Mortgage Glossary
Adjustable Rate Mortgage : ARMs are mortgages for which interest rate and payment may change over the life of the loan. Usually at the commencement of the loan, there is a period over which the interest rate is fixed. After the fixed period is over, the interest rate and payment may change based on changes to a specified index.
Amortization : Amortization is payment of the loan by diving it into equal periodic payments such that the entire loan is paid off at the end of the fixed period, including accrued interest.
Annual Percentage Rate : Annual percentage rate popularly referred to as the APR of the loan measures the full cost of the loan including interest and loan fees expressed as a yearly percentage rate.
Biweekly mortgage payment : Some lenders offer bi-weekly mortgage payments. This allows the borrower to make mortgage payments twice a month instead of the standard monthly payment resulting, typically, in 13 monthly payments a year instead of 12 standard monthly payments. This results in interest savings for the borrowers. Sometimes lenders may charge borrowers a small fee for biweekly mortgages.
Broker : Different kind of brokers may get involved in mortgage transactions. Real estate brokers typically assist their clients in identifying properties, negotiations, closure of sale and sometimes arranging for funds. Brokers may charge their clients fees typically expressed as a % of the sale price of the property.
Collateral : Property pledged as security for debt. For e.g. In a mortgage the house acts as a collateral for the mortgage. If the borrower defaults on the mortgage, the lender may have the option to sell the property and recover the money.
Contract : Contract is the legal document that is employed by the buyers and sellers of the real estate in their negotiations, offer and counter offer.
Credit history : Is a record of a person's debt payments. Borrowers should track their credit history closely and maximize their credit scores prior to purchase of real estate.
Deed : A document that provides title to property and is filed with a country recorder
Equity : Is the difference between the unpaid principle balance and the fair market value of the property. As the loan is paid down, the equity increases as it does with appreciation in the market value of the property.
Fair Market Value : Also referred to as FMV, it is the price an item will sell for. In real estate different methods including sales comparison method are used in determining the fair market value of a property. The lender may appoint an appraiser to determine the fair market value of a property before disbursement of funds.
Fixed rate mortgage : A fixed rate mortgage is a mortgage for which the interest rate does not change during the entire term of the mortgage. E.g. 30 year fixed, 15 year fixed.
Home equity : The part of the home's value that the borrower owns outright. It is the difference between the fair market value of the house and the principal balances of all mortgage loans for that property.
Index : A table of yields or interest rates being paid on debt (such as Treasury notes or bank deposits) that is used to determine interest-rate changes for adjustable-rate mortgages and other variable rate loans such as credit card debt. Some of the most common indices are: the one-year Treasury Constant Maturity Yield etc.
Interest only loan : On such a loan the borrower only pays the interest amount on the loan amount and not the principal. This results in a lower monthly payment as compared to an ARM or a fixed rate mortgage. As these loans are typically anchored to some index, the payments can vary based on the movement of such an index. Interest only loans have a fixed period after which the borrower starts paying both interest and the principal.
Loan origination fee : The fee that the lender levies for underwriting the loan.
Lock-in period : It is the period guaranteed by the lender during which the interest rate does not change. For e.g. After identifying a property, the potential owner may 'lock in' the rate
Mortgage : A legal document that pledges property to a lender as security for the repayment of the loan. Reference: Fannie Mae website.
Mortgage Refinance : The borrower pays off an old loan with a new loan. If interest rates declines such that the savings from switching to a loan with lower interest rate outweigh the costs of securing a new loan at lower interest rate, then refinancing may be advisable.
Negative amortization : An increase in debt that occurs when monthly payments do not cover the principal and the interest.
Origination fee : Is the fee a lender may charge to process a loan. It may include the cost to prepare the loan documents, run a credit check on the buyer and may also include property appraisal expenses.
Points : 1 point stands for 1% of the loan amount. Sometimes lenders charge borrowers 'points' to cover origination costs or to reduce the interest rate on the mortgage.
Purchase agreement : Is a document in which the buyer and seller approve the price and other terms and conditions that may govern the sale of the property.
Rate : Cost of borrowing usually expressed in terms of annual percentage rate or APR.
Recording fee : A fee charged by local government for recording sale of real estate transactions.
Second mortgage : A loan using a home's equity as collateral and which is subordinate to the original mortgage (i.e., the first mortgage has priority before all others).
Tax deduction : Tax deduction is an expense that the government allows you to subtract from your gross income before computing income tax. If the sum of the interest on the mortgage, property tax and sometimes points exceeds the standard deductions available to you, then you may itemize the above items in your tax filings.
Term : Time to maturity for a loan. For e.g. For a 30 year fixed it is 30 years or 360 months.
Title Company : A company that checks the property's title for any liens, fixes any problems and facilitates smooth closing of the property while ensuring that the purchase is processed correctly.
Title insurance : A policy that guarantees that an owner properly has title to a property and can legally transfer title to someone else. Reference bankrate.com
Transfer Tax : Transfer tax is a tax that is levied by a local government on change of ownership of real estate.
US Department of Housing and Development : This department enforces housing policy and oversees the Federal Housing Administration
Variable Rate : The rate or cost incurred by the borrower. Unlike fixed rate, as the name suggests variable rate moves in tandem with a specified index.
Wall Street Journal prime rate : The prime rate published by the Wall Street Journal. It publishes this rate based on a survey of rates offered by various banks. A Variable rate may often use the Wall Street journal or WSJ prime rate as an index. |
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Mortgage Glossary 
