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Glossary of Mortgage Terms

A B C D E F H L M N O P Q R S T V W

A

Adjustable Rate Mortgage (ARM)
With this type of loan, the interest rate will be linked to a pre-selected index (Libor, MTA, etc) and will adjust periodically (usually every 6 months but can be every year or even every month, depending on the loan program).  ARMs often have a fixed period at the beginning, they can be fixed for a period of 3, 5, 7, or 10 years before they adjust.  They can also have Interest Only periods.  These loans were popular when the rates were lower than fixed rate loans and are still popular with investors, where it is unlikely they will still have the property by the time it adjusts.

Amortization
A schedule of payments that will pay accruing interest and pay the loan down to zero over a set length of time.  An amortization schedule shows the proportion of loan payment to interest as the balance of the loan is decreased.

APR
The APR is not the interest rate on your ‘Note’.  The APR is supposed to give you a guide as to the fees associated with your loan however, as not all lenders disclose fees in the same way, this really is not the reliable guide it is supposed to be.  Here’s how it is supposed to work.  Take your loan amount then deduct the fees that are either paid to or by the lender.  This is your financed amount.  In order for all the payments (which are calculated to pay back the whole loan amount) to pay back the financed amount – the APR must be increased.  So, when you see an APR figure, don’t panic, it’s not the interest rate that you are paying on your total loan amount.  It’s just a representative figure that’s supposed to help compare one loan to another.  Confused?  Just ask us to explain.

Appraisal
An appraisal is ordered by the lender to determine the market value of the property they will be lending on.  The appraisal will be done by a licensed appraiser who is educated, trained and experienced in estimating the value of real estate property.  The appraiser will have to find local and recent comparable sales to justify the value.

Assets
Assets are items of value owned by an individual or company such as personal property, real estate and vehicles.  Liquid assets are those that can quickly be converted into cash, such as bank account balances, stocks, bonds, mutual funds, some insurance policies and retirement funds.

Assumable Loan
A loan that is assumable may be taken over by the prospective new home owner.  The buyer must qualify for the loan and if the loan is a VA loan, should put his or her entitlement in place of the seller’s.

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B

Balloon Mortgage
A balloon mortgage will be amortized over a certain period of time, often 30 years, but at a pre-determined time, the total outstanding balance will become due in one lump sum.

Broker
A mortgage broker arranges loans, but does not lend their own money.  Typically, brokers work with wholesale lenders, so have access to rates below retail levels.

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C

Cap
Adjustable Rate Mortgages have interest rates that can rise and fall with the index they are tied to.  There is a pre-set maximum amount that the interest rate can rise (or fall) to.  This maximum is called a ‘cap’.

Certificate of Eligibility
A Certificate of Eligibility is issued by the Veterans Administration as proof of the veteran’s eligibility for a VA loan.

Closing
A ‘closing’ will usually take place at a local Title Company.  It is a meeting between the buyers and the ‘closer’ (from the Title Company) where the closer talks through the legal documents that are necessary to complete the purchase and the buyers sign them.  Closings are usually also attended by the buyers’ Realtor and Loan Officer who are there to support the buyers and answer any questions that may arise, related to their area of expertise.

Co-borrower or Co-applicant
A person other than the borrower or applicant who is also obligated on the loan and on title to the property.

Comparable Sales
Known in the industry as ‘Comps’.  When a property is appraised, the appraiser has to provide proof of comparable sales on which he or she based the market value of the property currently being appraised.  These sales must be for similar homes sold within a certain distance and time frame.

Construction Loan – See also ‘OTC’ (One Time Close)
A short term loan to finance the cost of constructing a home.  Typically Construction loans require interest only payments during the term of construction, unless an interest reserve is included in the end loan. 

Contingency
A condition that must be met before a contract is legally binding.

Conventional Mortgage
Home loans other than government endorsed loans.

