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adjustable-rate mortgage (ARM) - A
mortgage that permits the lender to adjust its interest rate periodically
on the basis of changes in a specified index.
adjustment date - The date on which the interest
rate changes for an adjustable-rate mortgage (ARM).
adjustment period - The period that elapses between
the adjustment dates for an adjustable-rate mortgage
amortization - The gradual repayment of a mortgage
loan by installments.
amortization schedule - A timetable for payment of
a mortgage loan. An amortization schedule shows the amount of each
payment applied to interest and principal and shows the remaining
balance after each payment is made.
amortization term - The amount of time required to
amortize the mortgage loan. The amortization term is expressed as
a number of months. For example, for a 30-year fixed-rate mortgage,
the amortization term is 360
annual percentage rate (APR) - The cost of a mortgage
stated as a yearly rate; includes such items as interest, mortgage
insurance, and loan origination fee (points).
appraisal - A written analysis of the estimated value
of a property prepared by a qualified appraiser. Contrast with home
inspection.
appraised value - An opinion of a property's fair
market value, based on an appraiser's knowledge, experience, and analysis
of the property.
asset - Anything of monetary value that is owned
by a person. Assets include real property, personal property, and
enforceable claims against others (including bank accounts, stocks,
mutual funds, and so on).
assumable mortgage - A mortgage that can be taken
over ("assumed") by the buyer when a home is sold.
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balloon mortgage - A mortgage that has level monthly
payments that will amortize it over a stated term but that provides
for a lump sum payment to be due at the end of an earlier specified
term.
bankruptcy - A proceeding in a federal court in which
a debtor who owes more than his or her assets can relieve the debts
by transferring his or her assets to a trustee. Usually, at least
2 years must elapse from the discharge of the bankruptcy before lenders
will consider making a loan to someone who had declared bankruptcy.
beneficiary - The person designated to receive the
income from a trust, estate, or a deed of trust.
bill of sale - A written document that transfers
title to personal property.
bond - An interest-bearing certificate of debt with
a maturity date. An obligation of a government or business corporation.
A real estate bond is a written obligation usually secured by a mortgage
or a deed of trust.
bridge loan - A form of second trust that is collateralized
by the borrower's present home (which is usually for sale) in a manner
that allows the proceeds to be used for closing on a new house before
the present home is sold. Also known as "swing loan."
broker - A person who, for a commission or a fee,
brings parties together and assists in negotiating contracts between
them.
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cap - A provision of an adjustable-rate mortgage
(ARM) that limits how much the interest rate or mortgage payments
may increase or decrease. See lifetime payment cap, lifetime rate
cap, periodic payment cap, and periodic rate cap.
cash-out refinance - A refinance transaction in which
the amount of money received from the new loan exceeds the total of
the money needed to repay the existing first mortgage, closing costs,
points, and the amount required to satisfy any outstanding subordinate
mortgage liens. In other words, a refinance transaction in which the
borrower receives additional cash that can be used for any purpose.
Certificate of Eligibility - A document issued by
the federal government certifying a veteran's eligibility for a Department
of Veterans Affairs (VA) mortgage.
certificate of title - A statement provided by an
abstract company, title company, or attorney stating that the title
to real estate is legally held by the current owner.
closing costs - Expenses (over and above the price
of the property) incurred by buyers and sellers in transferring ownership
of a property. Closing costs normally include an origination fee,
an attorney's fee, taxes, an amount placed in escrow, and charges
for obtaining title insurance and a survey. Closing costs percentage
will vary according to the area of the country; lenders or Realtors®
often provide estimates of closing costs to prospective home buyers.
commission - The fee charged by a broker or agent
for negotiating a real estate or loan transaction. A commission is
generally a percentage of the price of the property or loan.
comparables - An abbreviation for "comparable
properties"; used for comparative purposes in the appraisal process.
Comparables are properties like the property under consideration;
they have reasonably the same size, location , and amenities and have
recently been sold. Comparables help the appraiser determine the approximate
fair market value of the subject property.
construction loan - A short-term, interim loan for
financing the cost of construction. The lender makes payments to the
builder at periodic intervals as the work progresses.
credit reporting agency (or bureau) - An organization
that prepares reports that are used by lenders to determine a potential
borrower's credit history. The agency obtains data for these reports
from a credit repository as well as from other sources.
conventional mortgage - A mortgage that is not insured
or guaranteed by the federal government. Contrast with government
mortgage.
convertibility clause - A provision in some adjustable-rate
mortgages (ARMs) that allows the borrower to change the ARM to a fixed-rate
mortgage at specified timeframes after loan origination
convertible ARM - An adjustable-rate mortgage (ARM)
that can be converted to a fixed-rate mortgage under specified conditions.
credit history - A record of an individual's open
and fully repaid debts. A credit history helps a lender to determine
whether a potential borrower has a history of repaying debts in a
timely manner.
credit report - A report of an individual's credit
history prepared by a credit bureau and used by a lender in determining
a loan applicant's creditworthiness. See merged credit report.
