Finance 101
Click on a letter below to go to the items starting with that letter:
Adjustable Rate Mortgage (ARM)
A mortgage loan in which the interest rate is scheduled to increase or decrease throughout the life of the loan. The rate is tied to a particular index and, upon terms specified in the note, the rate will change with the value of that index.
Amortization
The set period of time in which the mortgage payments are based.
Amount Financed
The amount of the loan less the prepaid finance charges. The amount financed is the figure used to calculate the Annual Percentage Rate.
Annual Percentage Rate (APR)
This is NOT the note rate for which the borrower applied. The APR is the cost of the loan in percentage terms taking into account various loan charges, such as loan discount points, origination fees, prepaid interest and document and underwriting fees. These charges are spread over the life of the loan, which results in a rate higher than what is shown on the Mortgage Note and Deed of Trust (the rate the borrower applied for).
Appraisal
A well-documented and thorough analysis report of the subject property used to determine the property value. It is also used to assist the underwriter in determining if the property can be used to secure a mortgage.
Asset
Everything owned by an individual, individuals or a corporation that can be used for the payment of debts. See also Liquid Asset.
Balloon Payment
The remaining loan balance due at the end of a lower rate, introductory period of a mortgage loan. Usually a thirty (30) year fixed rate loan with a thirty year payment schedule, due in a five (5) or seven (7) year term.
Bridge Loan
A loan secured against a borrower's existing home to pull out the equity to purchase another home, prior to the first property being sold. Also know as a Swing Loan.
Broker
A mortgage loan professional with access to many wholesale mortgage lenders and banking institutions, rather than just one company's product. He or she is paid a fee or a commission for finding and negotiating loans for the applicant and bringing them together with the wholesaler.
Buydown
A discount point or points paid up front by either the buyer, seller or lender to temporarily or permanently lower the interest rate. See also Interest Rate Buydown.
Buy down fixed rate mortgage
Buy down fixed rate mortgages are fixed rate mortgages, usually for 30 years, that have a lower rate for the first, second and/or possibly third years of the loan. They will not exceed the second, third or fourth change once it is reached. For example, a 30 year 2/1 buydown has a three step rate change. The initial rate may be 5.25% for year one, 6.25% for year two and 7.25% for year three until the loan is paid in full. These can be lender, buyer or, in some cases, even seller-paid charges.
Cap
A figure which limits periodic and/or life-time rate changes in adjustable rate mortgages. In the case of potentially negative amortizing loans, the cap limits the amount the payment can increase but not the interest rate.
Certificate of Eligibility
In a loan guaranteed by the Veteran's Administration (VA), the form that specifies the borrower's loan eligibility or how much of a loan he/she is allowed. This may be determined by factors such as length of time in the service or reserves or if there are any outstanding loans with the VA.
Certificate of Reasonable Value CRV)
In a transaction guaranteed by the Veteran's Administration (VA), this is part of the appraisal that specifies the value of the home.
Closing
This is the last day of an escrow period. Usually the date when the documents have been signed, dated and notarized, the funds have been transferred and the appropriate documents have been recorded with the recorder's office. The procedure for closing can vary from state to state and county to county.
Closing Costs
The costs and/or fees incurred in both buying and selling a piece of or refinancing property. These may include property taxes, escrow fees, title search fees, title insurance, notary and recording charges, etc. and will vary from state to state and county to county.
Credit Report
A documents that details a payment history, creditworthiness and payments of existing debts and aids the underwriter in the decision-making process of loan approval.
Credit Score
A computer-driven rating or score used to aid the underwriter in the decision-making process of loan approval. The score is derived from a compilation of data contained within the credit report. Various factors include the payment history, the amount of open credit, the amount of available credit against the amount of borrowed credit and many others. Higher scores are preferable.
Deed of Trust
The instrument that secures the loan against the property. Property is transferred to a trustee by the borrower (trustor) in favor of the lender (beneficiary) and reconveyed upon payment in full.
Default
Most commonly known as failure to make scheduled mortgage payments to the lender. Also failure to comply with other requirements of either the note or deed of trust.
