Mortgage Glossary

Adjustable Rate Mortgages (ARM)
A mortgage with an interest rate and payment that change periodically over the life of the loan based on changes in a specified index.

Important ARM concepts:            

Amortization Tables
The amortization tables allow you to see a summary of unpaid principal, interest paid, and initial monthly payments for each year of your loan.

Appraised Value
The appraised value is the property’s fair market value according to an appraiser. An appraisal is generally required by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property.

Annual Percentage Rate (APR)
By law, the APR is required to be disclosed to you by the lender. APR is usually the interest rate shown for the mortgage note because it includes up-front costs paid to obtain the loan. The APR does not include the appraisal and credit report. Ask your lender for more information.

Closing Costs
Closing costs include the appraisal fee, credit report fee, the processing fee, discount points, or other lender fees, loan document fees, title insurance, and escrow fees.

Closing Statement (HUD-1)
The settlement of escrow. For the buyer, it includes deposits made, the loan received or assumed, and any credits by escrow instructions, less the sales price, loan costs, insurance, prorate items, etc. For the seller, it has an accounting of the sales price minus any charges assessed to the seller and any payoffs made on the seller's behalf.

Conversion Clause
This provision (available in some ARM's) allows the buyer to change the loan to a fixed rate. The new rate is normally set at the prevalent interest rate for fixed-rate mortgages. This feature may cost extra.

Cost Analysis
Cost analysis helps a lender determine the best mortgage option that will cost you the least over the period of the time you own your home. Lenders usually calculate the following:

• The interest you pay
• The discount points you pay
• The closing costs you pay
• The property tax and property insurance you pay
• The mortgage insurance you pay

Lenders also take these benefits into consideration:

• The tax savings you receive from paying interest and discount points
• The tax savings you receive from paying property taxes
• The appreciation (increase in home’s value) you gain
• The amount of principal you repay with each payment

Deed
The deed is a written document that transfers ownership of real property from seller to buyer.

Default
Default is the failure to pay an obligation or perform a duty.

Discount Points
One discount point is equal to 1 percent of your loan amount. For example, on a $150,000 loan 1 discount point equals $1,500. Discount points are paid to obtain a lower interest rate on your mortgage.

Down Payment
The cash paid by the borrower that represents the difference between the sale price and the loan amount.

Equity
Equity is the difference between the remaining balance owed on your mortgage loan and the appraised value of the home. Your equity increases if your home increases in value and as you make your monthly payments of principal and interest. The principal portion of your payment is used to repay the amount you borrowed.

Escrow
A neutral third party that acts as an agent for both buyer and seller ensure that the agreed upon terms of the transaction are carried out.

FHA Loan
Federal Housing Administration Loan. A FHA loan program will allow you to purchase a home with a low down payment and flexible guidelines. This loan is issued by the Insuring Office of the Department of Housing and Urban Development (HUD). Check with your lender for more options.

Good Faith Estimate (GFE)
All lenders are required to give mortgage applicants an estimate of closing costs within three days of an application submission.

Graduated Payment Mortgage
Monthly payments on a mortgage that start out low and increase at a predetermined rate over the life of the loan.

Impound Account
One month's worth of your yearly tax bill and your yearly homeowner's insurance premium will be added to your loan payments.

If your taxes are left unpaid, your state can foreclose on your property in order to obtain payment. If the foreclosure is successful, the lender could lose his collateral. In other words, if you're not making your payments, the lender could not recoup his loss: the state's foreclosure supercedes his.

The lender also wants to make sure your insurance premium is always paid. If a fire destroys your property, he'll have lost his collateral, but the insurance company should repay his loan.

Interest Only Payments
Interest-only payments pay only the interest you owe. If you want to pay back what you've borrowed, you'll need to make a larger monthly payment.

Loan Commitment
A loan commitment is a written promise to draw up a loan for a specified amount and term.

Loan Policy
A loan policy is a written promise to draw up a loan for a specified amount and term.

Loan-to-Value Ratio
The relationship between the loan amount and the appraised value of the property, expressed as a percentage of the appraised value.

Lock In
You may choose to freeze the interest rate that will be charged on a particular loan for a certain time period.

Nehemiah
The Nehemiah down payment assistance program provides qualifying home buyers with free gift funds for the use towards the down payment and closing costs for eligible loan programs. 

Origination Fee
This fee is charged by the lender to offset the costs of evaluating, preparing and submitting a proposed mortgage loan. It's normally one percent of the loan amount.

Pre-Paid Interest
This is the amount of interest you owe from the day your loan funds to the end of the month.

Example:
If you close on the 15th of January and your interest is $21 per day, you would pay interest through the 31st of January. After that, your first payment would be due on March 1st and would pay principal and interest for the month of February.

Private Mortgage Insurance (PMI)
Insurance that protects the lender form loss if you stop making payments. You may not be required to pay mortgage insurance if your down payment is more than 20 percent of your home. Check with your lender to see how your PMI can be waived.

Property Taxes
The amount you pay varies significantly from area to area and is usually a set percentage of your property's value. Your lender will collect at least one month of property taxes at closing to set up an account so that they can pay your taxes when they’re due.

Pro-Rata
Adjustments such as taxes, insurance, rents, and interest on loans.

Savings Rate
Savings rate refers to the annual amount of interest you can earn on money you save.
For example, if you decide to make a larger down payment on your home, you are sacrificing the interest you would have earned on the additional amount of money.

Tax Rates
To estimate your tax rate, divide the amount you paid in taxes last year by your income.

Tax Savings
If you itemize your tax return, you will probably be able to claim a deduction for the interest you have paid on your mortgage loans, including home equity lines of credit. A deduction is the amount you are allowed to subtract from your taxable income. It reduces the amount of your income on which you must pay taxes.

Term
A term is the length of time that you will make payments on your loan. Typical mortgages have terms of 15, 30 or 40 years.