Glossary A – J

Adjustable Rate Mortgage (ARM) – A mortgage loan which allows the lender to adjust the interest rate periodically in accordance with a stated index and as agreed to at the inception of the loan by all parties. (Also known as variable rate mortgages)

Amortization – Repayment of a mortgage loan with periodic payments of principal and interest. The payments are calculated so that the debt is paid off at the end of a fixed period.

Annual Percentage Rate (APR) – A numerical figure which expresses (on an annual basis) the charges imposed on the borrower to obtain a mortgage loan (such as interest, discount points and other costs).

Appraisal – A report prepared by a qualified real estate appraiser which creates an estimate of the fair market value of a property.

Balloon Mortgage – A short-term mortgage with fixed installments of principal and interest that do not fully amortize the loan. The balance of the mortgage is due in a lump sum at the end of the term.

Buydown Mortgage – A fixed rate mortgage with a below-market interest rate for a stated initial period. The lender receives a payment subsidy in the form of additional discount points paid by the builder, seller or buyer.

Caps – Percentage restrictions on an ARM which limit the amount the interest rate may change per year and over the life of the loan.

Cash Reserve – In the mortgage commitment, some lenders require that the borrower have on deposit in their bank accounts at the time of the closing an amount equal to a predetermined number of months of the cost of principal, interest, taxes, and insurance. This is called a cash reserve.

Certificate of Occupancy – A certificate issued by a local governmental entity responsible for the use of land in the community where the property is located stating that the structures on the property or any improvements made to those structures comply with the codes, ordinances and regulations of that governmental entity and that they may be occupied.

Closing – The final step in the mortgage loan process after loan commitment. The closing is a meeting between all parties involved in the mortgage transaction in which mortgage documents are signed.(Also known as, settlement)

Closing Costs – Fees paid at a mortgage closing. Some examples of closing costs are title insurance, attorney fees, appraisal fees, recording fees and taxes.

Collateral – Property pledged as security for repayment of a mortgage loan.

Commitment Fee – A fee paid to the lender for processing, underwriting and originating the mortgage. When this fee is a percentage of the amount of the mortgage it is also called points. One point is one percent of the amount of the mortgage. (Also known as points or origination fee)

Commitment Letter – A written offer by the lender to the applicant which states the terms under which the lender agree to make a mortgage loan.

Conforming Loan – A mortgage in which the loan amount is less than or equal to the maximum amount eligible for purchase by either Government Sponsored Enterprise (GSE- Fannie Mae or Freddie Mac). Loan amounts are considered conforming if they are less than or equal to the following amounts based on the applicable property type.

Credit Score – A numerical rating provided on a credit report that establishes creditworthiness based upon a person’s past credit/payment history and their current credit standing.

Debt-to-Income Ratio – Relationship of a borrower’s monthly payment obligation on long-term debts divided by gross monthly income, expressed as a percentage. (Also known as bottom ratio)

Discount Points – A one-time charge paid by the borrower to the lender at closing to obtain a lower interest rate on the mortgage loan. One point equals 1% of the loan amount; therefore, two points on a $100,000 mortgage would cost $2,000. (Also known as points)

Equity – The amount by which the value of the borrower’s home exceeds the amount owed on the mortgage loan. If the borrower’s home is worth $100,000 and the borrower owes $65,000 on the mortgage loan secured by the borrower’s home, then the borrower’s equity in that home is $35,000 or 35% equity in the home.

Escrow Account – An account established with a mortgage lender comprising of funds from a borrower used to pay taxes and insurance premiums when they become due. (Also known as impounds or reserves)

Federal Housing Administration (FHA) – A federal agency that is part of the Department of Housing and Urban Development (HUD) that sets policy for mortgage underwriting and provides insurance for residential mortgages.

First Mortgage – A mortgage whose lien is superior to the lien of any other mortgage on the same property. This lien is superior either because it was recorded prior to all other mortgages or because the mortgagee of another mortgage which had been recorded ahead of this mortgage has agreed to have a lien subordinated to the lien of this mortgage.

Good Faith Estimate – An estimate of the fees a mortgage borrower will be required to pay at closing. It is required by Federal law that the lender provide the Good Faith Estimate within three business days of the initial loan application.

Housing expense ratio – The relationship of a borrower’s monthly payment obligation on housing (principal, interest, taxes, insurances and other applicable housing expenses) divided by gross monthly income, expressed as a percentage. (Also known as top ratio)

Index – A benchmark, usually a published interest rate, such as the one-year London Interbank Offered Rate (LIBOR) security yields, used to calculate the interest rate of an adjustable rate mortgage when rate is scheduled to change. Generally, a margin stated in loan documents is added to the index to determine the new interest rate.

Interim Interest – Interest owned by the borrower to the lender on the mortgage loan from the day of the closing to the date covered by the first payment.

Jumbo Loan – A mortgage in which the loan amount exceeds the maximum amount eligible for purchase by either Government Sponsored Enterprise (GSE- Fannie Mae or Freddie Mac). Loan amounts are considered Jumbo if they exceed the following amounts based on the applicable property type.

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