Acceleration Clause

Allows the lender to speed up the rate at which your loan comes due or
even to demand immediate payment of the entire outstanding balance of the loan
should you default on you loan.

Adjustable Rate Mortgage (ARM)

A mortgage in which the interest rate is adjusted periodically, based on a
pre-selected index. Also sometimes known as the renegotiable rate mortgage,
the variable rate mortgage or the Canadian rollover mortgage.

Adjustment Interval

On an adjustable rate mortgage, the time between changes in the interest
rate and/or monthly payment, typically one, three or five years, depending on
the index.

Amortization

Means loan payment by equal periodic payments calculated to pay off the
debt at the end of a fixed period, including accrued interest on the
outstanding balance.

Annual Percentage Rate (APR)

An interest rate reflecting the cost of a mortgage as a yearly rate. This
rate is likely to be higher than the stated note rate or advertised rate on
the mortgage, because it takes into account points and other credit costs. The
APR allows homebuyers to compare different types of mortgages based on the
annual cost for each loan.

Appraisal

An estimate of the value of property, made by a qualified professional
called an "appraiser."

Assumption

The agreement between buyer and seller where the buyer takes over the
payments on an existing mortgage from the seller. Assuming a loan can usually
save the buyer money. Since this is an existing mortgage debt, unlike a new
mortgage where closing costs and new, possibly higher, market-rate interest
charge will apply.

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Balloon (Payment) Mortgage

Usually a short-term fixed-rate loan which involves small payments for a
certain period of time and one large payment for the remaining amount of the
principal at a time specified in the contract.

Broker

An individual in the business of assisting in arranging funding or
negotiating contracts for a client, but who does not loan the money himself.
Brokers usually charge a fee or receive a commission for their services.

Buydown

When the lender and/or the home builder subsidizes the mortgage by
lowering the interest rate during the first few years of the loan. While the
payments are initially low, they will increase when the subsidy expires.

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Caps (Interest)

Consumer safeguards which limit the amount the interest rate on an
adjustable rate mortgage may change per year and/or the life of the loan.

Caps (Payment)

Consumer safeguards which limit the amount monthly payments on an
adjustable rate mortgage may change.

Closing

The meeting between the buyer, seller and lender or their agents, where
the property and funds legally change hands. Also called settlement.

Closing Costs

Usually include an origination fee, discount points, appraisal fee, title
search and insurance, survey, taxes, deed recording fee, credit report charge
and other costs assessed at settlement. The costs of closing are usually about
3 percent to 6 percent of the mortgage amount.

Commitment

An agreement, often in writing, between a lender and a borrower to loan
money at a future date subject to the completion of paperwork or compliance
with stated conditions.

Construction Loan

A short term interim loan for financing the cost of construction. The
lender advances funds to the builder at periodic intervals as the work
progresses.

Conventional Loan

A mortgage not insured by FHA or guaranteed by the VA or Farmers Home
Administration (FmHA).

Credit Ratio

The ratio, expressed as a percentage, which results when a borrower's monthly
payment obligation on long-term debts is divided by his or her net effective
income (FHA/VA loans) or gross monthly income (Conventional loans).
See Housing Expenses-to-Income Ratio.

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Deed of Trust

In many states, this document is used in place of a mortgage to secure the
payment of a note.

Default

Failure to meet legal obligations in a contract, specifically, failure to
make the monthly payments on a mortgage.

Deferred Interest

See Negative Amortization.

Delinquency

Failure to make payments on time. This can lead to foreclosure.

Department of Veterans Affairs (VA)

An independent agency of the federal government which guarantees
long-term, low- or no-down payment mortgages to eligible veterans.

Discount Points

Prepaid interest assessed at closing by the lender. Each point is equal to
1 percent of the loan amount (e.g. two points on a $100,000 mortgage would
cost $2,000).

Down Payment

Money paid to make up the difference between the purchase price and
mortgage amount. Down payments usually are 10 percent to 20 percent of the
sales price on Conventional loans, and no money down up to 5 percent on FHA
and VA loans.

Due-On-Sale Clause

A provision in a mortgage or deed of trust that allows the lender to
demand immediate payment of the balance of the mortgage if the mortgage holder
sells the home.

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Earnest Money

Money given by a buyer to a seller as part of the purchase price to bind a
transaction or assure payment.

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

The difference between the fair market value and current indebtedness,
also referred to as the owner's interest.

Escrow

Refers to a neutral third party who carries out the instructions of both
the buyer and seller to handle all the paperwork of settlement or "closing."
Escrow may also refer to an account held by the lender into which the
homebuyers pays money for tax or insurance payments.

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Fannie Mae

See Federal National Mortgage Association.

Farmers Home Administration
(FmHA)

Provides financing to farmers and other qualified borrowers who are unable
to obtain loans elsewhere.