Credit Report
A report of an individual’s credit history prepared by a credit bureau.  A tri-merge report is required for most mortgage lenders as it contains information held by all three credit repositories: Equifax, Experian and Trans Union.  If a husband and wife will be obligated on a loan, a joint report can be pulled.  The credit report will show credit ‘scores’, public record information (judgments, bankruptcies, etc.), any collections, late payments, a history of how debt has been repaid and the current level of outstanding debt with the corresponding monthly payment.

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D

Deed
The legal document conveying title to a property.

Deed in Lieu of Foreclosure
This conveys title to the lender when the borrower is in default and wants to avoid foreclosure.  The lender may still foreclose, but the Deed In Lieu may prevent a foreclosure being recorded as a public record.  Regardless, the non payment will almost certainly be reported on the borrowers’ credit report.

Deed of Trust
Instrument by which real estate is pledged as security for the repayment of a loan and that establishes lender’s right of foreclosure.

Disclosures
When you apply for a mortgage, lenders are required by law to provide you with information concerning your loan and / or application.

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E

Earnest Money
When a buyer is ready to make an offer on a home: a sum of money is offered as an Earnest Money Deposit, to show that she or he is serious about the offer.  The Earnest Money may be held with the Broker for the realtor representing the buyer or seller, or it may be held with a Title Company.  Earnest Money can be used towards the buyers’ down payment or closing costs.  Some loan programs allow the Earnest Money to be refunded at closing.

Easement
Right of way giving persons other than the owner access to or over a property.

Effective Age
The appraiser’s estimate of the physical condition of a building.  The actual age of a building may be older or newer than its effective age.

Eminent Domain
The right of a government to take private property for public use upon payment of its fair market value.  Eminent Domain is the basis for condemnation proceedings.

Encumbrance
A charge or claim on property, especially a mortgage

Equity
The value of a piece of property over and above any mortgage or other liabilities relating to it.

Escrow
Amount of money or property granted to somebody but held by a third party and only released after a specific condition has been met

Escrow Account
An escrow account may be held with your lender to collect monthly premiums in readiness for them to pay an annual or semi annual bill, like taxes and insurance.

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F

Fee Simple
A form of property ownership in which the owner has outright and unconditional disposal rights

FHA Mortgage
A mortgage insured by the Federal Housing Administration which falls under the category of ‘Government Loans’

First Time Homebuyer
A homebuyer who has not owned a home in the past three years.

Fixed Rate Mortgage
A mortgage where the interest rate is fixed at one figure for the life of the loan.

Flood Insurance
Insurance that compensates for physical property damage in the event of a flood.  All properties in federally designated flood zones require flood insurance.

Foreclosure
A legal process by which a mortgagee's right to redeem a mortgage is taken away, usually because of failing to make payments.  Properties that are foreclosed upon will often be sold at public auction, with the sale proceeds being applied to the unpaid mortgage.

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H

Hazard Insurance
Also known as Homeowners’ Insurance.  An insurance that compensates for physical damage to a property from fire, wind, vandalism or other hazards.

Home Equity Line Of Credit
HELOC: usually a second lien mortgage on a home that allows the borrower to draw up to an agreed amount against the equity in the home.

Home Inspection
Performed by a licensed professional who thoroughly inspects the structural and mechanical condition of a property.

Homeowners’ Insurance
An insurance policy that covers a home, its contents and personal liability.

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L

Lien
A legal claim against a property that must be paid off when the property is sold.  A mortgage is considered a lien as are unpaid taxes.

Loan Servicing
After you ‘close’ on your home you will make your payments to the company who will be servicing your loan.  They will hold an escrow account into which they will transfer a portion of your monthly payment to save for and pay tax and insurance bills.  The company handling your loan servicing will also handle statements, payoffs, assumptions and collections if the loan becomes delinquent.

Loan to Value (LTV)
This is a percentage calculated by dividing the loan amount by the lesser of the sales price or appraised value of the property being purchased.

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M

Margin
The fixed difference between the interest rate and the index on an adjustable rate mortgage. (Only the index adjusts).

