Glossary of Mortgage Terms

Adjustable Rate Mortgage (ARM):
A mortgage in which the interest rate is adjusted periodically according to a preselected index.

Annual Percentage Rate (APR): A term used in the Truth-in-Lending Act to represent the percentage relationship of the total finance charge to the amount of the loan. The APR reflects the cost of your mortgage loan as a yearly rate. It will be higher than the interest rate stated on the note because it includes, in addition to the interest rate, loan discount points, fees and mortgage insurance.

Application: A printed form used by a mortgage lender to record necessary information concerning a prospective mortgage.

Application Fee: A sum of money paid towards estimated initial mortgage processing expenses such as appraisal and credit report.

Appraisal: A report made by a qualified person setting forth an opinion or estimate of property value. The term also refers to the process by which this estimate is obtained.

Buydown: A payment to the lender from the seller, buyer or third party, causing the lender to reduce the interest rate.

Cash to Close: Liquid assets that are readily available to be used to pay the closing costs involved in a closing of a mortgage transaction.

Closing: The consummation of a real estate transaction. The closing includes the delivery of a deed, financial adjustments, the signing of notes, and the disbursement of funds necessary to complete the sale and loan transaction.

Closing Costs: Money paid by the borrower in connection with the closing of a mortgage loan. This generally involves an origination fee, discount points, appraisal, credit report, title insurance, attorney's fees, survey, and pre-paid items such as tax and insurance escrow payments.

Closing Statement: A form used at closing that gives an account of the funds received and paid at the closing, including the escrow deposits for taxes, hazard insurance, and mortgage insurance.

Commitment Letter: A lender's written offer to grant a mortgage loan outlining the terms, the amount of the loan, the interest rate and any other conditions. It can also serve as a communication of the lender's decision to the borrower's application.

Conforming: A mortgage loan that conforms to regulatory limits such as loan-to-value ratio, term and other characteristics.

Conforming Loan: Conventional home mortgages eligible for sale and delivery to either the Federal National Mortgage Association (FNMA) or the Federal Home Loan Mortgage Corporation (FHLMC). These agencies generally purchase traditional fixed rate level payment first mortgages up to loan amounts mandated by Congressional directive.

Conventional Mortgage: A mortgage not obtained under a government insured program (such as FHA or VA).

Credit Report: A report detailing an individual's credit history.

Deed of Trust: An instrument used in many states in place of a mortgage. Property is transferred to a trustee by the borrower (trustor), in favor of the lender (beneficiary) and reconveyed upon payment in full.

Discount Point: Amount payable to the lending institution by the borrower or seller to increase the lender's effective yield. One point is equal to one percent of the loan amount.

Earnest Money: A portion of the downpayment delivered to the seller or an escrow agency by the purchaser of real estate with a purchase offer as evidence of good faith.

Escrow: A procedure whereby a disinterested third party handles legal documents and funds on behalf of a seller and buyer.

First Mortgage: A real estate loan that has priority over any subsequently recorded mortgages.

Fixed Interest Rate: An interest rate which does not change during the loan term.

Gift Letter: A written explanation signed by the individual giving the gift stating, "This is a bona fide gift and there is no obligation expressed or implied to repay this sum at any time."

Gross Monthly Income: Total monthly income earned before deductions.

Hazard Insurance: A contract whereby an insurer, for a premium, undertakes to compensate the insured for loss on a specific property due to certain hazards.

Insured Loans: A loan insured by FHA or a private mortgage insurance company.

Interest Rate: The percentage of an amount of money which is paid for its use for a specified time.

Investment Property: Real estate owned with the intent of supplementing income and not intended for owner occupancy.

Loan-To-Value Ratio: The ratio between the amount of a given mortgage loan and the lower of sales price or appraised value.

Market Value: The highest price which a ready, willing and able buyer would pay and a willing seller will accept, both being fully informed under no pressure to act. The market value may be different from the price a property can actually be sold for at a given time (market price).

Monthly Payment: Usually, the amount of PITI (principal, interest, taxes, and insurance) paid each month on a mortgage loan.

Mortgage Insurance Premium (MIP): The consideration paid by a mortgagor (borrower) for mortgage insurance - either to the FHA or to a private mortgage insurer.

Mortgage Note: A written promise to pay a sum of money at a stated interest rate during a specified term. The note contains a complete description of the conditions under which the loan is to be repaid and when it is due.

Non-Conforming: A mortgage loan that does not conform to regulatory limits such as loan-to-value ratio, term and other characteristics.

Non-Conforming Loan: Conventional home mortgages not eligible for sale and delivery to either FNMA or FHLMC because of various reasons, including loan amount, loan characteristics or underwriting guidelines.

Occupancy: The use of a property as a full-time residence, either by the title holder (owner-occupancy) or by another party through a formal agreement (rental).

Origination Fee: The amount charged for services performed by the company handling the initial application and processing of the loan.

PITI (Principal, Interest, Taxes, and Insurance): The most common components of a monthly mortgage payment.

Preliminary Title Report: The results of a title search by a title company prior to issuing a title binder or commitment to insure clear title.

Principal Balance: The remaining balance due on a debt.

Private Mortgage Insurance: Insurance written by a private company protecting the mortgage lender against loss resulting from a mortgage default.

Processing: The preparation of a mortgage loan application and supporting documentation for consideration by a lender or insurer.

Purchase Contract (Agreement/Offer): An agreement between a buyer and seller of real property, setting forth the price and terms of the sale. Also known as a sales contract.

Rate Lock Option: An agreement guaranteeing the home buyer a specified interest rate provided the loan is closed within a set period of time.

Real Estate Settlement Procedures Act (RESPA): A Federal law requiring lenders to provide home mortgage borrowers with information on known or estimated settlement costs. It also establishes guidelines for escrow account balances and the disclosure of settlement costs.

Refinancing: The repayment of a debt from the proceeds of a new loan using the same property as security.

Survey: The measurement and description of land by a registered surveyor.

Term: The time limit within which a loan must be repaid.

Title: The legal evidence of ownership rights to real property.

Title Insurance Policy: A contract in which an insurer, usually a title insurance company, agrees to pay the insured party a specific amount for any loss caused by defects of title on real estate in which the insured has an interest as purchaser, mortgagee, or otherwise.

Title Search: An examination of public records to disclose the past and current facts regarding the ownership of a given piece of real estate.

Underwriting: Analysis of risk and setting of an appropriate rate and term for a mortgage on a given property for given borrowers.

Zero Point Option: An option which allows the borrower to not pay the points associated with the loan origination fee. This savings is offset by a slightly higher loan interest rate.

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