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This brief glossary will help you understand some of the more common terms used during the application, selection, processing, and closing of your home mortgage loan.
80/10/10, 80/20, and various other similar combinations are a short hand way of referring to a piggyback loan. A piggyback loan is a second loan on top of a first loan used to avoid paying PMI, avoiding a jumbo mortgage, or to purchase a home with little or no money down.
See: Eighty Twenty Mortgages, Avoiding Private Mortgage Insurance, and Avoiding A Jumbo Mortgage
An adjustable rate mortgage is a mortgage that does not have a fixed rate of interest throughout the life of the mortgage loan. During the life of the loan, the interest rate on the loan will be adjusted at various predetermined times. As the interest rate adjusts, so does the monthly principal and interest payment on the loan.
An adjustable rate mortgage (ARM) usually has a lower initial interest rate than fixed-rate mortgages, then adjusts after a specified period. A homebuyer may be able to qualify for a larger loan amount under an ARM program than with a fixed rate program. The rate for your ARM is based on the index rate (see "Index Rate";) and can go up or down, depending on what the index rate is doing. Simply put, you obtain a lower rate with an ARM in exchange for assuming the risk that your payments may increase. The terms that follow will help you understand some of the important ARM concepts.
See: Adjustable Rate Mortgages - Adjustable Rate Mortgage / ARM Indexes Explained
There are several types of ARMs available. The most common have three-year, five-year and seven-year adjustment periods. These refer to the period between one rate change and the next. For example, a loan with a fixed rate that adjusts after three years is called a 3/1 ARM.
Alt-A is not really a type of mortgage loan. It is more of a categorization of the loan and the borrower. Alt-A has traditionally meant a loan that has less than full documentation. Over time the definition has expanded to include loans that do not meet standard underwriting guidelines for property type, debt ratio or loan-to-value ratio, as well as documentation requirements.
See: Alt A Mortgages
Amortization is the process of fully paying off a mortgage loan over the term of the loan. For example, a 30 year loan amortizes over the 30 year term of the loan, and a 15 year loan amortizes over the 15 year term of the loan.
An amortization tables allow you to see a summary of unpaid principal, interest paid and initial monthly payment for each year of the life your loan.
See: Mortgage Calculator
The appraised value is the market price of the home you wish to buy or refinance. In some cases you may pay more or less than the appraised value of the home. But you can generally assume that the appraised value of the home is also the purchase price.
See: Appraising the Property - Do You Need an Appraisal for Your Mortgage?
Typically the market value of your home will increase over time. The appreciation rate is a way to judge how quickly the home's value is increasing. You can estimate this figure by calculating the percent increase of the home's value over a period of one year. For example, suppose that you own a $100,000 home and that the value of your home increases by roughly $3,000 per year. In this case, the home's appreciation rate would be 3% because the home's value has grown by 3%, from $100,000 to $103,000.
APR is an abbreviation for annual percentage rate. The Truth in Lending Act (TIL or TILA) requires that lenders publish an APR for their loans. As dictated by TIL, the APR includes the interest paid on the loan, any points or prepaid interest, and certain other costs of obtaining a loan. Its intent is to make it easier to compare one loan to another.
The APR is required to be disclosed to you by the lender under the federal Truth in Lending Act, Regulation Z. APR is usually higher than the interest rate shown for the mortgage note because it includes up-front costs paid to obtain the loan. The APR does not include title insurance, appraisal, and credit report. Ask your lender for more information.
See: Mortgage Laws And Regulations To Protect The Consumer
ARM is an abbreviation for adjustable rate mortgage. An adjustable rate mortgage is a mortgage that does not have a fixed rate of interest throughout the life of the mortgage loan. During the life of the loan, the interest rate on the loan will be adjusted at various predetermined times. As the interest rate adjusts, so does the monthly principal and interest payment on the loan.
See: Adjustable Rate Mortgage
A balloon mortgage is any mortgage that has a balance due at the end of its term.
