. The best known credit bureaus include TransUnion, Equifax, and Experian (previously TRW). Credit Report Information of an individual's credit history and current standing reported by a credit bureau. This is used by lenders to evaluate the creditworthiness of the individual's application. Debt to Income Ratio Percentage of a (potential) borrower's fixed monthly debt verses gross income. Lender's use this ratio to determine how much can be loaned to a borrower. Deed A legal document to convey title of a property from the owner to another. Deed of Trust A document held by a trustee, who holds title to property until loan conditions are met (paid). If the borrower defaults on a loan the trustee must sell the property to pay debt. Used in some states in place of a mortgage. Default Term used to indicate a failure in meeting contract obligations. Most commonly used to describe a situation where a borrower was/is thirty days late on a mortgage payment. Delinquency Failure to make payments on time. Discount Points Money paid to the lender in order to receive a lower loan rate. Down Payment Money paid by the borrower that makes up the difference between the purchase price and the mortgage loan. This usually amounts to ten to twenty percent of the purchase price for most conventional mortgages. Due on Sale Clause in contracts that allows lenders to demand payment in full on the advent of the property's sale. Earnest Money Money paid by the buyer to the seller as an act of good faith towards a firm buy offer. The funds are part of the buyer's down payment. Encumbrance A legal right or claim the affects the title of a property. This may include liens, taxes, or other restrictions that affect the sellers ability to sell the property. Equity The financial interest of property valued at market price and the amount owed on outstanding mortgages. The equity of a home is usually spoken of as a percentage of the fair-market value. Escrow A designated neutral party that handles documentation, paperwork, and dispersements between separate parties to effect the sale of property. Escrow Account Money collected as part of each mortgage payment to pay taxes, insurances, and other ongoing payments. The funds are held by the lender, who in turn makes payments as they become due. This is done as a service to the borrower who wants the fees paid in increments. Fannie Mae (Federal National Mortgage Association) Freddie Mac (Federal Home Loan Mortgage Corporation) Organizations created by Congress that buys mortgages in the secondary market to provide funds institutions to continue making loans to consumers. These are created as corporations governed by the government and set up mortgage industry guidelines for loans made available in the open market. The great majority of home loans are bought by these companies. Federal Housing Administration (FHA) Government agency that sets guidelines for mortgage underwriting and insures mortgages made by private lenders to borrowers of residential property. Part of the Department of Housing and Urban Development (HUD). FHA Loan Loan insured by the FHA. Available to borrowers of who qualify for low to mid income housing. Fixed Rate A mortgage interest rate which does not change for the life of the loan. Foreclosure Legal action where a lender may take possession of mortgaged property where the borrower has defaulted. The borrower forfeits all rights to the mortgaged property and usually entails a forced sale to pay off debt. Gift Funds Eligible money made in the behalf of a borrower towards the purchase of property. Commonly from relatives and non-profit organizations. Gross Income Income earned before deductions (e.g. taxes, dues, etc.). Hazard Insurance An insurance policy that protects against property loss caused by natural disasters. Terms vary depending on policy drawn. Home Equity Loan A loan that is secured by the equity built into a home. The amount available depends on the equity in the property and in most cases is tax deductible. The money is commonly used in debt consolidation, home improvement or any other great expense. Housing and Urban Development, Department of (HUD) Government agency involved in urban and community development. Housing Debt to Income Ratio Ratio of all monthly costs of housing (mortgage) expenses verses monthly income. Index Rates used by lending institutions that allow them to compare and adjust their own interest rates for mortgages. Examples include LIBOR (London Interbank Offered Rate), Treasury Bills, COFI (Cost of Funds Index). Interest Rate A rate charged as the fee for borrowing money. This is usually expressed as a percentage of the borrowed amount on an annual basis. Jumbo Loan (Non-Conforming) A mortgage amount that is higher than the loans allowed (bought) by FHLMC and FNMA (Freddie Mac and Fannie Mae). Because these loans do not qualify to be bought by the two government groups they tend to carry higher interest rates. Junior Mortgage A mortgage that is secondary to another loan regarding the same property. Liens on a property that do not have first rights to title (e.g. a second mortgage). Lien A claim over another's property to ensure payment of debt. Loan Application Document detailing information of a borrower that lenders will use to access the qualifications for a loan. Loan Origination Fee Fee charged for compensation for