A consumer with the best credit rating, deserving of the lowest prices that lenders offer. Most lenders require a FICO score above 720 (see Credit Issues). There is seldom any payoff for being above the A-credit threshold (see Does the Mortgage Market Reward Virtue?), but you pay a penalty for being below it.
A contractual provision that gives the lender the right to demand repayment of the entire loan balance in the event that the borrower violates one or more clauses in the note. See Should I Lie About My Income?
Interest that is earned but not paid, adding to the amount owed. Same as Negative amortization.
Adjustable rate mortgage (ARM)
A mortgage on which the interest rate, after an initial period, can be changed by the lender. While ARMs in many countries abroad allow rate changes at the lender's discretion ("discretionary ARMs"), in the US most ARMs base rate changes on a pre-selected interest rate index over which the lender has no control. These are "indexed ARMs". There is no discretion associated with rate changes on indexed ARMs. For articles on ARMs, click on Adjustable Rate Mortgages.
On an ARM, the time between changes in the interest rate or monthly payment. The rate adjustment interval is often displayed in x/y format, where "x" is the period until the first adjustment, and "y" is the adjustment period thereafter. For example, a 5/1 ARM is one on which the initial rate holds for 5 years, after which it is adjusted every year. The rate adjustment interval and the payment adjustment interval are the same on a fully amortizing ARM, but may not be on a negative amortization ARM. See Should You Fear Negative Amortization?
A consumer's capacity to afford a house. Affordability is usually expressed in terms of the maximum price the consumer could pay for a house, and be approved for the mortgage required to pay that amount. Read How Much House Can You Afford? , How Much House Should You Buy? and Mortgage Affordability: Should Government Require It?
The legal requirement that one party in a relationship has a fiduciary obligation to the other. See Mortgage Brokers: Agents or Independent Contractors? And Should Mortgage Brokers Be Required To Be Agents?
Agreement of sale
A contract signed by buyer and seller stating the terms and conditions under which a property will be sold.
A mortgage risk categorization that falls between prime and sub-prime, but is closer to prime. Also referred to as "A minus".
Expedited and simpler documentation requirements designed to speed up the loan approval process. Instead of verifying employment with the applicant's employer and bank deposits with the applicant's bank, the lender will accept paycheck stubs, W-2s, and the borrower's original bank statements. Alternative documentation remains “full documentation”, as opposed to the other documentation options. See What Are Mortgtage Documentation Requirements?
The repayment of principal from scheduled mortgage payments that exceed the interest due. The scheduled payment less the interest equals amortization. The loan balance declines by the amount of the scheduled payment, plus the amount of any extra payment. For a detailed explanation, see Mortgage Amortization: How Does It Work? If the payment is less than the interest due, the balance rises, which is negative amortization.
A table showing the mortgage payment, broken down by interest and amortization, the loan balance, tax and insurance payments if made by the lender, and the balance of the tax/insurance escrow account.
On the Truth in Lending form, the loan amount less "prepaid finance charges", which are lender fees paid at closing. For example, if the loan is for $100,000 and the borrower pays the lender $4,000 in fees, the amount financed is $96,000. A useless number. See Another Truth in Lending Lie.
Annual percentage rate
A request for a loan that includes the information about the potential borrower, the property and the requested loan that the solicited lender needs to make a decision. In a narrower sense, the application refers to a standardized application form called the "1003" which the borrower is obliged to fill out.
A fee that some lenders charge to accept an application. It may or may not cover other costs such as a property appraisal or credit report, and it may or may not be refundable if the lender declines the loan.
A written estimate of a property's current market value prepared by an appraiser.
A professional with knowledge of real estate markets and skilled in the practice of appraisal. When a property is appraised in connection with a loan, the appraiser is selected by the lender, but the appraisal fee is usually paid by the borrower.
A fee charged by an appraiser for the appraisal of a particular property.
The Annual Percentage Rate, which must be reported by lenders under Truth in Lending regulations. It is a measure of credit cost to the borrower that takes account of the interest rate, points, and flat dollar charges by the lender. The charges covered by the APR also include mortgage insurance premiums, but not other payments to third parties, such as payments to title insurers or appraisers. The APR is adjusted for the time value of money, so that dollars paid by the borrower up-front carry a heavier weight than dollars paid in the future. However, the APR is calculated on the assumption that the loan runs to term, and is therefore potentially deceptive for borrowers with short time horizons. Read Does the Annual Percentage Rate (APR) Help? Other articles about the APR are cited under Mandatory Mortgage Disclosure. For a summary of the differences between the APR and interest cost, see Annual Percentage Rate Versus Interest Cost.