Mortgage
A written contract describing the agreement between a borrower and a lending organization by which a loan is given against security.

Mortgagee
The lender in a mortgage agreement

Mortgage Insurance, also known as PMI (Private Mortgage Insurance)
An insurance that is generally required, in some form for all loans over 80% loan to value.  The insurance helps the lender recover their loss if a borrower defaults.

Mortgagor
The borrower in a mortgage agreement

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N

Negative Amortization
Some loans, like ‘Pay Option ARMs’ allow a fixed monthly payment that may not cover the accruing interest each month.  Any unpaid interest is added to the balance of the loan and so the outstanding loan can grow larger instead of smaller.

No Cost Loan (No Fee Loans)
‘No cost’ loans, like ‘no-point’ loans carry an inflated interest rate.  The difference between the inflated and uninflated interest rate provides the lender with an amount that they can pay the costs with.

Note
a legal agreement signed by the borrower to repay a mortgage loan at a specific interest rate over a predetermined length of time.

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O

One Time Close (OTC)
A two-part loan that provides funds for construction then modifies into the final loan once construction is complete.

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P

PITI
The four parts of an amortized mortgage with an escrow account: Principal, Interest, Tax & Insurance.

Power of Attorney
The legal authority to act for another person in legal and business matters.

Pre-Approval
Getting pre-approved involves giving personal and financial information to a lender so that they can determine whether the applicant will qualify for a loan.  If the borrower qualifies, the lender will provide a pre-approval letter stating the terms and conditions of the pre-approval.

Prepayment Penalty
A fee that may be charged to a borrower who pays off a loan before it is due.  Prepayment Penalties are legal in Idaho, but are not found on government or most conventional loans.

Principal
The initial amount of money that was borrowed, or the part of the monthly mortgage payment that reduces the remaining balance of the outstanding loan.

Purchase Agreement (Purchase & Sale Contract)
A written contract between buyer and seller of a property, stating the terms and conditions of the sale.

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Q

Quitclaim Deed, see also Warranty Deed
A formal statement renouncing a legal claim previously made.

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R

Rate Lock
A commitment issued by a lender to a borrower guaranteeing a specified interest rate for a certain period of time.

Recording
The noting in the registrar’s office of the details of a properly executed legal document such as a mortgage note, making it a part of the public record.

Refinance
The process of paying off one loan with another.  Rate and Term refinances pay off the original loan and the costs involved in doing so.  Cash-out refinances allow for the original loan to be paid off and a cash payment to be made to the borrower from the equity in the home.

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S

Seller Carry Back
An agreement in which the owner of a property provides financing, often in combination with an assumable mortgage.

Settlement Statement
A document that provides an itemized listing of the funds that were paid and received at closing

Subdivision
A housing development that is created by dividing a tract of land into individual lots for sale or lease.

Subordinate Financing
Any mortgage or other loan secured on the property that has a priority that is lower than that of the first mortgage

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T

Title
A legal document evidencing a person’s right to or ownership of a property

Title Company
A company that specializes in examining and insuring titles to real estate.

Title Insurance
Insurance that protects the buyer (Owners’ policy) and the lender (Lender’s Policy) against loss arising from disputes over ownership of a property.

Title Search
An investigation into title records by a title company to ensure that the seller is the legal owner of the property and that there are no liens or other claims outstanding.

Title Work
Work done by a Title Company to include Title Searches and preparation of Title Insurance Policies.

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V

VA
Veterans Administration – an agency of the federal government that guarantees residential mortgages made to eligible Veterans of the military services.  The guarantee protects the lender against loss and thus encourages lenders to make mortgages to veterans.

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W

Warranty Deed
A legal document that states that title to a property is free and clear of any prior claims or encumbrances.

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Copyright ©2012.
Barbara Hansen,
www.mountainhomemortgage.net
All Rights Reserved
Tel: 208 587 4471
Fax: 208 587 3690

 

 

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