the work of processing and evaluating a loan. Loan to Value (LTV) Ratio of the mortgage verses the property value. This is a common term describing many loan packages and is used to determine the available funds for subsequent (e.g. second mortgages) loans. Lock (Lock in) Describes a guaranteed interest rate for a set period by the lender. Most 'lock in' periods last from thirty to sixty days. Margin Used to describe the amount above an interest rate that added together will be the rate for an adjustable rate mortgage. Market Value The price that a seller and buyer of said property will agree to consummate a sale. Mortgage A document or note that signifies property is placed as security for guarantee of payment. Mortgagee Lender of a mortgage. Mortgage Insurance Insurance that protects the lender's interest in a mortgage in the event that the borrower defaults on a loan. Required in most cases where the loan-to-value exceeds eighty percent. Mortgagor Borrower of a mortgage. Negative Amortization The act of a mortgage debt increasing because payments made are insufficient to cover the amount of interest due. Interest not being paid is added to the balance of a mortgage and so the borrower would owe more the next period than the previous one. No Income Qualifier (Stated Income) Loan process where income of an applicant is declared and no verifying documentation are presented for evaluation. Non-Conforming Loan (Jumbo Loan) A mortgage that does not meet guidelines set by FHLMC and FNMA (Freddie Mac and Fannie Mae). The most common non-conforming loan are mortgages whose amount exceeds those allowed by FHLMC and FNMA. Because these loans do not qualify to be bought by the two government groups they tend to carry higher interest rates. Note Legal document stating the conditions and the borrower's promise of repayment of a loan. Origination Fee The fee charged by a lender to evaluate and process a loan. Payment Cap A limit on an adjustable rate mortgage of how much a payment may increase. PITI Acronym for Principal, Interest, Taxes and Insurance. Commonly used term to describe the components that encumbrance a loan. Points (Discount Points) Fee charged by a lender in return for a lower interest rate on a loan. Each point represents one percent of the mortgage value. Prepaid Items Expenses that must be paid as a condition of escrow but would be in advance of their due dates. These items include taxes, insurances, assessments, and prorated interest. Prepayment Penalty A clause/charge stated in a mortgage against loan payments ahead of schedule. Principal Loan balance of a mortgage but not including interest. Private Mortgage Insurance (PMI) Third party insurer that protects the lender in case of a borrower's default. Qualifying Ratios A measurement used by the lender to evaluate the ability of a borrower to repay mortgage debt. It is calculated by comparing monthly housing expenses verses total debt. Rate Describes the amount of interest applied to the principal of a mortgage. Recording Fees Fees paid to an agent or county recorder to make public record of a property sale. Refinancing The process of replacing a mortgage loan by the proceeds of another. This is usually done to receive better rates, terms or receive extra money. Sales Agreement Document stating the agreement between buyer and seller of property specifying terms, price and conditions. Second Mortgage An additional mortgage secured by a property that currently has a lien (mortgage). This process adds an additional lien that is subordinate to any previous liens. Settlement Costs Describes the costs involved in closing the mortgage loan process. This includes (but not limited to) origination fees, points paid, insurances, appraisals and taxes. Some of these may be pre-paid before the actual point of closing. Typically closing costs will amount to three to six percent of the loan amount. Stated Income Loan process where income of an applicant is declared and no verifying documentation are presented for evaluation. Survey A report that showing the measurements and boundaries of a land parcel. Term Describes the number of years, based on set periodic payments, needed to pay off a loan. Title Document of evidence of ownership and rights to property. Title Insurance Insurance that protects against loss due to disputes on the title of property. Title Search Process of the title company to ensure that the seller is the legal owner and uncover any claims or liens of property. Total Debt Ratio Percentage of a (potential) borrower's fixed monthly debt verses gross income. Lender's use this ratio to determine how much can be loaned to a borrower. Trust Account An account maintained by an agency (usually escrow) that handles all funds for clients. Truth In Lending Act Federal law that requires lenders to disclose all terms of a mortgage to the borrower after an application is made. Two Step Mortgage A mortgage which begins with a low fixed rate and changes into an adjustable rate in a specified period. Underwriting The process of evaluating and verifying data submitted for a loan. Variable Rate An interest rate that may increase or decrease (within a range with limits up and down) based on a specified index rate. Veterans Administration (VA) Government agency who help qualifying veterans for mortgage loans by guaranteeing the lender against default.