Down Payment
The amount of money used to make up the difference between what the lender(s) will lend on a given property and the sales price the borrower is willing to pay for the property. Also known as initial equity.
Equity
The market value of real property less the amount of any existing liens.
Equity Line
Also known as a Line of Credit, they have predetermined dollar amounts, terms and rate structures, usually adjustable rates. They can be unsecured but if secured against real property, they are usually placed in a subordinate lien position and funds borrowed against the equity in the home. The available funds can be borrowed via check or sometimes a credit card. If a balance does not exist, then payments are not required and interest is not charged. Some may have an annual fee for servicing.
Escrow
An independent, mutual third party used to follow specific instructions as to how to accept, hold and transfer deeds, funds and all pertinent documentation to all parties involved in the sale and transfer of real property.
Fannie Mae
FNMA/Federal National Mortgage Association. A private corporation dealing in the purchase of first mortgages.
FHA Mortgage
Federal Housing Administration. A federal agency that insures first mortgages, which allows lenders to lend a higher percentage of the value of the property.
Finance Charge
The amount of interest, prepaid finance charge and certain insurance premiums (if any) which the borrower will be expected to pay over the life of the loan.
First Mortgage
A loan in the first position, secured against real property by a deed of trust.
Fixed rate mortgage
These are loans that have a fixed interest rate and fixed payment for a given period of tiem and are, therefore, the most stable mortgage available. They are fully amortizing and, once paid, the title is reconveyed and the property is free and clear of that note. Typically geared for long-term plans, considered to be over 5-7 years.
Foreclosure
The process in or out of court to remove all rights, interest and the title of the owner(s) of real property in order to sell the property to satisfy a lien against it.
Freddie Mac
FHLMC/Federal Home Loan Mortgage Corporation. A federal agency purchasing first mortgages, both conventional and federally insured, from members of the Federal Reserve system and the Federal Home Loan Bank system.
Fully Amortizing ARM
An adjustable rate mortgage in which the monthly loan payments cover the interest then due and decrease a portion of the principal balance. The loan has a set term used for calculating the payments and they are sufficient to pay the loan in full within that term.
Homeowners Association
(1) An association of people who own homes, townhouses or condominiums in a given area, formed for the purpose of improving or maintaining the quality of the area. (2) An association formed by the builder of condominiums or planned unit developments and required by statute in some states. Statutes control the builder's participation as well as the duties of the association.
HOA Dues
Fees collected by a homeowners association or management company to maintain the association, grounds, insurance, reserves, repairs, etc.
HOA Package (Articles of Incorporation, Bylaws, Budget, Insurance, Declaration, Fidelity Bond)
A complete package of documentation relating to a given association, used to inform a home owner or potential home owner of the requirements of the association and/or complex.
Housing Expense Ratio
A percentage or ratio of the total of the monthly principal, interest, taxes, insurance and any other applicable housing expense, divided by the monthly gross income. Lower percentages are preferable.
HUD -1 Statement
The final federal document to show all credit, debit and transfer activity of funds, costs and proceeds involved in an escrow.
Intermediate ARM (3/1, 5/1, 7/1, 10/1)
An adjustable loan amortized over thirty (30) years with a fixed interest rate for the first predetermined term. After the fixed rate period, the loan may well convert to an adjustable rate mortgage.
Index
A measuring gauge used to adjust the interest rate of an adjustable rate mortgage. The note rate of the loan is based on the index value plus a set margin added to the index.
Initial Interest Rate
The beginning rate of interest charged on a adjustable mortgage loan. Sometimes referred to as the "start rate" or "teaser rate".
Installment Liability
A liability or debt with a fixed term for payment. For example, a real estate mortgage, car loan, student loan, etc. with a set time for repayment.
Interest
The cost of borrowing money for a period of time.
Interest Rate Buydown
A discount point or points paid up front by either the seller, buyer or lender to temporarily or permanently lower the interest rate. See also Buydown.
Interest Rate Ceiling
In conjunction with an adjustable rate mortgage, it is the highest rate possible to adjust to during the life of the loan as set forth in the note. Also known as the "Life Cap".
