Mortgage Glossary

 

Adjustable Rate Mortgage (ARM): is a mortgage that has a fixed rate for the first few years, then begins to adjust based upon the market’s current rates. Be aware of market conditions - if rates rise, so do your payments. 

Amortization: is payments of regular installments to repay a debt over a period of time.

Appraisal: a report that provides an estimation of a property’s true market value based on location, amenities and present market value based on similar properties.

Arms-Length Transaction: is a transaction between independent and unrelated parties to ensure that both parties are acting in their own self-interest.

Back-End Ratio: a ratio that indicates what portions of total monthly income go towards paying debts including mortgage payments, child support, installment loans and revolving debt.

Balloon Mortgage: a payment plan that has consistent monthly payments over a stated term but then provides the total payment in a lump-sum at the end of a specified time. 

Buydown: buyer pays the lender an up-front fee to obtain a lower interest rate for a temporary period, usually one to three years.

Cash-Out Refinance: is a refinance of an existing loan where the new mortgage is for a greater amount than the existing loan.

Closing Costs: money paid by borrowers and sellers at the closing of a loan, this could include origination fees, discount fees, title insurance, survey fees, attorney’s fees, appraisal fees, credit report fees, and prepaid items such as taxes and insurance.

Combined Loan-to-Value (CLTV): a ratio for more than one loan on a mortgage; used by lenders to determine the property’s worth and the risk of homebuyers. (1st mortgage balance + 2nd mortgage balance)/property value = CLTV

Construction Perm: is a long term loan that modifies or replaces a construction loan for a building project.

Debt-to-Income Ratio: is the percentage of a monthly gross income that goes towards paying monthly liabilities. It is used to determine the borrower’s capacity to repay the mortgage and all other debts.

Escrow Account: is also called an impound account. An account where borrower deposits funds for taxes and/or insurance payments.

Federal Housing Administration (FHA): is a government mortgage insurance agency under direction of the Department of Housing and Urban Development (HUD) that insures lenders against loss from default of borrowers on residential properties.

Fixed Rate Mortgage: a mortgage with a set interest rate for the entire term of the mortgage.

Foreclosure: a borrower defaults in their mortgage; followed by a process that usually involves a forced sale of the property at public auction with the proceeds of the sale being applied to the mortgage debt.

HOA: or homeowners association – an association whose directors and officers are elected by the unit owners of a condominium or PUD project. Their primary responsibilities are to manage the common areas, expenses and services of the project.

Mortgage Insurance (MI): an insurance that protects a mortgage lender against loss in the event of default by the borrower. This insurance allows lenders to make loans with lower down payments (LTVs above 80%, in most cases).

Non-Conforming Loans: loans that exceed the conforming loan limits. Generally, loans above $214,600 (Jumbo).

Private Mortgage Insurance (PMI): insurance coverage that lenders require the borrower to obtain to protect the lender against loss in the event of a mortgage default for higher LTV mortgages.

PUD (Planned Unit Development): a real estate project in which each unit owner has title to a residential lot and a non-exclusive easement on the common areas of the project.

Revolving Debt: debt that does not have a fixed payment, although repayment is usually a percentage of the outstanding balance and made at regular intervals; most common are credit cards issued by banks and department stores.

Second Mortgage: a mortgage that is in a second position behind the first mortgage.  

Underwriter: an analyst who reviews the supportive documentation to determine the risk associated with the loan request. The person who gives final loan approval.

Veterans Administration (VA): a government agency designed to encourage mortgage lenders to offer long term, low down payment financing to eligible veterans by partially guaranteeing the lender against loss from default.