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deed of trust - The document used in some states
instead of a mortgage; title is conveyed to a trustee.
Department of Veterans Affairs (VA) - An agency of
the federal government that guarantees residential mortgages made
to eligible veterans of the military services. The guarantee protects
the lender against loss and thus encourages lenders to make mortgages
to veterans.
discount points - See point.
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earnest money deposit - A deposit made by the potential
home buyer to show that he or she is serious about buying the house.
encumbrance - Anything that affects or limits the
fee simple title to a property, such as mortgages, leases, easements,
or restrictions.
Equal Credit Opportunity Act (ECOA) - A federal law
that requires lenders and other creditors to make credit equally available
without discrimination based on race, color, religion, national origin,
age, sex, marital status, or receipt of income from public assistance
programs.
equity - A homeowner's financial interest in a property.
Equity is the difference between the fair market value of the property
and the amount still owed on its mortgage.
escrow - An item of value, money, or documents deposited
with a third party to be delivered upon the fulfillment of a condition.
For example, the deposit by a borrower with the lender of funds to
pay taxes and insurance premiums when they become due, or the deposit
of funds or documents with an attorney or escrow agent to be disbursed
upon the closing of a sale of real estate.
escrow account - The account in which a mortgage
servicer holds the borrower's escrow payments prior to paying property
expenses.
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Fair Credit Reporting Act - A consumer protection
law that regulates the disclosure of consumer credit reports by consumer/credit
reporting agencies and establishes procedures for correcting mistakes
on one's credit record.
Fannie Mae - A congressionally chartered, shareholder-owned
company that is the nation's largest supplier of home mortgage funds.
first mortgage - A mortgage that is the primary lien
against a property.
fixed-rate mortgage (FRM) - A mortgage in which the
interest rate does not change during the entire term of the loan.
flood insurance - Insurance that compensates for
physical property damage resulting from flooding. It is required for
properties located in federally designated flood areas.
foreclosure - The legal process by which a borrower
in default under a mortgage is deprived of his or her interest in
the mortgaged property. This usually involves a forced sale of the
property at public auction with the proceeds of the sale being applied
to the mortgage debt.
fully amortized ARM - An adjustable-rate mortgage
(ARM) with a monthly payment that is sufficient to amortize the remaining
balance, at the interest accrual rate, over the amortization term.
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hazard insurance - Insurance coverage that compensates
for physical damage to a property from fire, wind, vandalism, or other
hazards.
HUD-1 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. Each item on the statement is represented
by a separate number within a standardized numbering system. The totals
at the bottom of the HUD-1 statement define the seller's net proceeds
and the buyer's net payment at closing. The blank form for the statement
is published by the Department of Housing and Urban Development (HUD).
The HUD-1 statement is also known as the "closing statement"
or "settlement sheet."
I
index - A number used to compute the interest rate for an adjustable-rate
mortgage (ARM). The index is generally a published number or percentage,
such as the average interest rate or yield on Treasury bills. A margin
is added to the index to determine the interest rate that will be
charged on the ARM. This interest rate is subject to any caps that
are associated with the mortgage.
in-file credit report - An objective account, normally computer-generated,
of credit and legal information obtained from a credit repository.
interest - The fee charged for borrowing money.
interest rate - The rate of interest in effect for the monthly
payment due.
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judgment - A decision made by a court of law. In judgments
that require the repayment of a debt, the court may place a lien against
the debtor's real property as collateral for the judgment's creditor.
jumbo loan - A loan that exceeds Fannie Mae's legislated mortgage
amount limits. Also called a non conforming loan.
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liabilities - A person's financial obligations. Liabilities
include long-term and short-term debt, as well as any other amounts
that are owed to others.
lien - A legal claim against a property that must be paid off
when the property is sold.
lifetime payment cap - For an adjustable-rate mortgage (ARM), a limit
on the amount that payments can increase or decrease over the life
of the mortgage. See cap.
