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.
Adjustment Date - The date that the interest rate changes on an adjustable-rate mortgage (ARM).
Amortization Term - The length of time required to amoritze 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.
Asset - Anything owned of monetary value including real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, etc.).
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 the 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.
Closing Costs - These are expenses - over and above the price of the property - that are incurred by origiation fee, property taxes, charges for title insurance and escrow costs, appraisal fees, etc. Closing costs will vary according to the area of the country and the lenders used.
Closing Disclosure - A five-page form, created by the Consumer Financial Protection Bureau (CFPB), that provides final details to a borrower about the mortgage loan selected. The form is completed by the lender and lists the loan terms, projected monthly payments, and closing costs.
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.
Deed of Trust - The document used in some states instead of a mortgage. Title is conveyed to a trustee.
Down Payment - Part of the purchase price of a property that is paid in cash and not financed with a mortgage.
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 the mortgage.
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.
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.
Housing Expense Ratio - The percentage of gross monthly income budgeted to pay housing expenses.
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."
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 specificed 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.
Lifetime Payment Cap - For an adjustable-rate mortgage (ARM), a limit on the amount that payments can increase or decrease over the life of a 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.
Liquid Asset - A cash asset or an asset that is easily converted into cash.
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.
Loan Estimate - The form provides you with important information, including the estimated interest rate, monthly payment, and total closing costs for the loan. The Loan Estimate also gives you information about the estitmated costs of taxes and insurance, and how the interest rate and payments may change in the future. In addition, the form indicates if the loan has special features that you will want to be aware of, like penalites for paying off the loan early (a prepayment penalty) or increases to the mortgage loan balance even if payments are made on time (negative amortization). If your loan has a negative amortization feature, it appears in the description of the loan product.
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 the loan becomes due and payable.
Mortgage - A legal document that pledges a property to the lender as security for payment of a debt.
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.
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.
PITI Reserves - 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).
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.
Principal - The amount borrowered 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) - The four components of a monthly mortgage payment. Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the monthly cost of property taxes and homeowner's insurance, whether these amounts that are paid into an escrow account each month or not.
Private Mortgage Insurance (PMI) - Mortgage insurance provided by a 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 Settlement Procedures Act (RESPA) - A consumer protection law that requires lenders to give borrowers advance notice of closing costs.
Security - The property that will be pledged as collateral for a loan.
Servicer - An organization that collects principal 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.
Treasury Index - An index used to determine interest rate changes for certain adjustable-rate mortgages (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.