Mortgage Glossary

Adjustable-Rate Mortgage (ARM)
A mortgage with an interest rate that changes during the life of the loan according to movements in an index rate.

Adjustment Date
The date that the interest rate changes on an adjustable-rate mortgage (ARM).

 

Adjustment Period
The period elapsing between adjustment dates for an adjustable-rate mortgage (ARM).

 

Amortization
The gradual repayment of a mortgage loan, both principal and interest, by installments.

 

Amortization Term
The length of time required to amortize the mortgage loan expressed as a number of months. For example, 360 months is the amortization term for a 30-year fixed-rate mortgage.

 

Annual Percentage Rate (APR)
The cost of credit, expressed as a yearly rate including interest, mortgage insurance, and loan origination fees. This allows the buyer to compare loans, however APR should not be confused with the actual note rate.

 

Appraisal
A written analysis prepared by a qualified appraiser and estimating the value of a property.

 

Asset
Anything owned of monetary value including real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, etc.).

 

Assignment
The transfer of a mortgage from one lender to another.

 

Before-tax Income
Income before taxes are deducted.

 

Biweekly Payment Mortgage
A plan to reduce the debt every two weeks (instead of the standard monthly payment schedule). The 26 (or possibly 27) biweekly payments are each equal to one-half of the monthly payment required if the loan were a standard 30-year fixed-rate mortgage. The result for the borrower is a substantial savings in interest over time.

 

Cap
Limits how much the interest rate can increase, either at each adjustment or during the life of the mortgage.

 

Certificate of Eligibility
A document issued by the federal government certifying a veteran’s eligibility for a Department of Veterans Affairs (VA) mortgage.

 

Change Frequency
The frequency (in months) of payment and/or interest rate changes in an adjustable-rate mortgage (ARM).

 

Closing
A meeting held to finalize the sale or refinance of a property. The buyer signs the mortgage documents and pays closing costs. Also called "settlement."

 

Closing Costs
These are expenses that are incurred by buyers and sellers when transferring ownership of a property. Closing costs normally include an origination fee, property taxes, charges for title insurance and escrow costs, appraisal fees, etc. Closing costs will vary according to the area of the country. 

 

Closing Disclosure
A disclosure provided a minimum of 3 days prior to closing that explains the final loan terms and costs associated with the transaction.

 

Credit Report
A report detailing an individual's credit history that is prepared by a credit bureau and used by a lender to determine a loan applicant's creditworthiness.

 

Credit Score
A credit score measures a consumer's credit risk relative to the rest of the U.S. population, based on the individual's credit usage history. The credit score most widely used by lenders is the FICO® score, developed by Fair, Issac and Company. This 3-digit number, ranging from 300 to 850, is calculated by a mathematical equation that evaluates many types of information that are on your credit report. Higher FICO® scores represents lower credit risks, which typically equate to better loan terms. In general, credit scores are critical in the mortgage loan underwriting process.

 

Deed of Trust
The document used in some states instead of a mortgage. Title is conveyed to a trustee.

 

Default
Failure to make mortgage payments on a timely basis or to comply with other requirements of a mortgage.

 

Delinquency
Failure to make mortgage payments on time.

 

Deposit (Earnest Money)
This is a sum of money given to bind the sale of real estate.

 

Down Payment
Part of the purchase price of a property that is paid in cash and not financed with a mortgage.

 

Equity
The amount of financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on the mortgage.
 

Escrow Disbursements
The use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, and other property expenses as they become due. 

 

Escrow Payment

The part of the monthly payment that is held by the servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due.

 

Fannie Mae
A congressionally chartered, shareholder-owned company that is the nation's largest supplier of home mortgage funds.

 

 

FHA Mortgage
A mortgage that is insured by the Federal Housing Administration (FHA).

 

First Mortgage
The primary lien against a property.

 

Fixed-Rate Mortgage (FRM)
A mortgage interest that is fixed throughout the entire term of the loan.

 

Housing Expense Ratio
The percentage of gross monthly income budgeted to pay housing expenses.

 

Hybrid ARM (3/1 ARM, 5/1 ARM, 7/1 ARM)
A combination fixed rate and adjustable rate loan - also called 3/1, 5/1, 7/1 - can offer the best of both worlds: lower interest rates (like ARMs) and a fixed payment for a longer period of time than most adjustable rate loans. For example, a "5/1 loan" has a fixed rate for the first five years and then turns into a traditional adjustable rate loan, based on then-current rates for the remaining 25 years. It's a good choice for people who expect to move or refinance, before or shortly after, the adjustment occurs.

 

Index
The index is the measure of interest rate changes a lender uses to decide the amount an interest rate on an ARM will change over time. The index is generally a published number or percentage, such as the average interest rate or yield on Treasury bills. Some index rates tend to be higher than others and some more volatile.

 

Initial Interest Rate
This refers to the original interest rate of the mortgage at the time of closing. This rate changes for an adjustable-rate mortgage (ARM).

 

Interest Rate
The fee charged for borrowing money expressed as an annual percentage of the loan amount.

 

Interest Rate Ceiling
For an adjustable-rate mortgage (ARM), the maximum interest rate, as specified in the mortgage note.

 

Interest Rate Floor
For an adjustable-rate mortgage (ARM), the minimum interest rate, as specified in the mortgage note.