See: Balloon Mortgage
Closing costs are all of the fees that must be paid when closing a loan. They can include things such as discount and origination points, application fees, appraisal fees, credit report fee, title search and title insurance, survey fee, flood certification, recording and transfer charges, interim interest, and attorney's fees. Closing costs are itemized in a lender’s Good Faith Estimate (GFE). The GFE and the actual HUD-1 Settlement Statement are required by the Real Estate Settlement Procedures Act (RESPA).
Are the upfront costs you pay in order to close your loan; such as origination, appraisal fees, underwriting or other lender fees, title insurance, and escrow fees. Closing costs can differ between lenders.
See: What Closing Expenses Should You Expect?
A Cost Analysis helps you determine how to choose the mortgage option that will cost you the least over the period you own your home.
For total costs, you usually calculate the following:
You may also take these benefits into consideration:
A construction loan is a short term loan taken out to finance the building of a home. Construction loans usually have a six month to one year term. Other financing is typically found to pay off the construction loan when construction is completed and a Certificate of Occupancy issued.
See: Construction Loans
A construction-to-permanent loan program is a type of loan program that combines a construction loan for building a home, with an automatic traditional mortgage to finance the home upon its completion. It has the advantage of a single closing and set of fees for both loans.
See: Construction Loans
A credit history is a record of an individual's various loans and credit cards, the balances of any current loans or credit cards, a payment history, and any other pertinent financial information.
See: Understanding Credit
A credit score is a numerical designation that gives an indication of the credit worthiness or credit risk of an individual. Lenders use credit scores to predict how likely an individual is to make their credit payments on time. The most commonly used credit scoring model is the FICO model (named after the company that developed the model, Fair Isaac and Company).
See: Understanding Credit
Debt ratio is the total of all monthly payments made by a borrower to service all debt (including housing expenses such as mortgage and escrow payments, property taxes, homeowner's insurance, and maybe private mortgage insurance, as well as the monthly payments for other credit such as credit cards, student loans, car loans, and other loans) divided by the borrower's monthly gross income (income before taxes and benefits are removed).
One discount point is equal to 1% of your loan amount. In other words, one discount point on a $100,000 mortgage loan equals $1,000. Discount points are paid to obtain a lower interest rate on your mortgage. The more points you pay, the lower the rate.
Down payment is that amount that a borrower puts down on a home. Most lenders like to see borrowers put down at least 20%. Typically the best interest rates and the most loan options are available to borrowers who put down 20% or more.
This is the difference between what you owe on your mortgage loan and the appraised value of the home. Your equity increases if your home goes up in value, and also when you pay on your principal each month.
Fannie Mae is the Federal National Mortgage Association (FNMA). Fannie Mae is a corporation sponsored by the U.S. Government to establish a secondary market for mortgages. Fannie Mae purchases home loans from lenders.
An FHA loan is a loan made by a lender that is insured by the Federal Housing Administration.
See: FHA Loans
A fixed rate mortgage is a mortgage that has a fixed rate of interest and a fixed monthly principal and interest payment throughout the term of the loan.
See: Fixed Rate Mortgage
Freddie Mac is the Federal Home Loan Mortgage Corporation (FHLMC). Freddie Mac is a corporation sponsored by the U.S. Government to establish a secondary market for mortgages. Freddie Mac purchases home loans from lenders.
FRM is an abbreviation for a fixed rate mortgage. A fixed rate mortgage is a mortgage that has a fixed rate of interest and a fixed monthly principal and interest payment throughout the term of the loan.
See: Fixed Rate Mortgage
GFE is an abbreviation for Good Faith Estimate which is an estimate of the fees that will be due at closing. The GFE must be provided by a lender to a borrower within three days of an application for a mortgage loan. It is required by the Real Estate Settlement Procedures Act (RESPA).
See: Mortgage Laws And Regulations To Protect The Consumer
Ginnie Mae is the Government National Mortgage Association (GNMA). GNMA is a federal agency that guarantees mortgage securities issued against pools of FHA and VA mortgages.
The Good Faith Estimate (GFE) is an estimate of the fees that will be due at closing. The GFE must be provided by a lender to a borrower within three days of an application for a mortgage loan. It is required by the Real Estate Settlement Procedures Act (RESPA).
