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 Below are some home loan definitions.
Actual Cash Value: An amount equal to the
replacement value of damaged property minus depreciation.
Adjustable-Rate Mortgage (ARM): Also known as a variable-rate
loan, an ARM usually offers a lower initial rate than a fixed-rate loan. The
interest rate can change at a specified time, known as an adjustment period,
based on a published index that tracks changes in the current finance market.
Indexes used for ARMs include the LIBOR index and the Treasury index. ARMs also
have caps or a maximum and minimum that the interest rate can change at each
adjustment period.
Adjustment Period: The time between interest rate adjustments
for an ARM. There is usually an initial adjustment period, beginning from the
start date of the loan and varying from 1 to 10 years. After the first adjustment
period, adjustment periods are usually 12 months, which means that the interest
rate can change every year.
Amortization: Paying off a loan over the period of time and
at the interest rate specified in a loan document. The amortization of a loan
includes the payment of interest and a part of the amount borrowed in each mortgage
payment.
Amortization Schedule: Provided by mortgage lenders, the schedule
shows how over the term of your mortgage the principal portion of the mortgage
payment increases and the interest portion of the mortgage payment decreases.
Annual Percentage Rate (APR): How much a loan costs annually.
The APR includes the interest rate, points, broker fees and certain other credit
charges a borrower is required to pay.
Application Fee: The fee that a mortgage lender charges to
apply for a mortgage to cover processing costs.
Appraisal: A professional analysis used to estimate the value
of the property. This includes examples of sales of similar properties.
Appraiser: A professional who conducts an analysis of the
property, including examples of sales of similar properties in order to develop
an estimate of the value of the property. The analysis is called an "appraisal."
Appreciation: An increase in the market value of a home due
to changing market conditions and/or home improvements.
Arbitration: A process where disputes are settled by referring
them to a fair and neutral third party (arbitrator). The disputing parties agree
in advance to agree with the decision of the arbitrator. There is a hearing
where both parties have an opportunity to be heard, after which the arbitrator
makes a decision.
Asbestos: A toxic material that was once used in housing insulation
and fireproofing. Because some forms of asbestos have been linked to certain
lung diseases, it is no longer used in new homes. However, some older homes
may still have asbestos in these materials.
Assets: Everything of value an individual owns.
Assumption: A homebuyer's agreement to take on the primary
responsibility for paying an existing mortgage from a home seller.
Balloon Mortgage: A mortgage with monthly
payments based on a 30-year amortization schedule, with the unpaid balance due
in a lump sum payment at the end of a specific period of time (usually 5 or
7 years). The mortgage contains an option to "reset" the interest rate to the
current market rate and to extend the due date if certain conditions are met.
Bankruptcy: Legally declared unable to pay your debts. Bankruptcy
can severely impact your credit and your ability to borrow money.
Capacity: Your ability to make your mortgage
payments on time. This depends on your income and income stability (job history
and security), your assets and savings, and the amount of your income each month
that is left over after you've paid for your housing costs, debts and other
obligations.
Closing (Closing Date): The completion of the real estate
transaction between buyer and seller. The buyer signs the mortgage documents
and the closing costs are paid. Also known as the settlement date.
Closing Agent: A person who coordinates closing-related activities,
such as recording the closing documents and disbursing funds.
Closing Costs: The costs to complete the real estate transaction.
These costs are in addition to the price of the home and are paid at closing.
They include points, taxes, title insurance, financing costs, items that must
be prepaid or escrowed and other costs. Ask your lender for a complete list
of closing cost items.
Collateral: Property which is used as security for a debt.
In the case of a mortgage, the collateral would be the house and property.
Commitment Letter: A letter from your lender stating the amount
of the mortgage, the number of years to repay the mortgage (the term), the interest
rate, the loan origination fee, the annual percentage rate and the monthly charges.
Concession: Something given up or agreed to in negotiating
the sale of the house. For example, the sellers may agree to help pay for closing
costs.
Condominium: A unit in a multiunit building. The owner of
a condominium unit owns the unit itself and has the right, along with other
owners, to use the common areas but does not own the common elements such as
the exterior walls, floors and ceilings or the structural systems outside of
the unit; these are owned by the condominium association. There are usually
condominium association fees for building maintenance, property upkeep, taxes
and insurance on the common areas and reserves for improvements.
Contingency: A plan for something that may occur but is not
likely. For example, your offer may be contingent on the home passing a home
inspection. It the home does not pass inspection, you're protected.
Counter-offer: An offer made in response to a previous offer.
For example, after the buyer presents their first offer, the seller may make
a counter-offer with a slightly higher sale price.
