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Mortgage Glossary

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Abstract of Title A written history of the title transactions or conditions bearing on the title to a designated parcel of land. It covers the period from the original source of title to the present and summarizes all subsequent instruments of public record by setting forth their material parts.
Adjustable-Rate Mortgage A general term for any mortgage in which the interest rate and, generally, the payments change over the life of the loan. The interest rate is adjusted to match the rise or fall of a preselected interest rate index and the borrower's regular payments will increase or decrease accordingly. Different types of adjustable-rate mortgages (ARMs) have different frequencies for these adjustments. Some ARMs have limits on payment and interest rate changes and the maximum interest rate over the life of the loan. To the borrower's advantage, the initial rate of an ARM is usually low, permitting the purchase of real estate that otherwise would be unaffordable with a fixed-rate mortgage. But, there is a risk of higher payments later on. (See Index, Initial Interest Rate.)
Amortization The systematic and continuous repayment of an obligation through periodic installments until the debt has been paid off in full.
Amortization Period That period of time over which a calculated mortgage payment will fully repay a set loan amount at a set interest rate.
Annual Percentage Rate The actual interest rate the borrower pays when all the costs of obtaining credit are included.
Annuity An amount paid at regular intervals for a set period of time. Mortgage payments are a form of an annuity paid to the lender.
Appraisal A report made by a qualified appraiser setting forth an opinion or estimate of value. The term also refers to the process by which this estimate is obtained.
Appraised Value An estimation of property value made by a qualified expert.
Appreciation An increase in the value of a property. Appreciation may be the result of an increased demand for a property, any improvements or additions made, improvements to the neighborhood, etc.
APR See Annual Percentage Rate.
ARM See Adjustable-Rate Mortgage.
Assessment Tax on real property either by an annual property tax based on current fair market value or via special assessments for sewers, public improvements, etc.
Assumption A means by which the title/mortgage may be transferred to another party with or without release of liability on the note.
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Balloon Mortgage A mortgage with periodic installments of principal and interest that, at the end of such a period, do not fully amortize the loan. The balance of the mortgage due is usually paid in a lump sum at a specified date, usually at the end of the term of such periodic installments.
Balloon Payment The unpaid, principal amount of a mortgage loan that is due on a specified date, and paid in a lump sum at the end of the term.
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Cap A limit placed on payments, interest rates and/or the balance of a loan. Caps can limit increases by either a dollar amount or a percentage.
Cash Take-Out Refinance See Equity Refinance.
Closing (Loan Closing) The process that brings a loan into legal existence, including the signing of all loan documents, their delivery to the appropriate parties, and the disbursing of at least some of the loan funds.
Closing Costs Costs, in addition to the price of the property itself, that are due at closing. These costs normally include, but are not limited to, origination fees, discounts points (see Points), attorney's fees, costs for title insurance surveys, recording documents, and prepayments of real estate taxes and insurance premiums held by the lender. Sometimes the seller will help the borrower pay some of these costs.
Closing Statement A statement of the funds received and spent at the closing of a real estate sale. The closing statement is furnished by the real estate closing agent to the buyer and seller separately. The standardized federal form, HUD-1, is used in most residential transactions.
Collateral Property pledged as security for a debt. For example, real estate securing a mortgage. Collateral can be repossessed if the loan is not repaid.
Collateral Mortgage Obligation A multi-class, mortgage-backed security collateralized by loans that are typically residential or multi-family loans.
Conventional Loan A mortgage loan not insured by the Federal Housing Administration (FHA) or guaranteed by the Veterans Administration (VA) or Farmers Home Administration (FmHA). No governmental agency approval is required of the lender, borrower or property. It is called "conventional" because it conforms to accepted standards, modified within legal bounds by mutual consent of the borrower and the lender. Also called "conventional residential mortgage."
Co-signer A party who signs the mortgage note along with the borrower, but who does not own or have any interest in the title to the property.
Coupon Rate The annual interest rate shown on the face of a mortgage note.
Credit Report A document completed by a credit-reporting agency providing information about the buyer's credit cards, previous mortgage history, bank loans and public records dealing with financial matters.
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Deed in Lieu of Foreclosure A transfer of title to real property, from a delinquent mortgagor to the mortgagee, given voluntarily to satisfy the balance due on a defaulted loan and to avoid foreclosure proceedings. Also called "voluntary conveyance."
Deed of Trust A legal document which conveys title to real estate to a disinterested third party (trustee) who holds the title until the owner of the property has repaid the debt. In states where it is used, a deed of trust accomplishes essentially the same purpose as a regular mortgage. Also called "trust deed" or "trust indenture." In some states, this is used in place of a mortgage. Three people are involved in a deed of trust: the borrower, the lender and the trustee. The borrower transfers the legal title for the property to the trustee who holds the property as security for the debt. If the borrower pays the mortgage as agreed, the trustee gives the legal title to the owner . If the borrower does not pay the mortgage as agreed, the trustee can sell the property. (See Mortgage.)