 

Late Charge
The penalty a borrower must pay when a payment is made a stated number of days (usually 15) after the due date.

 

Liabilities
A person's financial obligations. Liabilities include long-term and short-term debt.

 

Lifetime Rate Cap
For an adjustable-rate mortgage (ARM), a limit on the amount that the interest rate can increase or decrease over the life of the loan. See cap.

 

Liquid Asset
An asset that is easily converted into cash.

 

Loan Estimate
A disclosure provided a maximum of 3 days after application that explains the loan terms and costs associated with the transaction.

 

Loan-to-Value (LTV) Percentage
The relationship between the principal balance of the mortgage and the appraised value (or sales price if it is lower) of the property. For example, a $100,000 home with an $80,000 mortgage has an LTV of 80 percent.

 

Lock-In Period
The guarantee of an interest rate for a specified period of time by a lender, including loan term and points, if any, to be paid at closing.

 

Margin
The number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment.

 

Maturity
The date on which the principal balance of a loan becomes due and payable.

 

Mortgage
A legal document that pledges a property to the lender as security for payment of a debt.

 

Mortgage Banker
A company that originates mortgages exclusively for resale in the secondary mortgage market.

 

Mortgage Broker
An individual or company that brings borrowers and lenders together for the purpose of loan origination.

 

Mortgage Insurance
A contract that insures the lender against loss caused by a mortgagor's default on a government mortgage or conventional mortgage. Mortgage insurance can be issued by a private company or by a government agency.

 

Mortgage Insurance Premium (MIP)
The amount paid by a mortgagor for mortgage insurance.

 

Non Liquid Asset
An asset that cannot easily be converted into cash.

 

Note
A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.

 

Origination Fee
A fee paid to a lender for processing a loan application. The origination fee is stated in the form of points. One point is 1 percent of the mortgage amount.

 

Owner (or Seller) Financing
A property purchase transaction in which the party selling the property provides all or part of the financing.  Also known as a Seller Carry-Back.

 

Periodic Payment Cap
A limit on the amount that payments can increase or decrease during any one adjustment period.

 

Periodic Rate Cap
A limit on the amount that the interest rate can increase or decrease during any one adjustment period, regardless of how high or low the index might be.

 

PITI Reserves
A cash amount that a borrower must have on hand after making a down payment and paying all closing costs for the purchase of a home. The principal, interest, taxes, and insurance (PITI) reserves must equal the amount that the borrower would have to pay for PITI for a predefined number of months.

 

Points
A point is equal to one percent of the principal amount of your mortgage. For example, if you get a mortgage for $165,000 one point means $1,650 to the lender. Points usually are collected at closing and may be paid by the borrower or the home seller, or may be split between them.

 

Prepayment Penalty
A fee that may be charged to a borrower who pays off a loan before it is due.

 

Pre-Qualification
The process of determining how much money you will be eligible to borrow before you apply for a loan.

 

Principal Balance
The outstanding balance on a mortgage not including interest or any other charges.

Principal, Interest, Taxes, and Insurance (PITI)
The four components of a monthly mortgage payment. Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the monthly cost of property taxes and homeowners insurance, whether these amounts that are paid into an escrow account each month or not.

 

Private Mortgage Insurance (PMI)
Mortgage insurance provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults. Most lenders generally require MI for a loan with a loan-to-value (LTV) percentage in excess of 80 percent.

 

Processing
The process of collecting and organizing the documents and reports required for submission to Underwriting.

 

Qualifying Ratios
Calculations used to determine if a borrower can qualify for a mortgage. They consist of two separate calculations: a housing expense as a percent of income ratio and total debt obligations as a percent of income ratio.

 

Real Estate Agent
A person licensed to negotiate and transact the sale of real estate on behalf of the property owner.

 

Real Estate Settlement Procedures Act (RESPA)
A consumer protection law that requires lenders to give borrowers advance notice of closing costs.

 

Recording
The noting in public records of the details of a properly executed legal document, such as a deed, a mortgage note, a satisfaction of mortgage, or an extension of mortgage.

 

Refinance 
Paying off one loan with the proceeds from a new loan using the same property as security.

 

Revolving Liability
A credit arrangement, such as a credit card, that allows a customer to borrow against a pre-approved line of credit when purchasing goods and services.

 

Security
The property that will be pledged as collateral for a loan.

 

Servicer
An organization that collects principal and interest payments from borrowers and manages borrowers’ escrow accounts. The servicer often services mortgages that have been purchased by an investor in the secondary mortgage market.

 

Settlement Statement
A document that provides an itemized listing of the funds that are payable at closing. Items that appear on the statement include real estate commissions, loan fees, points, and initial escrow amounts. The totals at the bottom of the Settlement Statement define the seller's net proceeds and the buyer's net payment at closing.

Total Expense Ratio
Total obligations as a percentage of gross monthly income including monthly housing expenses plus other monthly debts.

Truth-in-Lending
A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the annual percentage rate (APR) and other charges.

 

Underwriting
The process of evaluating a loan application to determine the risk involved for the lender. Underwriting involves an analysis of the borrower's creditworthiness and the quality of the property itself.

 

VA Mortgage
A mortgage that is guaranteed by the Department of Veterans Affairs (VA).

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