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Acceleration Clause – allows the lender to speed up the rate at which your loan becomes due or even to demand immediate payment of the entire outstanding balance of the loan, should you default on your loan. back to top

Adjustable Rate Mortgage (ARM): a mortgage loan in which the interest rate is
adjusted periodically based on a pre-selected index; i.e., “11th District Cost of Funds”, 6 month and 1 year Treasury Bills”, Prime Rate”, “Libor” (London Index Banking Offered Rate), and others. back to top

Adjustment Interval – on an ARM loan, it is the time between changes in the interest rate and/or monthly payment, typically one, three, or five years, depending on the index. back to top

Amortization – refers to a loan whereby the periodic loan payments are calculated to pay-off the debt completely at the end of a fixed period, including accrued interest. back to top

Appraisal – an estimate of the value of property, made by a qualified licensed
Professional called an “appraiser”. back to top

Assumption – an agreement between Seller and buyer, whereby the buyer takes over the payments on an existing mortgage loan from the Seller. Most loans are not assumable. back to top

Balloon Payment Mortgage – usually a short-term loan that involves small payments for a certain period of time and one larger payment for the remaining loan balance and unpaid interest. back to top

Broker (Mortgage) – an individual or company, in the business of assisting and
arranging financing for a client, but who does not loan the money himself. Brokers usually charge a fee or receive a commission for their services. back to top

Broker (Real Estate) – an individual or company in the business of assisting and
arranging the sale/purchase of property. Acts as an intermediary for and/or between the Buyer or Seller. Also known as a Realtor. back to top

Buy-down (Temporary) – when the lender and/or homebuilder sub-seizes the mortgage payment by lowering the effective interest rate during the first few years of the loan. While the payment are initially low, they increase annually until the subsidy expires. back to top

Buy – Down (Permanent) – when the lender and/or customer pays extra points to lower an interest for the loan for the entire term of the loan. back to top

Caps – consumer safeguards that limit the amount the interest rate and/or monthly payment on an adjustable rate mortgage may change per year and/or for the life of the loan. back to top

Closing -  the meeting between the Buyer, Seller, Lender and Realtor or their agents where the property and funds legally change hands. Also called “Settlement”. back to top

Closing Costs – usually include an origination fee, discount points, appraisal and credit report fees, title insurance and escrow fees, taxed, prepaid interest, fire insurance, deed recording cost and others. The fees vary with the loan type and lender. back to top

Conventional Loan – a mortgage loan not insured by FHA or guaranteed by VA or the Farmers Home Administration. The insurance is in favor of losses to the bank and make no guarantees to the consumer or make the loan any better to the consumer.

DEBT-TO-INCOME RATIO- the ratio, expressed as a percentage, which results when a borrower’s monthly payment obligation on long term debts is divided by his/her gross monthly income. back to top

DEED OF TRUST- in California, this document is used in place of a mortgage
to secure the payment of a note. back to top

DEFAULT- failure to meet legal obligations in a contract. Specifically, failure to make the monthly payments on a mortgage. back to top

DEFERRED INTEREST- see Negative amortization back to top

DEPARTMENT OF VETERANS AFFAIRS (VA) - an independent agency of the
federal government which guarantees long-term low- or no- down payments mortgages to eligible veterans. back to top

DISCOUNTS POINTS- see Points back to top

DUE-ON-SALE CLAUSE- a provision in a mortgage or deed of trust that allows the
lender to demand immediate payment of the balance of the mortgage if the holder sells the home. back to top
          
EQUITY- the difference between the fair market value and current indebtedness, also referred to as the Owner’s Interest. back to top

ESCROW- refers to a neutral third party who carried out the instructions of both the buyer and seller and to handle all the paperwork of settlement of “closing”. Escrow may also refer to an account held by the lender into which the homebuyer pays money for tax or insurance payments. back to top

FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC) - also called
“Freddie Mac”, is a quasi-governmental agency that purchase conventional mortgages from insured depository institutions and HUD-approved mortgage bankers. back to top

FEDERAL HOUSING ADMINISTRATION (FHA) - also known as “Fannie Mae”. A
tax-paying corporation created by Congress that purchases and sells conventional mortgages from insured depository institutions and HUD-approved mortgage bankers. back to top

GROSS MONTHLY INCOME- the total amount the borrower earns per month, before any expenses are deducted. back to top