Deferred Interest With adjustable-rate mortgages (ARMs), if monthly payments do not cover the interest cost, the interest left unpaid is deferred to later years by adding it to the unpaid principal balance, In subsequent months, charged interest is added to this unpaid interest. Many lenders limit deferred interest. For example, by not allowing it to go above 125% of the original mortgage loan balance. If the unpaid balance exceeds the limit placed by the lender, the borrower can no longer defer interest and must begin making payments large enough to fully pay what is due over the remaining term. In this case, the payments can increase suddenly and significantly. Deferred interest can occur when choosing a graduated payment option (see Graduated Payments), where the loan starts out below current rates but an agreement to pay the difference (the deferred interest) in later years is made. Deferred interest can also occur when choosing a monthly payment cap. (See Cap.)
Department of Housing and
Urban Development
A department within the government that is responsible for the implementation and administration of government housing and urban development programs.
Deposit With reference to the sale of real estate, a sum of money given to either bind a sale of real estate or assure payment or an advance of funds in the processing of a loan. Also known as "earnest money."
Depreciation A lowering of value based on physical deterioration or functional or economic obsolescence.
Down Payment The difference between the sales price of real estate and the amount of the mortgage loan.
Due-On-Sale Clause A clause allowing the lender to demand payment of the entire loan balance upon sale or other transfer of title by the borrower to a third party.
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Earnest Money See Deposit
Easement A right to the enjoyment or access of land held by another. Easement is a non-ownership interest in land.
Equal Credit Opportunity Act Federal legislation that prohibits a creditor from discriminating in mortgage lending on the basis of race, color, religion, national origin, sex, marital status, age, income derived from public assistance programs, or previous exercise of Consumer Credit Protection Act rights.
Equity The owner's interest, or the amount of cash the owner has, realized, paid in or invested in real estate.
Equity Mortgage A debt secured by a lien against real estate that usually is subordinate to a previous mortgage and is based or given on the amount of equity one has in real estate after deducting the previous mortgage.
Equity Refinance The borrower obtains a new loan, taking cash out of the equity which has built up in the original loan, resulting in a larger loan balance than the original loan. Also called "cash take-out refinance."
Escrow Account An account held by the lending institution to which the borrower pays monthly installments for property taxes, insurance and special assessments, and from which the lender disburses these sums as they become due.
Escrow Payment The portion of a borrower's monthly payment that is set aside by the lender in an escrow account to pay the taxes, hazard insurance, mortgage insurance, ground rents and other special items as they come due.
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Farmers Home Administration A federal agency that makes and insures loans for rural housing and farms.
Federal Deposit Insurance Corporation A federal agency that insures deposits in commercial banks up to $100,000 and, along with the Federal Reserve System, regulates banks and banking procedures.
Federal Home Loan Bank Board A regulatory and supervisory agency for federally chartered savings institutions. It oversees the operations of the Federal Savings and Loan Insurance Corporation (FSLIC) and the Federal Home Loan Mortgage Corporation (FHLMC).
Federal Housing Administration A federal agency within the U.S. Department of Housing and Urban Development (HUD). Using loan insurance programs to insure mortgages for lenders, the Federal Housing Administration (FHA) stimulates the availability of housing for low- and moderate-income families.
FHA Mortgage A mortgage with federally sponsored mortgage guaranty insurance provided through the Federal Housing Administration (FHA).
Foreclosure An action to eliminate the interest of a borrower in real estate so as to give the lender good title.
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Good Faith Estimate Provides a breakdown of the estimated closing charges.
Government National Mortgage Association A government corporation within the Department of Housing and Urban Development (HUD) that provides assistance for the purchase of certain Federal Housing Administration (FHA) and Veterans Administration (VA) mortgages and guarantees securities backed by pools of mortgage loans.
Graduated Payment Mortgage A mortgage in which the monthly payments will generally increase for a set period of time and then reach an amount that remains constant for the rest of the amortization period. This increasing payment feature can be incorporated into fixed-rate or floating-rate loans. For example, the borrower may agree to make initial monthly payments of $700 that will rise gradually to $900 by the fifth year, where the payment will stay for the remainder of the loan.
Graduated Payments The amount a borrower pays initially covers only part of the actual amount needed to amortize the loan. Payments increase annually during the first few years of the loan and then ultimately level off. Such payments may result in negative amortization if there is no pledged account to supplement the borrower's payment.
