Glossary of Mortgage and Closing Terms

1003 — A four-page residential loan application completed when you purchase a home and apply for a mortgage. In addition to asking questions about the home that is being purchased, it also presents questions about employment history, current income, residence history, and savings and asset information. 

Accelerated Depreciation — Depreciation in which deductions start at their highest annual value in the first year and steadily diminish in later years. 

Adjustable Rate Mortgage (ARM) — A mortgage in which the interest rate is adjusted periodically according to a pre-selected index. The terms, adjustment schedule, and index to be used can be negotiated by the borrower and lender. Specific types include the renegotiable rate mortgage and the variable rate mortgage. Also referred to as a Canadian rollover mortgage. 

Amortization — The paying off of debt in regular installments over a period of time. The deduction of capital expenses over a specific period of time. Similar to depreciation, it is a method of measuring the consumption of the value of long-term assets like equipment or buildings. 

Annual Percentage Rate — ‘Annualized Percentage Rate’ as defined by the Federal (APR) Government is the ‘effective’ cost of borrowing money which takes into account certain costs of borrowing such as prepaid interest, points, escrow fees, and private mortgage insurance. 

Appraisal — A report made by a qualified person setting forth an opinion or estimates of value. The term also refers to the process by which this estimate is obtained. 

Assumable Loan — A loan in which the lender is willing to “transfer” from the previous owner of the home to the new owner, sometimes at the same interest rate, sometimes at a new rate. An assumable loan can make your home more attractive to buyers when you want to sell. 

Balloon Mortgage — A mortgage with periodic installments of principal and interest that do not fully amortize the loan. The balance of the mortgage is due in a lump sum at a specified date in the future, usually at the end of the term. 

Closing Costs — Costs the buyer must pay at the time of closing in addition to the down payment: including points. mortgage insurance premium, homeowners insurance, prepayments for property taxes. etc. Closing costs average 3% – 4% of the loan amount. If you’re buying a HUD Home. You can request they be paid by HUD. 

Conforming Loans — Generally. those loan amounts which conform to FNMA/FHLMC loan limits, $417,000 in 2006. Also means those loan programs which “conform” to income, credit, and property guidelines for those agencies. 

Contingency — A condition put on an offer to buy a home; such as the prospective buyer making an offer contingent on his or her sale of a present home. 

Conventional Mortgage — A type of mortgage not insured by either the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA), and thus usually requiring a 10% – 20% down payment. (HUD homes may be purchased with a conventional mortgage.) 

Down Payment — Amount of money the borrower intends to pay towards the purchase price of the home and not counting costs involved in the transaction including title, escrow, appraisal, etc. The down payment is often expressed in percentage terms. e.g. “20% down payment.” 

Earnest Money — Funds submitted with an offer to show “good faith” to follow through with the purchase. Earnest money is placed by the broker in an escrow/trust account until closing. when it becomes part of the down payment of closing costs. (HUD generally requires an earnest money deposit of $500 – $2,000.) 

Escrow — In a purchase transaction, this is the third party company which facilitates the transfer of title from seller to the buyer and the transfer of purchase funds from the buyer to the seller. In a refinance transaction, the escrow company facilitates the payoff of the existing loan(s) and the recording of the new loan against the property. 

Escrow Account — Also known as an “impound account”, this is an account in which the lender holds the borrower’s monthly payments for property taxes and insurance until such time as those obligations need to be paid by the lender on the behalf of the borrower. 

FHA Financing – Financing for a loan which will be insured against loss by the Federal Housing Administration-a part of the U. S. Department of Housing and Urban Development (HUD). Such financing only requires a 3% – 5% down payment. 

FNMA (Fannie Mae) — The Federal National Mortgage Corporate. The largest non-bank financial services company in the world. This shareholder-owned company purchases conventional mortgages and mortgages insured by the federal government so that lenders are able to free up funds to finance additional loans.

Freddie Mac — The Federal Home Loan Mortgage Corporate. A private corporation developed by Congress to help support the secondary mortgage market. Freddie Mac purchases loans from lenders, enabling the lenders to have additional funds to make home loans to a greater number of homebuyers. 

Ginnie Mae — Ginnie Mae helps make affordable housing a reality for millions of low and moderate-income households across America by channeling global capital into the nation’s hosing markets. Specifically, the Ginnie Mae guaranty allows mortgage lenders to obtain a better price for their mortgage loans in the secondary market.

Government Loan — Loans guaranteed or insured by the Federal Government such as 

FHA (Federal Housing Authority) and VA (Veteran’s Administration). 

Gross Monthly Income — For salaried borrowers, their monthly earnings prior to any deductions for income taxes or any other employee deductions for self-employed borrowers, this would be the monthly earnings after all business expenses are deducted. Gross monthly income for self employed borrowers is usually averaged over the prior two years. 

Homeowners Insurance — Insurance that protects the homeowner from “casualty” (losses or damage to the home or personal property) and from “liability” (damages to other people or property). Required by the lender and usually included in the monthly mortgage payment. 