Federal Home Loan Mortgage Corporation
(FHLMC)

Also called Freddie Mac, is a quasi-governmental agency that
purchases conventional mortgages from insured depository institutions and
HUD-approved mortgage bankers.

Federal Housing Administration
(FHA)

A division of the Department of Housing and Urban Development. Its main
activity is the insuring of residential mortgage loans made by private
lenders. FHA also sets standards for underwriting mortgages.

Federal National Mortgage Association (FNMA)

Also known as Fannie Mae. A tax-paying corporation created by
Congress that purchases and sells conventional residential mortgages as well
as those insured by FHA or guaranteed by VA. This institution, which provides
funds for one in seven mortgages, makes mortgage money more available and more
affordable.

FHA Loan

A loan insured by the Federal Housing Administration open to all qualified
home purchasers. While there are limits to the size of FHA loans, they are
generous enough to handle moderate-priced homes almost anywhere in the
country.

FHA Mortgage Insurance

Requires a small fee (up to 3 percent of the loan amount) paid at closing
or a portion of this fee added to each monthly payment of an FHA loan to
insure the loan with FHA. On a 9.5 percent $75,000 30-year fixed-rate FHA
loan, this fee would amount to either $2,250 at closing or an extra $31 a
month for the life of the loan. In addition, FHA mortgage insurance requires
an annual fee of 0.5 percent of the current loan amount, the more years the
fee must be paid.

Fixed-Rate Mortgage

A mortgage on which the interest rate is set for the term of the loan.

Foreclosure

A legal procedure in which property securing debt is sold by the lender to
pay a defaulting borrower's debt .

Freddie Mac

See Federal Home Loan Mortgage Corporation.

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Ginnie Mae

See Government National Mortgage Association.

Government National Mortgage Association
(GNMA)

Also known as Ginnie Mae, provides sources of funds for residential
mortgages, insured or guaranteed by FHA or VA.

Graduated Payment Mortgage (GPM)

A type of flexible-payment mortgage where the payments increase for a
specified period of time and then level off. This type of mortgage has
negative amortization built into it.

Gross Monthly Income

The total amount the borrower earns per month, before any taxes or
expenses are deducted.

Guarantee

A promise by one party to pay a debt or perform an obligation contracted
by another, if the original party fails to pay or perform according to a
contract.

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Hazard Insurance

A form of insurance in which the insurance company protects the insured
from specified losses, such as fire, windstorm and the like.

Housing Expenses-to-Income Ratio

The ratio, expressed as a percentage, which results when a borrower's
housing expenses are divided by his/her net effective income (FHA/VA loans) or
gross monthly income (Conventional loans).

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Impound

That portion of a borrower's monthly payments held by the lender or
servicer to pay for taxes, hazard insurance, mortgage insurance, lease
payments, and other items as they become due. Also known as reserves.

Index

A published interest rate against which lenders measure the difference
between the current interest rate on an adjustable rate mortgage and that
earned by other investments (such as one- three-, and five-year U.S. Treasury
Security yields, the monthly average interest rate on loans closed by savings
and loan institutions, and the monthly average Costs-of-Funds incurred by
savings and loans), which is then used to adjust the interest rate on an
adjustable mortgage up or down.

Investor

Money source for a lender.

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Jumbo Loan

A loan which is larger than the limits set by
the Federal National Mortgage Association and the
Federal Home Loan Mortgage Corporation. Because jumbo
loans cannot be funded by these two agencies, they usually carry a higher
interest rate.

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Lien

A claim upon a piece of property for the payment or satisfaction of a debt
or obligation.

Loan-To-Value Ratio

The relationship between the amount of the mortgage loan and the appraised
value of the property expressed as a percentage.

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Margin

The amount a lender adds to the index on an adjustable rate mortgage to
establish the adjusted interest rate.

Market Value

The highest price a buyer would pay and the lowest price a seller would
accept on a property. Market value may be different from the price a property
could actually be sold for at a given time.

Mortgage Insurance

Money paid to insure the mortgage when the down payment is less than
20 percent. See Private Mortgage Insurance or
FHA Mortgage Insurance.

Mortgagee

The lender.

Mortgagor

The borrower or homeowner.

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Negative Amortization

Occurs when your monthly payments are not large enough to pay all the
interest due on the loan. This unpaid interest is added to the unpaid balance
of the loan. The danger of negative amortization is that the homebuyers ends
up owing more than the original amount of the loan.

Net Effective Income

The borrower's gross income minus federal income tax.

Non-Assumption Clause

A statement in a mortgage contract forbidding the assumption of the
mortgage without the prior approval of the lender.

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Origination Fee

The fee charged by a lender to prepare loan documents, make credit checks,
inspect and sometimes appraise a property; usually computed as a percentage of
face value of the loan.

PITI

Principal, interest, taxes, and insurance. Also called monthly housing
expense.