Interest Rate Floor
In conjunction with an adjustable rate mortgage, it is the lowest rate possible to adjust to during the life of the loan as set forth in the note.
Life Cap
In conjunction with an adjustable rate mortgage, it is the highest rate possible to adjust to during the life of the loan as set forth in the note. Also known as the "Interest Rate Ceiling".
Line of Credit
Also known as an Equity Line, they have predetermined dollar amounts, terms and rate structures, usually adjustable rates. They can be unsecured but if secured against real property, they are usually placed in a subordinate lien position and funds borrowed against the equity in the home. The available funds can be borrowed via check or sometimes a credit card. If a balance does not exist, then payments are not required and interest is not charged. Some may have an annual fee for servicing.
Liquid Asset
A monetary asset where funds are readily and easily available for withdrawal. Also a material asset that can be quickly and easily turned into cash.
Loan
A given sum of money or principal to be repaid over time, generally with interest.
Loan to Value (LTV)
The ratio, expressed in percentage form, of the loan size to the value or selling price of real property. For example, a home with a value of $100,000 and a loan size of $75,000 has a 75% loan to value or LTV.
Lock
In reference to interest rates. The terms used to secure a given rate and associated fees and points for a specified period of time, usually, 15, 30, 45 days, etc.
Lock-in Period
The period of time that an interest rate is secured and guaranteed. The loan needs to be closed within the lock period or there is a risk of losing the interest rate. The longer lock periods have a higher cost associated with them (discount points) due to the investors' money being promised or guaranteedfor a longer period of time.
Margin
The percentage a lender will add to a given index to calculate the interest rate on an adjustable rate mortgage at each adjustment. The index value plus the margin equals the interest rate (usually rounded to the nearest .125 or .25 of a percent).
Mortgage
An instrument used by the lender to secure borrowed money against real property.
Mortgage Banker
A company providing mortgage financing with its own funds and those of investors, rather than simply bringing together the lender and the borrower, such as a Mortgage Broker.
Mortgage Broker
A company or individual with access to many wholesale mortgage bankers and banking institutions rather than using the company's own funds. The broker is paid a fee or commission for negotiating loans for the applicant and bringing them together with the wholesaler.
Mortgage Insurance
Insurance written by an independent company to protect the lender against loss incurred in the case of default, thus enabling the lender to lend a higher percentage of the sales price. Mortgage insurance can be issued by a private company or a government agency. Also known as "PMI" or "MI".
Mortgage Insurance Premium (MIP)
The premium charged for obtaining mortgage insurance when purchasing real property with a minimal down payment.
Negative Amortization
A condition that is created when the mortgage payment is less than the interest then due. The portion not paid is then added to the loan balance.
Non-Liquid Asset
An asset, usually material but can also be financial, that cannot be quickly and easily turned into cash.
Note
A unilateral instrument used to state the specific terms on which borrowed money is to be repaid. Usually for a specified period of time with interest and, in the case of real property, it is secured by a mortgage or deed of trust.
Origination Fee
A fee charged by a lender for making a real estate loan. Usually a percentage of the amount of the loan. Most commonly known as "points".
Payment Cap
The maximum percentage a payment can increase in a deferred interest option mortgage. Usually an annual adjustment rate of 7.5%. The payment cap may allow for monthly payments to fall short of monthly interest due. For example, a $1,000 mortgage payment cannot increase more than $75 to $1,075, even though the interest charged may exceed that amount.
Payment Schedule
The dollar figures in the payment schedule represent principal, interest and Private Mortgage Insurance (if applicable) over the life of the loan. These figures will not reflect tax and insurance impounds or any temporary buydown payments contributed by the seller.
Periodic Cap
The maximum rate increase or decrease allowed at the scheduled rate adjustment periods in an ARM.
Points
One point is equal to one percentage point of the principal amount of the loan. For example, one point on a $100,000 mortgage would equal $1,000.00 to the lender or broker. This fee may be paid for by the borrower or, in the case of a purchase, the seller, or may be split between them. In the case of a zero point loan, the lender is financing the points in exchange for a higher rate of interest.