Impounds — Many borrowers choose to include monthly installments for their property taxes and homeowner’s insurance with their monthly mortgage payment. The lender holds or impounds these funds until such time as the property tax payment and the annual insurance premium are payable. Then the lender pays those obligations on the behalf of the borrower. Impound accounts for taxes and insurance may also be called ‘escrow’ accounts. However, this escrow account is different from the escrow services used to facilitate real estate purchase and refinance transactions. 

Insurance — Usually hazard (fire, etc.) insurance on the home to be purchased, the costs of which are calculated on a monthly basis for qualification purposes. ‘Insurance’ may also include other insurance policies for flood, earthquake, hurricane, etc. 

Interest Rate — The rate used to determine the monthly payment on the loan. May also be known as ‘rate’ or ‘note rate.’ 

Jumbo Loan — Generally, those loans which are in excess of FNMA/FHLMC limits,vcurrently at $227,150. 

Loan — The actual amount of money borrowed. 

Loan Origination Fee — A fee charged by the lender for evaluating, preparing, and submitting a proposed mortgage loan. 

Loan-to-Value — The amount of your mortgage divided by the fair market value of your home, expressed as a percentage. For example, if your mortgage is $200,000 and your home is worth $250,000, your loan-to-value ratio is 80 percent. If the loan-to-value ratio exceeds 80 percent, the lender requires private mortgage insurance. 

Lock — Depending on the loan program, the borrower may ask the lender to guarantee the interest rate quoted for the loan for a specific period of time, e.g. 30 days. 

Monthly Payment — Usually used to describe the monthly principal and interest payment on the loan without including monthly payments for taxes, insurance, and private mortgage insurance. May also be expressed as ‘P & I’ 

Mortgage Insurance — A charge paid by the borrower (usually as part of the closing costs) to obtain financing, especially when making a down payment of less than 20% of the purchase price, for example on an FHA-insured loan. 

Non-conforming Loans — Those loan amounts in excess of FNMA/FHLMC loan limits $417,000 in 2006. May also refer to those loan programs which allow for income, credit and property characteristics which do not conform to FNMA/FHLMC guidelines. 

Note Rate — The contract rate which is used to determine the actual principal and actual principal and interest payment on the loan. It is the interest rate which appears on the loan contract, also known as the “note.” 

P & I — Abbreviation for “Principal & Interest” which is the payment on the loan. Each loan payment for a fully amortizing loan is part interest and part repayment of the money (I.e., principal) borrowed 

PITI — Abbreviation for ‘Principal Interest Taxes and Insurance.’ Usually means the total monthly cost of owning the home and is used for qualification purposes. 

PMI — Abbreviation for ‘Private Mortgage Insurance’ which insures the lender against any loss arising from the borrower’s default (non-payment) on the loan. PMI is usually required when the borrower’s down payment or equity is less than 20%. PMI is the private sector equivalent of FHA insurance on government loans. 

Point — An amount equal to 1 % of the principal amount being borrowed. The lender may charge the borrower several “points” in order to provide the loan. 

Predatory Lender — One who imposes deceptive, unfair, and/or abusive loan terms on borrowers, often through aggressive sales tactics, taking advantage of a borrower’s lack of understanding of extremely complicated transactions. 

Prepaids — The fees and expenses paid at closing to cover the future cost of items like property taxes, mortgage insurance, and hazard insurance. This money goes into an escrow account and the escrow agent pays the recurring costs out of this account as they become due.

Prime — The interest rate charged by banks to A-credit clientele. Many financial institutions use the prime rate as a guideline for determining what rates they assess to their credit cards and home equity loans. The prime rate usually changes according to the changes the Federal Reserve makes in monetary policy.

Principal — The amount of money borrowed. Also that portion of the monthly payment which repays the money borrowed. 

Property Taxes — Taxes (based on the assessed value of the home) paid by the homeowner for community services such as schools, public works, and other costs of local government. Paid as a part of the monthly mortgage payment. 

Purchase Express — A method in which the borrower may qualify for a loan and receive loan commitment from North American Mortgage Company prior to identifying a property to purchase. 

Purchase Price — The selling price agreed upon by buyer and seller. 

Sub Prime — Refers to residential mortgage programs in which the borrower is not able to meet Fannie Mae mortgage lending standards. 

Title Insurance — Protects lenders and homeowners against loss of their interest in property due to legal defects in the title. 

Total Monthly Debt — The total of all debt to be paid monthly by the borrower. Includes the monthly payment on the proposed real estate loan and other monthly housing costs as well as payments ,. on all other borrower revolving and installment debts. 

VA Loan — A loan guaranteed by the Department of Veterans Affairs against loss to the lender, and made through a private lender. (HUD Homes may be purchased with a VA loan.) 

Variables — To calculate a loan payment, one must know (1) the amount of money which is to be borrowed, (2) the length of time over which the money will be repaid (term), and (3) interest rate being charged on the loan amount. From these ‘variables’, one can mathematically calculate a loan payment. Changes in any or all of the variables will change the payment. Since the relationship between these variables is mathematical, one can solve for anyone of the variables as long as the other three variables are know. For example, if one knew the payment amount, the interest rate, and the loan amount, then one could solve for the term of the loan. 

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