Acceptance of the borrower's loan application. Approval means that the borrower meets the lender's qualification requirements and also its underwriting requirements. In some cases, especially where approval is provided quickly as with automated underwriting systems, the approval may be conditional on further verification of information provided by the borrower. See Mortgage Concepts Home Buyers Should Know.
An adjustable rate mortgage.
A method of selling real estate where the buyer of the property agrees to become responsible for the repayment of an existing loan on the property. Unless the lender also agrees, however, the seller remains liable for the mortgage.
A mortgage contract that allows, or does not prohibit, a creditworthy buyer from assuming the mortgage contract of the seller. Assuming a loan will save the buyer money if the rate on the existing loan is below the current market rate, and closing costs are avoided as well. A loan with a "due-on-sale" clause stipulating that the mortgage must be repaid upon sale of the property, is not assumable. See Are Mortgage Assumptions a Good Deal?
See Lead-Generation site.
Someone authorized by the original credit card holder to use the holder’s card. The card-holder is responsible for the charges of the authorized user, but the authorized user is not responsible for paying any charges, including his own. But sometimes authorized users are dunned for the unpaid bills of the card holder. See Are Authorized Users At Risk?
A computer-driven process for informing the loan applicant very quickly, sometimes within a few minutes, whether the applicant will be approved, or whether the application will be forwarded to an underwriter. The quick decision is based on information provided by the applicant, which is subject to later verification, and other information retrieved electronically including information about the borrower's credit history and the subject property.
Automated underwriting system
A particular computerized system for doing automated underwriting. Mortgage insurers and some large lenders have developed such systems, but the most widely used are Fannie Mae’s “Desktop Underwriter” and Freddie Mac’s “Loan Prospector”.
Back-end fee or commission
Mortgage broker income paid by the lender, same as yield-spread premium and Negative points.
The practice of low-balling figures for settlement costs on the Good Faith Estimate to make them appear more attractive to mortgage shoppers. See A Bad Faith Estimate: Any Recourse?
Government support to a firm in trouble, which may be limited to protecting creditors but sometimes to owners as well. See What Is a Bail-Out"?
The amount of the original loan remaining to be paid. It is equal to the loan amount less the sum of all prior payments of principal. See Mortgage Amortization: How Does it Work?
A mortgage which is payable in full after a period that is shorter than the term. In most cases, the balance is refinanced with the current or another lender. On a 7-year balloon loan, for example, the payment is usually calculated over a 30-year period, and the balance at the end of the 7th year must be repaid or refinanced at that time. Balloon mortgages are similar to ARMs in that the borrower trades off a lower rate in the early years against the risk of a higher rate later. They are riskier than ARMs because there is no limit on the extent of a rate increase at the end of the balloon period. See Balloon Mortgages.
The loan balance remaining at the time the loan contract calls for full repayment.
A mortgage on which the borrower pays half the monthly payment on the first day of the month, and the other half on the 15th. See Alternative Early Payoff Plans.
A mortgage on which the borrower pays half the monthly payment every two weeks. Because this results in 26 (rather than 24) payments per year, the biweekly mortgage amortizes before term. See Biweekly Mortgages.
A borrowers have one or more of the following risk factors: they can only make a very small or no down payment; they cannot fully document their income and assets; their property is something other than a single-family home; their loan is intended to raise cash or to purchase an investment property; they have low credit scores; their income is low relative to their expected total obligations; and their mortgage carries an adjustable rate that will result in substantially higher payments in a few years. See HR 3915 Would Stick it to Blemished Borrowers.
A short-term loan, usually from a bank, that "bridges" the period between the closing date of a home purchase and the closing date of a home sale. Unsecured bridge loans are available if the borrower has a firm contract to sell the existing house. Secured bridge loans are available without such a contract. Read Buying a New House Before Selling the Old One.
Having the builder finance the construction. Read Should the Builder Finance Construction?
A permanent buy-down is the payment of points in exchange for a lower interest rate. See Points. A temporary buy-down concentrates the rate reduction in the early years. See Temporary Buy-Down.
Paying a higher interest rate in exchange for a rebate by the lender which reduces upfront costs. See Negative Points.
Same as Float-down.
Cash Flow Option Loan
Same as Flexible Payment ARM.