See: Mortgage Laws And Regulations To Protect The Consumer
A graduated payment mortgage is a mortgage with a fixed interest rate that starts with a low monthly payment. The payment increases with time until it eventually levels off and remains fixed through the remainder of the mortgage term.
See: Graduated Payment Mortgage
A growing equity mortgage (GEM) is a fixed rate mortgage whose payments increase by a fixed amount over a given schedule for an established period of time.
See: Growing Equity Mortgage
HECM is an abbreviation for a home equity conversion mortgage, which is another name for a reverse annuity mortgage (RAM) or a reverse mortgage (RM). It is a mortgage where an elderly borrower (62 years old or older) may borrow against the equity in their home to receive a monthly payment, and/or lump sum payment of cash.
See: Reverse Annuity Mortgage
HELOC is an abbreviation for a home equity line of credit. Typically a secondary loan, a HELOC is a type of loan that allows a home owner to tap into the equity of their home to obtain cash for other uses. A HELOC may also be called an equity line or an equity loan.
See: Home Equity Line Of Credit and Second Mortgages
A home equity conversion mortgage (HECM) is another name for a reverse annuity mortgage (RAM) or reverse mortgage (RM). It is a mortgage where an elderly borrower (62 years old or older) may borrow against the equity in their home to receive a monthly payment, and/or lump sum payment of cash.
See: Reverse Annuity Mortgage
A home equity line of credit, or HELOC, is typically a secondary loan. It allows a home owner to tap into the equity of their home to obtain cash for other uses. A home equity line of credit may also be called an equity line or an equity loan.
See: Home Equity Line Of Credit and Second Mortgages
To obtain a mortgage, homeowner's insurance is required based on the value and contents of your home. Your representative may be able to help you estimate typical payments in your area.
Housing expenses consist of all monthly housing payments including principal and interest on a mortgage, property taxes, homeowner's insurance, private mortgage insurance (if applicable) and association or condominium dues (if applicable).
See: How Much House You Can Afford
Housing ratio is a borrower's total monthly housing expense (principal, interest, taxes, and insurance, and association dues if applicable) divided by their total monthly gross income (income before taxes and benefits are removed).
See: How Much House You Can Afford
Most lenders tie ARM interest rate changes to changes in an "index rate." These indexes usually go up and down with the general movement of interest rates. In most circumstances, your mortgage rate and payment go up if the index rate rises. On the other hand, if the index rate goes down your rate and monthly payment may also. Lenders base ARM rates on a variety of indexes. You should ask your lender what index will be used and how often it changes. Also ask how it has behaved in the past and where it is published.
A mortgage interest rate is the interest rate charged for a certain period. It is quoted as an annual interest rate, even though the interest rate on a loan may change in smaller increments of time as is common with some adjustable rate mortgages.
An interest-only mortgage is not really a type of mortgage. Interest-only refers to the ability to make only interest payments on a loan for some specified period of time. The interest-only option may be available on both ARMs and FRMs. It is far more common on adjustable rate mortgages.
See: Interest Only Mortgage
This is typically for people who want to maximize how much they can borrow. With this type of loan, however, you do not build any equity in the home and will need to make larger monthly payments to pay back the principal.
This is a limit on the amount your interest rate can increase. There are two different types of Interest Rate Caps:
By law, virtually all ARMs must have an overall cap.
A jumbo mortgage, also known as a non-conforming loan, is any mortgage that exceeds loan limits set annually by Fannie Mae and Freddie Mac.
See: Avoiding A Jumbo Mortgage
In most cases, a home is worth more than the mortgage balance. In other words, the mortgage balance is a percentage of what the home is actually worth. The percentage represents the Loan-To-Value. For example, if a home is worth $100,000 and the mortgage owed is $80,000, the LTV is 80%.
Loan-to-value ratio is the amount borrowed divided by the value of the property being purchased.
To determine your ARM rate, lenders usually charge a few percentage points over the Index Rate. Margin is the difference between the Index Rate and your ARM rate. Margins can differ from one lender to another, but are usually constant over the life of the loan. Be sure to discuss the margin with your lender.
