Common Mortgage Terms

COMMON MORTGAGE TERMS AND ACRONYMS

Adjustable Rate Mortgage: An adjustable rate mortgage, known as an ARM, is a mortgage that has a fixed rate of interest for only a set period of time, typically one, three or five years. During the initial period the interest rate is lower, and after that period it will adjust based on an index. The rate thereafter will adjust at set intervals.

Annual Percentage Rate (APR): Refers to the cost of the loan as a percentage of the outstanding amount. This means that the total cost of loan is expressed in the form of a yearly rate on the remaining balance of the loan (outstanding balance).

Amortization: The amortization of the loan is a schedule on how the loan is intended to be repaid. For example, a typical amortization schedule for a 30- year loan will include the amount borrowed, interest rate paid and term. The result will be a month breakdown of how much interest you pay and how much is paid on the amount borrowed. An example of this would be a standard 30-year mortgage amortization wherein a borrower would make 360 equal consecutive monthly payments at the end of which the original loan would be paid in full.

Application or Administration Fee: Is the fee that a lender charges in order to process a borrower’s loan application. Such cost is borne by the borrower.

Appraisal: Is conducted by a licensed professional appraiser who will look at a property and give an estimated value based on physical inspection and comparable houses that have been sold in recent times.

Cash Out Refinance: A type of loan wherein an existing loan is refinanced and the borrower is allowed to receive cash in addition to the amount of the home loan. The cash is considered part of the amount financed and is part of the lien against the property securing the loan.

Closing Costs: These are the costs that the buyer must pay during the mortgage process. There are many closing costs involved ranging from attorney fees, title fees, recording fees and other costs associated with the mortgage closing.

Debt-to-Income Ratio (DTI): Lenders look at a number of ratios and financial data to determine if the borrowers are able to repay the loan. One such ratio is the debt-to-income ratio. In this calculation, the lender compares the monthly payments, including the new mortgage, and compares it to monthly income. The income figure is divided into the expense figure, and the result is displayed as a percentage. The higher the percentage, the more riskier loan it is for the lender.

Equal Credit Opportunity Act: Federal Law aimed at protecting borrowers from being discriminated against based upon such things as ethnicity, sex, location of property and religious beliefs.

Escrow: At the closing of the mortgage, the borrowers are generally required to set aside a percentage of the yearly taxes to be held by the lender. On a monthly basis, the lender will also collect additional money to be used to pay the taxes on the home. This escrow account is maintained by the lender who is responsible for sending the tax bills on a regular basis.

Fannie Mae (FNMA): Federal National Mortgage Association, also known as Fannie Mae, is a government-sponsored enterprise (GSE). Fannie Mae was established to provide local banks with federal money to finance home mortgages in an attempt to raise levels of home ownership and the availability of affordable housing.

Federal Housing Administration (FHA): FHA is a governmental agency that operates, oversees and monitors a wide variety of home-loan programs and initiatives. FHA loans carry low-interest rates and minimum down payments. FHA provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories.

Federal Home Loan Mortgage Corporation (FHLMC): Also known as Freddie Mac, is a public government-sponsored enterprise (GSE) that buys mortgages on the secondary market, pools them, and sells them as a mortgage-backed security to investors on the open market

Fixed Rate Mortgage: Is a mortgage where the interest rate and the term of the loan is negotiated and set for the life of the loan. The terms of fixed rate mortgages can range from 10 years to up to 40 years.

Homeowner's Insurance: Prior to the mortgage closing date, the homeowners must secure property insurance on the new home. The policy must list the lender as loss payee in the event of a fire or other event. This must be in place prior to the loan going into effect.

Interest Rate: The rate at which interest is paid by a borrower for the use of money that they borrow from a lender. Specifically, the interest rate is a percentage of principal paid a certain number of times per period (usually quoted per year). A mortgage interest rate is the percentage of interest you pay a bank or financial company to have a home loan.

Late Charge: Whenever the borrower fails to make a payment on time, a late charge (or penalty) is imposed.

Loan Origination: The beginning of the loan process. Initial contact wherein the borrower and lender agree to work together to secure a loan. Usually an application is taken and an initial quote is given. The borrower is asked to supply documents supporting the information that is included in the application and upon which the quote is based.

Loan-to-value Ratio (LTV): This calculation is done by dividing the amount of the mortgage by the value of the home. Lenders will generally require the LTV ratio to be at least 80% in order to qualify for a mortgage.

No Cash Out Refinance: Also known as a "Rate and Term" refinance, this is a loan in which a lender simply refinances the existing first mortgage and no other bills are paid off and the borrower receives no cash as part of the transaction. These loans are usually done to improve the borrower's interest rate and to lower their mortgage payment.

Origination Fee: When applying for a mortgage loan, borrowers are often required to pay an origination fee to the lender. This fee may include an application fee, appraisal fee, fees for all the follow-up work and other costs associated with the loan.

PITI: PITI stands for the four segments of most mortgage payments: Principal, Interest, Taxes, and Insurance.

Point: A fee equal to 1% of a loan amount or principal. There are generally two types of points in play at a mortgage closing. Origination points are used as compensation for the lender. Discount points enable a borrower to prepay interest; each point purchased typically lowers the mortgage interest rate by .25%.

Private Mortgage Insurance: When the loan to value (LTV) is higher than 80% lenders will generally not be able to do the transaction. In these cases, the borrowers can get private mortgage insurance (PMI) which is a guarantee to the lender that until the borrower reaches a 80% LTV, they are covered from default. To get this protection, borrowers pay a monthly PMI premium.

Qualifying Ratios: These formulas are used by the lenders to estimate how much a potential buyer can borrow. In other words, qualifying ratios denote the affordability range of the buyer for the lender’s purposes.

Rate Lock: It is an option given to the buyer to select and set an interest rate during the loan application stage. A rate lock allows borrowers to set an interest rate that is well within their affordability range.

Settlement Costs: Prior to closing, the attorneys involved in the mortgage closing will meet to determine the final costs that are associated with the loan. These settlement costs are given to all parties so that they will be prepared to pay the closing costs that have been agreed upon.

TRID: TRID is an acronym for TILA (Truth in Lending Act) RESPA (Real Estate Settlement Procedures Act) Integrated Disclosure. The Consumer Financial Protection Bureau issued a rule under TRID that integrated TILA and RESPA mortgage loan disclosures into two new forms: The Loan Estimate and the Closing Disclosure.

VA Loan: As a benefit to U.S. Service members, VA Home Loans are provided by private lenders, such as banks and mortgage companies. The Department of Veteran’s Affairs (VA) guarantees a portion of the loan, enabling the lender to provide borrowers with more favorable terms. If you are a military service member, veteran or surviving spouse of a veteran, you may qualify for a VA loan. Advantages include no down payment requirement and an allowance for less-than-perfect credit.