Refinancing for an amount in excess of the balance on the old loan plus settlement costs. The borrower takes "cash-out" of the transaction. This way of raising cash is usually an alternative to taking out a home equity loan. For a discussion of the relative merits of the two approaches, read Debt Consolidation With a Cash-Out Refinance.
On a home purchase, the process of transferring ownership from the seller to the buyer, the disbursement of funds from the buyer and the lender to the seller, and the execution of all the documents associated with the sale and the loan. On a refinance, there is no transfer of ownership, but the closing includes repayment of the old lender.
Same as Settlement costs.
The date on which the closing occurs. See Mortgage Closing Date: Does it Matter?
A technique for repaying a loan early that involves using the mortgage as a substitute for a checking account. See The CMG Plan: Your Mortgage as a Checking Account.
One or more persons who have signed the note, and are equally responsible for repaying the loan. Unmarried co-borrowers who live together are advised to agree beforehand on what happens if they split. See On Buying a House With a Domestic Partner.
Cost of funds index. One of many interest rate indexes used to determine interest rate adjustments on an adjustable rate mortgage. See What Is a Coffee Loan? and Which Adjustable Rate Mortgage Index Is the Best?
A loan eligible for purchase by the two major Federal agencies that buy mortgages, Fannie Mae and Freddie Mac. See What Do Fannie Mae and Freddie Mac Do?
The method of financing used when a borrower contracts to have a house built, as opposed to purchasing a completed house. See Pitfalls in Financing Home Construction .
Inserting provisions into a loan contract that severely disadvantage the borrower, without the borrower’s knowledge, and sometimes despite oral assurances to the contrary. Prepayment penalties are perhaps the most frequently cited subject of such abuse. Read What Is Predatory Lending?
A home mortgage that is neither FHA-insured nor VA-guaranteed.
The option to convert an ARM to an FRM at some point during its life. These loans are likely to carry a higher rate or points than ARMs that do not have the option. See Conversion Option on an Adjustable Rate Mortgage?
A lender who delivers loans to a (usually larger) wholesale lender against prior price commitments the wholesaler has made to the correspondent. The commitment protects the correspondent against pipeline risk. See What Is a Correspondent Lender?
Cost of savings index. One of many interest rate indexes used to determine interest rate adjustments on an adjustable rate mortgage. See Which Adjustable Rate Mortgage Index Is the Best?
Co-signing a note
Assuming responsibility for someone else's loan in the event that that party defaults. A risk not to be taken lightly. See The Hazards of Co-signing, and Co-Signing a Mortgaage: How Much Help?
A report from a credit bureau containing detailed information bearing on credit-worthiness, including the individual's credit history. See What Is a Credit Report? and Credit Reports and Credit Scores.
A single numerical score, based on an individual's credit history, that measures that individual's credit worthiness. Credit scores are as good as the algorithm used to derive them. The most widely used credit score is called FICO for Fair Issac Co. which developed it. Many of the columns in Mortgage Credit Issues discuss factors that affect the FICO score, including Raise Credit Score by Paying Delinquencies? and Do Credit Inquiries Hurt Your Credit Credit?
The sum of all interest payments to date or over the life of the loan. This is an incomplete measure of the cost of credit to the borrower because it does not include up-front cash payments, and it is not adjusted for the time value of money. See Interest cost.
Current index value
The most recently published value of the index used to adjust the interest rate on an indexed ARM.
A borrower who doesn't pay. See When Good Credit Marries Bad Credit. And Can a Deadbeat Pay Cash?
A borrower who cannot handle debt except by complete abstinence. See Are Credit Problems Cured by the Passage of Time?
Rolling short-term debt into a home mortgage loan, either at the time of home purchase or later. For columns on the subject, see Debt Consolidation.
Scams designed to relieve you of your money by promising to eliminate your mortgage debt. See Debt Elimination - Dupes Apply Here.
Deed in lieu of foreclosure
Deeding the property over to the lender as an alternative to having the lender foreclose on the property. See Options When Equity in Your Home is Gone and Mortgage Payment Problems: What If You Can't Pay?
Failure of the borrower to honor the terms of the loan agreement. Lenders (and the law) usually view borrowers delinquent 90 days or more as in default.
Same as negative amortization.
A mortgage payment that is more than 30 days late. For articles on payment problems, see Payment Problems. Don't confuse with Late payment.
A clause in the note that allows the lender to demand repayment at any time for any reason. See What Is a Demand Clause?
Same as lender.