Mortgage insurance, commonly called "Private Mortgage Insurance" (PMI), protects the lender from loss if you stop making payments. All lenders require this; however, you may not have to pay mortgage insurance if your down payment is more than 20% of the appraised value of your home. Check with your representative to see if your mortgage insurance can be waived.
Mortgage life insurance is an insurance policy that will pay off a mortgage in the event of the death of the individual taking out the insurance policy.
See: Mortgage Life Insurance
In a mortgage pre-approval a borrower provides income, asset, and debt information that is verified. After verification the lender pre-approves the borrower for a mortgage. This means that in the absence of a material change in their financial picture, or a bad appraisal on the home that they decide to buy, they will receive a mortgage.
See: Mortgage Pre Qualification And Pre Approval
In a mortgage pre-qualification a borrower provides income, asset, and debt information to a lender who, without verification, provides an opinion as to whether or not the borrower should receive a mortgage. Pre-qualification come with disclaimers that state that the opinion is subject to verification of the information provided by the borrower.
This can happen when a Payment Cap prevents a monthly mortgage payment from covering the interest due. If your ARM allows for negative amortization, the interest shortage in your payment will be automatically added to your debt, and you may owe the lender more than you did at the start.
This fee is usually 1% of the loan amount and pays the lender for processing and originating your loan. As an example, the origination fee on a $100,000 mortgage loan is $1,000.
This is the limit a monthly payment can increase at the time of each adjustment, usually to a percentage of the previous payment. In other words, with a 7.5% payment cap, a payment of $100 could increase to no more than $107.50 in the first adjustment period, and to no more than $115.56 in the second.
A piggyback loan (which may also be referred to using a numeric nomenclature such as 80/10/10, or 80/20) is a second loan on top of a first loan that is used to avoid paying PMI, to avoid a jumbo mortgage, or to purchase a home with little or non money down.
PITI is an abbreviation for principal, interest, taxes, and insurance, which are the principal components of a borrower's housing expense.
PMI is an abbreviation for private mortgage insurance. Private mortgage insurance is insurance required by a lender and paid for by the borrower for any loan with less than a 20% down payment. The rate for private mortgage insurance varies depending on the amount of the down payment.
See: Private Mortgage Insurance
Points are an up front payment required by the borrower typically to buy-down the interest rate of a mortgage or for an extended rate lock. A point is equal to 1% of the value of the loan (for example, 1 point on a $100,000 loan is $1,000).
Paid at closing, this is the amount of interest - usually calculated daily - that you owe from the day your loan closes to the end of the month. For example, if you close on January 15 and your interest is $21 per day, you would pay interest through January 31 ($21 X 16). After that, when you make your monthly mortgage payment, interest is always paid for the previous month. So you would not make your first payment until March 1, which pays principal and interest for the month of February.
Private mortgage insurance is insurance required by a lender and paid for by the borrower for any loan with less than a 20% down payment. The rate for private mortgage insurance varies depending on the amount of the down payment.
See: Private Mortgage Insurance
Property taxes are different for each county and is usually a straight percentage of your property's value. Your lender will collect at least one month of property taxes at your closing to set up an account so that they can pay your taxes when they are due. In some cases you can pay your taxes annually, but usually pay them monthly. The monthly amount you pay is added to this account, sometimes called "impound" or "escrow". If you need help estimating your yearly property taxes, please contact your county assessor's office.
RAM is an abbreviation for reverse annuity mortgage, which may also be referred to as a home equity conversion mortgage (HECM) or reverse mortgage (RM). It is a mortgage where an elderly borrower (62 years old or older) may borrow against the equity in their home to receive a monthly payment, and/or lump sum payment of cash.
See: Reverse Annuity Mortgage
Refinancing a mortgage is the process of replacing an existing mortgage with a new one. This is typically done to obtain a lower interest rate and monthly payment, obtain a different loan term, or to obtain cash from the equity in a home for another purpose.
