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MORTGAGE GLOSSARY

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Consult this mortgage glossary when you’re unsure of any of the terms and language used in the mortgage loan process. If you come across words that are not included in the glossary or other general questions regarding home loans please feel free to reach out to Tandem Mortgage directly 1.818.700.6300.

 

2/1 Buy Down Mortgage
 The 2/1 Buy Down Mortgage allows the borrower to qualify at below market rates so they can borrow more. The initial starting interest rate increases by 1% at the end of the first year and adjusts again by another 1% at the end of the second year. It then remains at a fixed interest rate for the remainder of the loan term.

Acceleration Clause 
Provision in a mortgage that allows the lender to demand payment of the entire principal balance if a monthly payment is missed or some other default occurs.

Additional Principal Payment
 A way to reduce the remaining balance on the loan by paying more than the scheduled principal amount due.

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. Sometimes called AMLs (adjustable mortgage loans) or VRMs (variable-rate mortgages).

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).

Affordability Analysis
 An analysis of a buyers ability to afford the purchase of a home. Reviews income, liabilities, and available funds, and considers the type of mortgage you plan to use, the area where you want to purchase a home, and the closing costs that are likely.

Amortization 
The gradual repayment of a mortgage loan, both principle 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.

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

Balance Sheet
 A financial statement that shows assets, liabilities, and net worth as of a specific date.

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.

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

Buydown
 When the seller, builder or buyer pays an amount of money up front to the lender to reduce monthly payments during the first few years of a mortgage. Buydowns can occur in both fixed and adjustable rate mortgages.

Cap 
Limits how much the interest rate or the monthly payment can increase, either at each adjustment or during the life of the mortgage. Payment caps don’t limit the amount of interest the lender is earning and may cause negative amortization.

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 Reasonable Value (CRV) 
A document issued by the Department of Veterans Affairs (VA) that establishes the maximum value and loan amount for a 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 of a property. The buyer signs the mortgage documents and pays closing costs. Also called “settlement.”

Closing Costs 
These are expenses – over and above the price of the property- 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 country and the lenders used.

Compound Interest 
Interest paid on the original principal balance and on the accrued and unpaid interest.

Consumer Reporting Agency (or Bureau)
 An organization that handles the preparation of reports used by lenders to determine a potential borrower’s credit history. The agency gets data for these reports from a credit repository and from other sources.

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 Risk Score
 A credit score is a prediction or measurement of the likelihood that a consumer will pay off a loan in full without default, or 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.

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.

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

Deposit
 This is a sum of money given to bind the sale of real estate, or a sum of money given to ensure payment or an advance of funds in the processing of a loan.

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

Effective Gross Income
 A borrowers normal annual income, including overtime that is regular or guaranteed. Salary is usually the principal source, but other income may qualify if it is significant and stable.

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 all loans secured by the property.

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 of funds or documents into an escrow account to be disbursed upon the closing of a sale of real estate.

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 a mortgagor’s 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). Also known as a government mortgage.

FICO Score 
FICO® scores are the most widely used credit score in U.S. mortgage loan underwriting. 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 represent lower credit risks, which typically equate to better loan terms.

First Mortgage 
The primary lien against a property.

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

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.

GNMA 
A government-owned corporation that assumed responsibility for the special assistance loan program formerly administered by Fannie Mae. Popularly known as Ginnie Mae.

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

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.

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 monthly payment and interest 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). It’s also known as “start rate” or “teaser.”

Insured Mortgage 
A mortgage that is protected by the Federal Housing Administration (FHA) or by private mortgage insurance (MI).

Interest
 The fee charged for borrowing money.

Interest Accrual Rate 
The percentage rate at which interest accrues on the mortgage. In most cases, it is also the rate used to calculate the monthly payments.

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.

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.

LIBOR (London Interbank Offered Rate) Index 
An index used to determine interest rate changes for certain adjustable-rate mortgage (ARM) plans. It is based on the average interest leading banks in London would be charged when borrowing from each other.

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

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.

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.

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-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. Short term locks (under 21 days), are usually available after lender loan approval only. However, many lenders may permit a borrower to lock a loan for 30 days or more prior to submission of the loan application.

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.

Mortgage Life Insurance 
A type of term life insurance In the event that the borrower dies while the policy is in force, the debt is automatically paid by insurance proceeds.

Mortgagor
 The borrower in a mortgage agreement.

Net Worth
 The value of all of a person’s assets, including cash.

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.

Payment Change Date
 The date when a new monthly payment amount takes effect on an adjustable-rate mortgage (ARM) or a graduated-payment mortgage (GPM). Generally, the payment change date occurs in the month immediately after the adjustment date.

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.

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-Approval
 The process of determining how much money you will be eligible to borrow before you apply 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 Balance 
The outstanding balance of principal on a mortgage not including interest or any other charges.

Principal, Interest, Taxes, and Insurance (PITI)
 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 (usually three).

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.

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.

Rate Lock 
A commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified interest rate and lender costs for a specified period of time.

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 the registrar’s office of the details of a properly executed legal document, such as a deed, a mortgage, a satisfaction of mortgage, or an extension of mortgage, thereby making it a part of the public record.

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.

Secondary Mortgage Market
 Where existing mortgages are bought and sold.

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

Servicer
 An organization that collects principle 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.

Standard Payment Calculation 
The method used to determine the monthly payment required to repay the remaining balance of a mortgage in substantially equal installments over the remaining term of the mortgage at the current interest rate.

Third-party Origination 
When a lender uses another party to completely or partially originate, process, underwrite, close, fund, or package the mortgages it plans to deliver to the secondary mortgage market.

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

Treasury Index 
An index used to determine interest rate changes for certain adjustable-rate mortgage (ARM) plans. Based on the results of auctions that the U.S. Treasury holds for its Treasury bills and securities or 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.

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). Also known as a government mortgage.

MORTGAGE GLOSSARY January 31, 2016
19520 Nordhoff Street, Suite 7
Northridge, California 91324
Phone: (818)700-6373
Fax: (818)993-9914
Website: tandemmortgage.com
Email: rita@tandemmortgage.com