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.
line of credit - An agreement by a commercial bank or other
financial institution to extend credit up to a certain amount for
a certain time to a specified borrower.
liquid asset - A cash asset or an asset that is easily converted
into cash.
loan - A sum of borrowed money (principal) that is generally
repaid with interest.
loan origination - The process by which a mortgage lender brings
into existence a mortgage secured by real property.
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 $85,000 mortgage has a LTV percentage of 85 percent.
lock-in - A written agreement in which the lender guarantees
a specified interest rate if a mortgage goes to closing within a set
period of time. The lock-in also usually specifies the number of points
to be paid at closing.
lock-in period - The time period during which the lender has
guaranteed an interest rate to a borrower. See lock-in.
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margin - For an adjustable-rate mortgage (ARM), the amount
that is added to the index to establish the interest rate on each
adjustment date, subject to any limitations on the interest rate change.
merged credit report - A credit report that contains information
from three credit repositories. When the report is created, the information
is compared for duplicate entries. Any duplicates are combined to
provide a summary of a your credit.
mortgage broker - An individual or company that brings borrowers
and lenders together for the purpose of loan origination. Mortgage
brokers typically require a fee or a commission for their services.
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 such as the Veterans Administration (VA). Depending
on the type of mortgage insurance, the insurance may cover a percentage
of or virtually all of the mortgage loan. See private mortgage insurance.
mortgage life insurance - A type of term life insurance often
bought by mortgagors. The amount of coverage decreases as the principal
balance declines. In the event that the borrower dies while the policy
is in force, the debt is automatically satisfied by insurance proceeds.
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no cash-out refinance - A refinance transaction in which the
new mortgage amount is limited to the sum of the remaining balance
of the existing first mortgage, closing costs (including prepaid items),
points, the amount required to satisfy any mortgage liens that are
more than one year old (if the borrower chooses to satisfy them),
and other funds for the borrower's use (as long as the amount does
not exceed 1 percent of the principal amount of the new mortgage).
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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.
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periodic payment cap - For an adjustable-rate mortgage (ARM),
a limit on the amount that payments can increase or decrease during
any one adjustment period. See cap.
periodic rate cap - For an adjustable-rate mortgage (ARM),
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. See cap.
point - A one-time charge by the lender for originating a loan.
A point is 1 percent of the amount of the mortgage.
power of attorney - A legal document that authorizes another
person to act on one's behalf. A power of attorney can grant complete
authority or can be limited to certain acts and/or certain periods
of time.
prepayment - Any amount paid to reduce the principal balance
of a loan before the due date. Payment in full on a mortgage that
may result from a sale of the property, the owner's decision to pay
off the loan in full, or a foreclosure. In each case, prepayment means
payment occurs before the loan has been fully amortized.
pre-qualification - The process of determining how much money
a prospective home buyer will be eligible to borrow before he or she
applies for a loan.
prime rate - The interest rate that banks charge to their preferred
customers. Changes in the prime rate influence changes in other rates,
including mortgage interest rates.
principal - The amount borrowed or remaining unpaid. The part
of the monthly payment that reduces the remaining balance of a mortgage.
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 amounts that are paid into an escrow account
each month for property taxes and mortgage and hazard insurance.
private mortgage insurance (PMI) - Mortgage insurance that
is 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.
purchase and sale agreement - A written contract signed by
the buyer and seller stating the terms and conditions under which
a property will be sold.
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rate lock - A commitment issued by a lender to a borrower or
other mortgage originator guaranteeing a specified interest rate for
a specified period of time. See lock-in.
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second mortgage - A mortgage that has a lien position subordinate
to the first mortgage.
title - A legal document evidencing a person's right to or ownership
of a property.
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title company - A company that specializes in examining and
insuring titles to real estate.
title insurance - Insurance that protects the lender (lender's
policy) or the buyer (owner's policy) against loss arising from disputes
over ownership of a property.
title search - A check of the title records to ensure that
the seller is the legal owner of the property and that there are no
liens or other claims outstanding.
Treasury index - An index that is used to determine interest
rate changes for certain adjustable-rate mortgage (ARM) plans. It
is based on the results of auctions that the U.S. Treasury holds for
its Treasury bills and securities or is derived from the U.S. Treasury's
daily yield curve, which is based on the closing market bid yields
on actively traded Treasury securities in the over-the-counter market.
See adjustable-rate mortgage (ARM).
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.
U
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.
V
VA mortgage - A mortgage that is guaranteed by the Department
of Veterans Affairs (VA). Also known as a government mortgage.
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