See: Refinancing Your Home
RESPA is an abbreviation for the Real Estate Settlement Procedures Act. RESPA requires certain disclosures to borrowers, and it prohibits certain lender practices that can drive up the closing costs of a loan.
See: Mortgage Laws And Regulations To Protect The Consumer
A reverse annuity mortgage (RAM), home equity conversion mortgage (HECM), or reverse mortgage (RM), is a mortgage where an elderly borrower (62 years old or older) may borrow against the equity in their home to receive a monthly payment, and/or lump sum payment of cash.
See: Reverse Annuity Mortgage
A reverse mortgage is also referred to as a reverse annuity mortgage (RAM), or home equity conversion mortgage (HECM). It is a mortgage where an elderly borrower (62 years old or older) may borrow against the equity in their home to receive a monthly payment, and/or lump sum payment of cash.
See: Reverse Annuity Mortgage
RM is an abbreviation for reverse mortgage, which may also be referred to as a reverse annuity mortgage, or a home equity conversion mortgage (HECM). It is a mortgage where an elderly borrower (62 years old or older) may borrow against the equity in their home to receive a monthly payment, and/or lump sum payment of cash.
See: Reverse Annuity Mortgage
A second mortgage may also be referred to as a second loan, a home equity loan, or even a "piggyback" mortgage or loan. It is an additional mortgage that a homeowner takes out on their home, above and beyond their first or primary mortgage.
See: Second Mortgages
One month's worth of your yearly tax bill and your yearly homeowner's insurance premium may be added to your loan payments.
Here's why taxes and insurance are collected along with your principal and interest payments:
If your taxes are left unpaid, your state can foreclose on your property in order to obtain payment. If the foreclosure is successful, the lender could lose their collateral. In other words, if you're not making your payments, the lender could not recoup their loss: the state's foreclosure would supersede their rights.
The lender also wants to make sure your insurance premium is always paid. If your property is destroyed by a fire, they have lost their collateral, but the loan would be repaid by the insurance company.
In some home financing calculators, you are asked to make a comparison between two financing options. If one of the options costs more than another, the difference is invested into a savings account because you've saved money with that option. To make a fair comparison, the calculator tracks the balance and interest earnings on this account. As earnings in this account grow, they are taxed at the rate you indicated. Your personal tax rate is also used to compute your tax savings. To estimate your tax rate, divide the amount you paid in taxes last year by your income. If prompted, please include federal and state taxes.
Most people can take a Standard Deduction on their tax return, which is an amount the IRS allows you to deduct from your taxable income. However, you can usually deduct your mortgage interest, home equity loan interest (if you have one), property taxes and points you pay at closing by itemizing your deductions. You can also itemize other expenses, such as charitable contributions. If the total of these amounts is higher than your Standard Deduction, you can save more in taxes each year.
The term of a mortgage is the amount of time that it takes for the mortgage loan to be fully paid off, commonly referred to as amortization. The most common mortgage terms are 15 years and 30 years.
The length of time that you will make payments on your loan. Typical mortgages have terms of 15, 30 or 40 years. The shorter the term, the lower the interest rate but the higher the payment. Ask your representative which term is best for you.
TIL and TILA are abbreviations for the Truth in Lending Act. The Truth in Lending Act sets forth certain written disclosure requirements, including finance charge, annual percentage rate (APR), amount financed, total of payments, and total sales price. TIL also sets forth certain advertising requirements for lenders as well as rescission rights for consumers.
See: Mortgage Laws And Regulations To Protect The Consumer
Title insurance is a type of insurance that protects the holder of the policy from any claims resulting from defects to the title of real estate.
See: Title Insurance
The Truth in Lending Act sets forth certain written disclosure requirements, including finance charge, annual percentage rate (APR), amount financed, total of payments, and total sales price. TIL also sets forth certain advertising requirements for lenders as well as rescission rights for consumers.
See: Mortgage Laws And Regulations To Protect The Consumer
A VA Loan is a loan that is partially guaranteed by the U.S. Department of Veterans Affairs.
See: VA Loans
Find answers to common questions about the mortgage process and how to get the best financing.
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