HAZARD INSURANCE- a form of insurance in which the insurance company protects the insured from specified losses, such as fire, windstorm and the like. back to top

HOUSING EXPENSE-TO-INCOME RATIO- the ratio expressed as a percentage,
which results when a borrower’s housing expenses are divided by his/her gross monthly income. See Debt-To-Income Ratio. back to top

IMPOUNDS- that portion of borrower’s monthly mortgage payments held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, and other items as they become due. Also known as “reserves”. back to top

INDEX- a published interest rate against which lenders measures the difference between the current interest rate or an adjustable rate mortgage and that earned by other investments (such as one-, three- or five-year U.S. Treasury security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average cost of funds incurred by savings and loans.) These are then used to adjust the interest rate on an adjustable mortgage up or down. back to top

JUMBO LOAN- a loan which is larger than the limits set by Fannie Mae and Freddie Mac. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate. back to top

LOAN-TO-VALUE RATIO (LTV) - the relationship between the amount of the
mortgage loan and the appraised value of the property expressed as a percentage. back to top

MARGIN- the amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate. back to top

MORTGAGE INSURANCE- money to be paid to insure the mortgage when the down payment is less than 20% for conventional loans, or for any FHA loan, regardless of down payment. back to top

NEGATIVE AMORTIZATION- occurs when your monthly payments are not large enough to pay all the interest due on the loan. This unpaid interest is added to the unpaid balance of the loan. back to top

ORIGINATION FEE- the fee charged by a lender to process the loan paperwork, prepare loan documents and other services for the borrower; usually expressed as a percentage of the loan amount. back to top

P.I.T.I. - Principal, Interest, Taxes and Insurance. Also called monthly housing expenses. back to top

POINTS- Also known as Loan Discounted Points. Prepaid interest assessed at closing by the lender. Discount points are required by the investor when the interest rate is below market. Each “point” is equal to 1 percent of the loan amount (i.e., 2 points on a $100,000 loan would equal $2,000). back to top

PREPAIDS- expenses necessary to create an escrow account or to adjust the Seller’s existing escrow account. Can include taxes, hazard insurance, mortgage insurance and other assessments. back to top

PREPAYMENT- a privilege in a mortgage permitting the borrower to make payments in advance of their due date. back to top

PREPAYMENT PENALTY- money charged for an early repayment of debt.
Prepayment penalties are normally not charged on FmHA, VA or FNMA/FHLMC conventional loans. back to top

PRIVATE MORTGAGE INSURANCE (PMI)- for conventional loans, in the event a
borrower does not have a 20 percent down payment, lenders will allow a smaller down payment – as low as 5 percent in some cases. With the smaller down payment loans, however, borrowers are usually required to carry private mortgage insurance, which insures the lender against losses which may result if the borrower is unable to make housing payments. PMI companies will require an initial premium payment at closing, the amount dependent upon the loan-to-value ratio, loan type and other lender criteria. Additionally, an annual renewal premium will be pro-rated on a monthly basis and added to the monthly payment. back to top

RECISON- the cancellation of a contract. With respect to mortgage refinancing, the law gives the homeowner three days to cancel a contract in some cases once it is signed if the transaction uses equity in the home security. back to top

REVERSE ANNUITY MORTGAGE (RAM)- form of mortgage in which the lender
makes periodic payments to the borrower using the borrower’s equity in the homes as security, Also called Reverse Equity Mortgage (REM) and Home Equity Conversion Mortgage (HECM). back to top

TITLE- a document that gives evidence of an individual’s ownership of property. back to top

TITLE INSURANCE- a policy, usually issued by a title insurance company, which
insures a homebuyer against errors in the title search. The cost of the policy is usually a function of the value of the property, and is usually paid by the Buyer and/or Seller. back to top

TRUTH-IN-LENDING- a federal law requiring disclosure of the Annual Percentage
Rate (APR) to homeowners shortly after they apply for the loan. back to top

UNDERWRITING-  the decision whether to make a loan to a potential Buyer based on based on credit, employment, assets, and appropriate rate and term or loan amount. back to top

WRAP-AROUND- When an existing non-assumable loan is placed under a new loan or "wrapped around". The new loan is carried by the seller even though a bank might collect it. When the payments are made on the new loan, the seller keeps the difference between the old payment and the new loan payment. The danger is that a seller might default on the old mortgage before the new buyer becomes aware. back to top