Credit: The ability of a person to borrow money, or buy good
by paying over time. Credit is extended based on a lender's good opinion of
the person's financial situation and reliability.
Credit Bureau: A company that gathers information on consumers
who use credit. These companies sell that information to credit lenders in the
form of a credit report.
Credit History: A record of credit use comprised of a list
of individual consumer debts and a record of whether or not these debts were
paid back on time or "as agreed." Credit institutions have created a detailed
document of your credit history called a credit report.
Credit Report: A document used by the credit industry to examine
your use of credit. It provides information on money that you've borrowed from
credit institutions and your payment history.
Credit Score: A computer-generated number that summarizes
your credit profile and predicts the likelihood that you'll repay future debts.
Creditworthy: Your ability to qualify for credit and repay
debts.
Debt: Money owed from one person or institution
to another person or institution.
Debt-to-Income Ratio: The percentage of gross monthly income
that goes toward paying for your monthly housing expense, alimony, child support,
car payments and other installment debts, and payments on revolving or open-ended
accounts such as credit cards.
Deed: The legal document transferring ownership or title to
a property
Deed of Trust: A legal document in which the borrower transfers
the title to a 3rd party (trustee) to hold as security for the lender. When
the loan is paid in full the trustee transfers title back to the borrower. If
the borrower defaults on the loan the trustee will sell the property and pay
the lender the mortgage debt.
Default: Failure to fulfill a legal obligation. A default
includes failure to pay on a financial obligation, but may also be a failure
to perform some action or service that is non-monetary. For example, when leasing
a car, the lessee is usually required to properly maintain the car.
Depreciation: A decline in the value of a house due to changing
market conditions or lack of upkeep on a home.
Down Payment: A portion of the price of a home, usually between
3-20%, not borrowed and paid up front.
Earnest Money Deposit: The deposit to show
that you're committed to buying the home. The deposit will not be refunded to
you after the seller accepts your offer, unless one of the sales contract contingencies
is not fulfilled.
Equity: The value in your home above the total amount of the
liens against your home. If you owe $100,000 on your house but it is worth $130,000,
you have $30,000 of equity.
Escrow: The holding of money or documents by a neutral third
party before closing. It can also be an account held by the lender (or servicer)
into which a homeowner pays money for taxes and insurance.
Fixed-Rate Mortgage: A mortgage with an interest
rate that does not change during the entire term of the loan.
Foreclosure: A legal action that ends all ownership rights
in a home when the homebuyer fails to make the mortgage payments or is otherwise
in default under the terms of the mortgage.
Gift Letter: A letter that a family member
writes verifying that s/he has given you a certain amount of money as a gift
and that you don't have to repay it. You can use this money towards a portion
of your down payment with some mortgages.
Good-Faith Estimate: A written statement from the lender itemizing
the approximate costs and fees for the mortgage.
Gross Monthly Income: The income you earn in a month before
taxes and other deductions. It may also include rental income, self-employed
income, income from alimony, child support, public assistance payments, and
retirement benefits.
Home Inspection: A professional inspection
of a home to determine the condition of the property. The inspection should
include an evaluation of the plumbing, heating and cooling systems, roof, wiring,
foundation and pest infestation.
Homeowner's Insurance: A policy that protects you and the
lender from fire or flood, which damages the structure of the house; a liability,
such as an injury to a visitor to your home; or damage to your personal property,
such as your furniture, clothes or appliances
Housing Expense Ratio: The percentage of your gross monthly
income that goes toward paying for your housing expenses.
HUD-1 Settlement Statement: A final listing of the costs of
the mortgage transaction. It provides the sales price and down payment, as well
as the total settlement costs required from the buyer and seller.
Index: The published index of interest rates
used to calculate the interest rate for an ARM. The index is usually an average
of the interest rates on a particular type of security such as the LIBOR.
Individual Retirement Account (IRA): A tax-deferred plan that
can help you build a retirement nest egg.
Inflation: An increase in prices.
Inquiry: A request for a copy of your credit report. An inquiry
occurs every time you fill out a credit application and/or request more credit.
Too many inquiries on a credit report can hurt your credit score.
Interest: The cost you pay to borrow money. It is the payment
you make to a lender for the money it has loaned to you. Interest is usually
expressed as a percentage of the amount borrowed.
Keogh Funds: A tax-deferred retirement-savings
plan for small business owners or self-employed individuals who have earned
income from their trade or business. Contributions to the Keogh plan are tax-deductible.
Liabilities: Your debts and other financial
obligations.
Lien: A claim or charge on property for payment of a debt.
With a mortgage, the lender has the right to take the title to your property
if you don't make the mortgage payments.
Loan Origination Fees: Fees paid to your mortgage lender for
processing the mortgage application. This fee is usually in the form of points.