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Hazard Insurance A broad form of casualty insurance coverage for real estate that includes protection against loss from fire, certain natural causes, vandalism and malicious mischief.
HUD Information Booklet Describes the closing process and costs and the loan applicant's rights under the Real Estate Settlement Procedures Act (RESPA).
Index 1) Measurement used by lenders in a market to determine changes in an accrual rate. This can be based on a published, independent measure of current interest rates, such as a Treasury Bill. An index must be readily verifiable by the borrower and beyond the control of the lender. It provides a guideline that should accurately reflect the current cost of lending money.

2) A measure of prevailing market interest rates. The index is used with the margin to determine a new interest rate at the time of adjustment. If the index increases, the interest rate increases unless an interest rate cap is reached. Often, these interest rates are the rates for U.S. Treasury securities. Treasury securities have become popular as indexes because they are easy to monitor and reflect economic conditions accurately.

Initial Interest Rate The beginning interest rate at the start of an adjustable-rate mortgage (ARM). It may be lower than the fully indexed rate or "going market rate" and it will remain constant until it is adjusted up or down on the adjustment date.
Interest Rate The percentage of an amount of money which is paid for its use for a specified time; usually expressed as an annual percentage.
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Joint Tenancy Joint ownership by two or more persons giving each person equal interest and equal rights in the property, including the right of survivorship.
Letter of Commitment A document that advises the borrower that the loan has been approved, spells out the terms and conditions of the loan and confirms the closing date.
Lien A legal encumbrance or claim of one person on the property of another as security for a debt or charge.
Lienholder Any person or organization who holds a legal claim over the specific property of another as security for debt.
Liquidity The amount an individual or entity holds in cash, checking and savings accounts and other assets quickly convertible to cash without any significant loss.
Loan Closing A meeting between borrower and lender in which transfer of ownership is accomplished, funds and deed are exchanged, and all loan documents, including the promissory note and mortgage, are signed.
Loan Servicing Department The division of a mortgage lending institution that is responsible for servicing the terms and conditions of the loan agreement. The duties of a loan servicing department include the collection of payments, interest, principal, trust items such as hazard insurance and taxes, and conducting foreclosures. Servicing duties also consist of operational procedures covering accounting, bookkeeping, insurance, tax records, loan payment follow-up and loan analysis. A fee is charged to the borrower for these services.
Loan to Value Mathematical computation that compares the loan amount to the value of the property.
Loan-to-Value Ratio The ratio, expressed as a percentage, of the amount of a loan (numerator) to the value or selling price of real property (denominator). Usually, the higher the percentage, the greater the interest charged. Maximum percentages for banks, savings and loans, or government-insured loans are set by statute.
LTV See Loan to Value and Loan-to-Value Ratio.
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Margin Under the terms of an adjustable-rate mortgage (ARM), the margin is a premium that a lender charges which is added to the index. This premium is typically two or three percentage points. Once the lender specifies the margin, it remains fixed.
Market Value An estimate of the highest price a property would sell for within a reasonable period of time, on the open market under normal conditions, and between a willing, ready and able buyer and seller.
Mechanic's Lien A claim created by law for the purpose of securing priority payment for work performed and material furnished by a mechanic or other person who has done construction or repair of a building. Such a claim attaches to the land as well as buildings and improvements erected on land.
Mortgage Guaranty Insurance Insurance written by an independent mortgage guaranty insurance company that protects the mortgage lender against loss incurred by a mortgage default, thus enabling the lender to lend a higher percentage of the sales price. The federal government writes this form of insurance through the Federal Housing Administration (FHA) and the Veterans Administration (VA).
Mortgage Guaranty Insurance Premium The amount paid by a mortgagor for mortgage guaranty insurance either to the FHA or a private mortgage guaranty insurance company.
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Negative Amortization

The gradual increase in the balance of a loan, caused by adding unpaid interest to the loan balance. The unpaid interest is a result of monthly payments being less than the amount required to pay the interest. Negative amortization can occur on a potential or scheduled basis.
(a) Potential negative amortization: Negative amortization that results from borrower optional payment caps.
(b) Scheduled negative amortization: Negative amortization that is scheduled to occur during the life of the loan.
Origination Fee

The fee that the lender charges the borrower to cover the cost of issuing a loan commitment. It pays for processing the loan which includes collecting information about the borrower's creditworthiness and the property. The fee is usually computed as a percentage (for example, 1%) of the mortgage loan. It usually does not include fees for appraisals, credit reports, inspections and loan document preparation.
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PITI See Principal Interest Real Estate Tax Insurance.