Prepaid Finance Charge
Prepaid finance charges are certain charges made in connection with the loan that must be paid upon the close of the loan. The Federal Reserve Board in Regulation Z defines these charges and the borrower must pay the charges in some fashion. Some examples of such charges are loan origination fees, points or discount points, private mortgage insurance premiums (if applicable) and tax service fees. Some loan charges are specifically excluded from prepaid finance charge, such as appraisal and credit report fees.
Prepayment Penalty
A penalty imposed on a note, mortgage or deed of trust when it is paid before it is due. Many investors offer more attractive interest rates and/or points based on a predetermined expected return on investment. They will offer a lower rate at a lower cost in exchange for a penalty if the loan is paid off early. Generally, the penalty is for the first three to five years of the life of the loan.
Pre-Approval
Credit approved by a lender to an applying borrower prior to a property being identified. The maximum borrowing power is established through this process, which may result in a stronger negotiating position when bidding on homes.
Principal
Most commonly an amount of debt not including interest. The face value of a note, mortgage, etc. Also the person who gives authority to an agent or attorney.
Principal, Interest, Taxes, Insurance (PITI)
The housing expense used in calculating housing expense ratios. May also include homeowner dues (HOA dues) and/or mortgage insurance (MI).
Private Mortgage Insurance (PMI)
Insurance written by an independent company to protect the lender against loss incurred in the case of default, thus enabling the lender to lend a higher percentage of the sales price. Mortgage insurance can be issued by a private company or a government agency. Also known as "MI".
Qualifying Ratios
Calculations of percentages or ratios or both housing and total expense against monthly gross income. The two figures need to meet certain guidelines and allow mortgage professionals to calculate maximum loan qualifying. These ratios are a large part of the decision-making process of loan approval.
Reconveyance Deed
An instrument used to transfer title from a trustee to the equitable owner of real estate when the title is held as collateral security for a debt. Most commonly used upon payment in full of a trust deed or note.
Recording
The filling of documents affecting real property as a matter of public record, giving notice to future purchasers, creditors or other interested parties. Recording is controlled by statute and usually requires the witnessing and notarizing of an instrument (i.e., deed of trust, grant deed, reconveyance deed) to be recorded.
Refinance
The process of taking a loan or loans to pay off an existing loan secured by the same property, typically by the same borrower(s).
Revolving Liability
A liability or debt as a result of an arrangement with a bank or banking establishment that allows the use of recurring credit. The borrower may borrow money and repay the debt on a repeated basis, based on a preestablished amount and agreement.
Seller Carry Back
Usually partial financing but can be complete financing by the owner/seller of real property. Upon the close of a sale escrow, the former owner/seller retains a note, usually with interest, against the property for an agreed-upon amount and agreed-upon terms.
Servicer
Controlling the necessary duties of a mortgage, such as collecting payments, releasing the lien upon payment in full, foreclosing if in default and making sure the taxes are paid, insurance is in form, etc. Servicing may be done by the lender or for a servicing fee a company may act in place of the lender.
Swing Loan
A loan secured against a borrower's existing home to pull out the equity to purchase another home prior to the first property being sold. Also know as a Bridge Loan.
Total Expense Ratio
A percentage or ratio of the total of the monthly principal, interest, taxes, insurance and all obligatory monthly credit debt, divided by the monthly gross income. Lower percentages are preferable.
Total of Payments
The figure represents the total of all payments made toward principal, interest and mortgage insurance (if applicable) over the life of the loan.
Truth in Lending Disclosure
The federal required disclosure to state in writing the terms and conditions of a loan, including the Annual Percentage Rate (APR) and other charges associated with the loan.
Underwriting
The review process by a lending institution, of (1) a potential borrower's loan application and supporting documentation to determine the borrower's creditworthiness and of (2) the items related to the property to determine the ability to secure the loan against it.
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VA Mortgage
Veteran's Administration. Housing loans to eligible veterans by various banking institutions that are insured by the Veteran's Administration, enabling veterans to buy a residence with little or no down payment.
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