One point equals 1% of the mortgage amount.
Lock-In Rate: A written agreement guaranteeing a specific
mortgage interest rate for a certain amount of time.
Low-Down-Payment Feature: A feature of some mortgages, usually
fixed-rate mortgages, that helps you buy a home with as little as a 3% down
payment.
Margin: A percentage added to the index for
an ARM to establish the interest rate on each adjustment date.
Market Value: The current value of your home based on what
purchaser would pay. An appraisal is sometimes used to determine market value.
Mortgage: A loan using your home as collateral. In some states
the term mortgage is also used to describe the document you sign [to grant the
lender a lien on your home]. It may also be used to indicate the amount of money
you borrow, with interest, to purchase your house. The amount of your mortgage
is usually the purchase price of the home minus your down payment.
Mortgage Broker: An independent finance professional who specializes
in bringing together borrowers and lenders to complete real estate mortgages.
Mortgage Insurance (MI or PMI): Insurance needed for mortgages
with low down payments (usually less than 20% of the price of the home).
Mortgage Lender: The lender providing funds for a mortgage.
Lenders also manage the credit and financial information review, the property
and the loan application process through closing.
Mortgage Rate: The cost or the interest rate you pay to borrow
the money to buy your house.
Mutual Funds: A fund that pools the money of its investors
to buy a variety of securities.
Net Monthly Income: Your take-home pay after
taxes. It is the amount of money that you actually receive in your paycheck.
Offer: A formal bid from the homebuyer to
the home seller to purchase a home.
Open House: When the seller's real estate agent opens the
seller's house to the public. You don't need a real estate agent to attend an
open house.
Points: 1% of the amount of the mortgage loan.
For example, if a loan is made for $50,000, one point equals $500.
Pre-Approval Letter: A letter from a mortgage lender indicating
that you qualify for a mortgage of a specific amount. It also shows a home seller
that you're a serious buyer.
Predatory Lending: Abusive lending practices that include
making mortgage loans to people who do not have the income to repay them or
repeatedly refinancing loans, charging high points and fees each time and "packing"
credit insurance onto a loan.
Pre-Qualification Letter: A letter from a mortgage lender
that states that you're pre-qualified to buy a home, but does not commit the
lender to a particular mortgage amount.
Principal: The amount of money borrowed to buy your house
or the amount of the loan that has not yet been repaid to the lender. This does
not include the interest you will pay to borrow that money. The principal balance
(sometimes called the outstanding or unpaid principal balance) is the amount
owed on the loan minus the amount you've repaid.
Private Mortgage Insurance: See Mortgage Insurance
Property Appreciation: See Appreciation
Radon: A toxic gas found in the soil beneath
a house that can contribute to cancer and other illnesses.
Rate Cap: The limit on the amount an interest rate on an ARM
can increase or decrease during an adjustment period.
Ratified Sales Contract: A contract that shows both you and
the seller of the house have agreed to your offer. This offer may include sales
contingencies, such as obtaining a mortgage of a certain type and rate, getting
an acceptable inspection, making repairs, closing by a certain date, etc.
Real Estate Professional: An individual who provides services
in buying and selling homes. The real estate professional is paid a percentage
of the home sale price by the seller. Unless you've specifically contracted
with a buyer's agent, the real estate professional represents the interest of
the seller. Real estate professionals may be able to refer you to local lenders
or mortgage brokers, but are generally not involved in the lending process.
Refinance: Getting a new mortgage with all or some portion
of the proceeds used to pay off the original mortgage.
Replacement Cost: The cost to replace damaged personal property
without a deduction for depreciation.
Securities: A financial form that shows the
holder owns a share or shares of a company (stock) or has loaned money to a
company or government organization (bond).
Title: The right to, and the ownership of,
property. A title or deed is sometimes used as proof of ownership of land.
Title Insurance: Insurance that protects lenders and homeowners
against legal problems with the title.
Truth-In-Lending Act (TILA): Federal law that requires disclosure
of a truth-in-lending statement for consumer loans. The statement includes a
summary of the total cost of credit, such as the APR and other specifics of
the loan.
Underwriting: The process a lender uses to
determine loan approval. It involves evaluating the property and the borrower's
credit and ability to pay the mortgage.
Uniform Residential Loan Application: A standard mortgage
application your lender will ask you to complete. The form requests your income,
assets, liabilities, and a description of the property you plan to buy, among
other things.
Warranties: Written guarantees of the quality
of a product and the promise to repair or replace defective parts free of charge.
Click here for a free home loan how-to eBook that will explain more about obtaining the right home loan for you. The information contained in this eBook will empower you to make informed decisions.
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