PITI Ratio Compares the amount of the monthly income to the amount the borrower will owe each month in principal, interest, real estate tax and insurance on a mortgage. It is used by lenders in deciding whether to give the borrower a loan. (Compare to Qualifying Income Ratio.) Also called "income-to-debt" ratio.
Points An amount equal to one percent of the principal amount of a note. Loan discount points are a one-time charge assessed at closing by the lender to increase the yield on the mortgage loan to a competitive position with other types of investments.
Prepaid Interest Interest the borrower pays the lender before it becomes due.
Prepayment Penalty A penalty under a note, mortgage or deed of trust imposed when the loan is paid before its maturity date.
Principal Interest Real Estate Tax Insurance The total mortgage payment which includes principal, interest, taxes and insurance.
Private Mortgage Insurance (PMI) See Mortgage Guaranty Insurance.
Processing Gathering the loan application and all of the required supporting documents (including the property appraisal, credit report, credit history, and income and expenses) so that a lender can consider the borrower for a loan.
Property Appraisal A supportable estimate of a property's market value determined by a trained and certified appraiser who measures the likelihood that a property will maintain its value over the duration of the loan.
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Qualifying Income Ratio Income analysis used by lenders in deciding whether to offer the borrower a loan. One type of analysis compares only the amount of the proposed monthly mortgage payment to the monthly income. (See PITI Ratio.) Another compares the amount of the total monthly payments (for example, car, credit card and proposed mortgage payments) to the monthly income.
RAM See Reverse Annuity Mortgage
Rate and Term Refinance The borrower replaces a mortgage loan on the subject property with another mortgage loan for the purpose of getting a better interest rate and loan term.
Real Estate Settlement Procedures Act Federal legislation designed to help home buyers compare settlement costs among lenders and to eliminate kickbacks.
Refinance 1) To change a loan from one financial institution to another, or to rewrite the terms of a loan contract within the existing lending institution. 2) The payment of a debt from the proceeds of a new loan, using the same property as security.
Reverse Annuity Mortgage A non-traditional mortgage in which someone who owns their home free and clear (that is, has paid off all mortgages on the property) receives monthly payments from a lender for a short period of time, usually less than 10 years. At the end of the mortgage, the owners agrees to refinance the loan or sell the property to pay off the loan. Such payments from the lender are often beneficial for retired people, who know they won't be in a house for more than five or 10 years, because the payments can help them make tax and insurance payments.
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Special Assessments A special tax imposed on property, individual lots or all property in the immediate area, for road construction, sidewalks, sewers, street lights, etc.
Special Lien A lien that binds a specified piece of property, unlike a general lien, which is levied against all one's assets. It creates a right to retain something of value belonging to another person as compensation for labor, material, or money expended in that person's behalf. In some localities it is called "particular" lien or "specific" lien. (See lien.)
Survey A map or plat made by a licensed surveyor showing the results of measuring the land with its elevations, improvements, boundaries, and its relationship to surrounding tracts of land. A survey is often required by the lender to assure him that a building is actually sited on the land according to its legal description.
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Title As generally used, the rights of ownership and possession of particular property. In real estate usage, title may refer to the instruments or documents by which a right of ownership is established (title documents), or it may refer to the ownership interest one has in the real estate.
Title Insurance Protects lenders or homeowners against loss of their interest in property due to legal defects in title. Title insurance may be issued to a "mortgagee's title policy." Insurance benefits will be paid only to the "named insured" in the title policy, so it is important that an owner purchase an "owner's title policy", if he desires the protection of title insurance.
Title Search A check of the title records, generally at the local courthouse, to make sure the buyer is purchasing a house from the legal owner and there are no liens, overdue special assessments, or other claims or outstanding restrictive covenants filed in the record, which would adversely affect the marketability or value of title.
Trustee A party who is given legal responsibility to hold property in the best interest of or "for the benefit of" another. The trustee is one placed in a position of responsibility for another, a responsibility enforceable in a court of law. (See deed of trust.)
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Underwriting In mortgage lending, the process of approving or denying a loan based on an evaluation of the property and the applicant's creditworthiness and ability to repay the loan. The underwriter analyzes the risks involved and selects an appropriate loan term and interest rate.
Variable-Rate Mortgage A long-term mortgage loan in which the interest rate may vary or float periodically throughout the term of the loan. The fluctuations are generally based on an interest rate index and are restricted under the terms of the mortgage. Also called "adjustable-rate mortgage."
Wrap-Around Mortgage A form of refinancing. (See Refinance.) When the borrower already owns a property and borrows more money, the lender combines the amount still owed on the home's original loan (see First Mortgage) with the new amount to form one wrap-around mortgage.
Yield The effective rate or return on an investment based upon the fees, the rate of interest and the price paid for the mortgage.

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