Points

See Discount Points

Power of Attorney

A legal document authorizing one person to act on behalf of another.

Prepaids

Expenses necessary to create an escrow account or to adjust the seller's
existing escrow account. Can include taxes, hazard insurance, private mortgage
insurance and special assessments.

Prepayment

A privilege in a mortgage permitting the borrower to make payments in
advance of their due date.

Prepayment Penalty

Money charged for an early repayment of debt. Prepayment penalties are
allowed in some form (but not necessarily imposed) in 36 states and the
District of Columbia.

Principal

The amount of debt, not counting interest.

Private Mortgage Insurance (PMI)

In the event that you do not have a 20 percent down payment, lenders will
allow a smaller down payment-as low as 5 percent in some cases. With the
smaller down payments loans, however, borrowers are usually required to carry
private mortgage insurance. Private mortgage insurance will require an initial
premium payment of 1.0 percent to 5.0 percent of your mortgage amount and may
require an additional monthly fee depending on your loan's structure. On a
$75,000 house with a 10 percent down payments, this would mean either an
initial premium payment of $2,025 to $3,375, or an initial premium of $675 to
$1,130 combined with a monthly payment of $25 to $30.

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Realtor

A real estate broker or an associate holding active membership in a local
real estate board affiliated with the National Association of Realtors.

Recision

The cancellation of a contract. With respect to mortgage refinancing, the
law that gives the homeowner three days to cancel a contract. In some cases,
once it is signed if the transaction uses equity in the home as security.

Recording Fees

Money paid to the lender for recording a home sale with the local
authorities, thereby making it part of the public records.

Renegotiable Rate Mortgage (RRM)

A loan in which the interest rate is adjusted periodically. See
Adjustable Rate Mortgage.

Real Estate Settlement Procedures Act
(RESPA)

RESPA is a federal law that allows consumers to review information on
known or estimated settlement costs once after application and once prior to
or at settlement. The law requires lenders to furnish information after
application only.

Reverse Annuity Mortgage (RAM)

A form of mortgage in which the lender makes periodic payments to the
borrower using the borrower's equity in the home as security.

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Servicing

All the steps and operations a lender perform to keep a loan in good
standing, such as collection of payments, payment of taxes, insurance,
property inspections and the like.

Settlement

See Closing.

Settlement Costs

See Closing Costs.

Shared Appreciation Mortgage (SAM)

A mortgage in which a borrower receives a below-market interest rate in
return for which a lender (or another investor such as a family member or
other partner) receives a portion of the future appreciation in the value of
the property. May also apply to mortgages where the borrower shares the
monthly principal and interest payments with another party in exchange for a
part of the appreciation.

Survey

A measurement of land, prepared by a registered land surveyor, showing the
location of the land with reference to known points, its dimensions, and the
location and dimensions of any building.

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Term Mortgage

See Balloon Payment Mortgage.

title

A document that gives evidence of an individual's ownership of property.

title Insurance

A policy, usually issued by a title Insurance company, which insures a
homebuyer against errors in the title search. The cost of the policy is
usually a fraction of the value of the property, and is often borne by the
purchaser and/or seller.

title Search

An examination of municipal records to determine the legal ownership of
property. Usually is performed by a title company.

Truth-in-Lending

A federal law requiring disclosure of the Annual Percentage Rate to homebuyers shortly after they apply
for the loan.

Two-Step Mortgage

A mortgage in which the borrower receives a below-market interest rate for
a specified number of years (most often seven or 10 years), and then receives
a new interest rate adjusted (within certain limits) to market conditions at
that time. The lender sometimes has the option to call the loan, due within 30
days notice at the end of seven or 10 years. Also called "Super Seven" or
"Premier" mortgage.

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Underwriting

The decision whether to make a loan to a potential homebuyers based on
credit, employment, assets, and other factors and the matching of this risk to
an appropriate rate and term or loan amount.

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VA Loan

A long-term, low-or no-down payment loan guaranteed by the Department of
Veterans Affairs. Restricted to individuals qualified by military service or
other entitlements.

VA Mortgage Funding Fee

A premium of up to 2 percent (depending on the size of the down payment)
paid on a VA-backed loan. On a $75,000 30-year fixed-rate mortgage with no
down payment, this would amount to $1,406 either paid at closing or added to
the amount financed.

Variable Rate Mortgage (VRM)

See Adjustable Rate Mortgage.

Verification of Deposit (VOD)

A document signed by the borrower's financial institution verifying the
status and balance of his/her financial accounts.

Verification of Employment
(VOE)

A document signed by the borrower's employer verifying his/her position
and salary.

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Wraparound

Results when an existing assumable loan is combined with a new loan,
resulting in an interest rate somewhere between the old rate and the current
market rate. The payments are made to a second lender or the previous
homeowner, who then forwards the payments to the first lender after taking the
additional amount off the top.

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