The tendency of lenders to ignore potential shocks that can cause them major losses if a long period has elapsed since a shock has occurred. See Upheaval in the Sub-Prime Mortgage Market.
Discount mortgage broker
A mortgage broker who claims to be compensated entirely by the lender rather than by the borrower. See Are Discount Mortgage Brokers Upfront?
Same as points.
An adjustable rate mortgage on which the lender has the right to change the interest rate at any time subject only to advance notice. Discretionary ARMs are found abroad, not in the US. See Can You Have Peace of Mind With an ARM?
The set of lender requirements that specify how information about a loan applicant's income and assets must be provided, and how it will be used by the lender. See What Are Mortgage Documentation Requirements?
The difference between the value of the property and the loan amount, expressed in dollars, or as a percentage of the price. For example, if the house sells for $100,000 and the loan is for $80,000, the down payment is $20,000 or 20%. To read articles about the down payment, see Down Payment.
A borrower who submits applications through two loan providers, usually mortgage brokers. See Is It OK to Submit Two Mortgage Loan Applications?
Dual index mortgage
A mortgage on which the interest rate is adjustable based on an interest rate index, and the monthly payment adjusts based on a wage and salary index. See Dual Index Mortgages.
A provision of a loan contract that stipulates that if the property is sold the loan balance must be repaid. This bars the seller from transferring responsibility for an existing loan to the buyer when the interest rate on the old loan is below the current market. A mortgage containing a due-on-sale clause is not an assumable mortgage.
A term used in two ways. In one context it refers to a measure of interest cost to the borrower that is identical to the APR except that it is calculated over the time horizon specified by the borrower. The APR is calculated on the assumption that the loan runs to term, which most loans do not. (See
Does the Annual Percentage Rate (APR) Help?). In most texts on the mathematics of finance, however, the "effective rate" is the quoted rate adjusted for intra-year compounding. For example, a quoted 6% mortgage rate is actually a rate of .5% per month, and if interest received in the early months is invested for the balance of the year at .5%, it results in a return of 6.17% over the year. The 6.17% is called the "effective rate" and 6% is the "nominal" rate.
In connection with a home, the difference between the value of the home and the balance of outstanding mortgage loans on the home.
A type of predatory lending where the lender intends for the borrower to default so the lender can grab the borrower's equity. Read What Is Predatory Lending?
An agreement that money or other objects of value be placed with a third party for safe keeping, pending the performance of some promised act by one of the parties to the agreement. It is common for home mortgage transactions to include an escrow agreement where the borrower adds a specified amount for taxes and hazard insurance to the regular monthly mortgage payment. The money goes into an escrow account out of which the lender pays the taxes and insurance when they come due. For articles on this subject, see Escrows.
The practice of using escrow accounts inappropriately to generate more income from hapless borrowers. See Escrow Abuse and Manufactured Foreclosures.
Loan applications that are withdrawn by borrowers, sometimes because they have found a better deal. See Why Is Locking Unique to Mortgages?
One of two Federal agencies that purchase home loans from lenders. (The other is Freddie Mac). Both agencies finance their purchases primarily by packaging mortgages into pools, then issuing securities against the pools. The securities are guaranteed by the agencies. They also raise funds by selling notes and other liabilities. See What Do Fannie Mae and Freddie Mac Do?
The sum of all upfront cash payments required by the lender as part of the charge for the loan. Origination fees and points are expressed as a percent of the loan. Junk fees are expressed in dollars.
A mortgage on which the lender is insured against loss by the Federal Housing Administration, with the borrower paying the mortgage insurance premium. The major advantage of an FHA mortgage is that the required down payment is very low, but the maximum loan amount is also low. For articles on FHA, see FHA Mortgages.
See Credit Score.
The prices paid by the borrower, as opposed to posted prices. The distinction is discussed in Why Do Minorities Pay More For Mortgages?
Financial Services Authority (FSA)
In the UK, a series of sweeping changes beginning in 1997 placed most financial regulation under a new Financial Services Authority (FSA). FSA is an independent non-governmental body but it is answerable to the Treasury and ultimately to the Parliament. In 2004, the FSA took over regulation of the mortgage sector, including mortgage brokers.
Including points in the loan amount. Read Can Mortgage Points Be Financed?
A mortgage that has a first-priority claim against the property in the event the borrower defaults on the loan. For example, a borrower defaults on a loan secured by a property worth $100,000 net of sale costs. The property has a first mortgage with a balance of $90,000 and a second mortgage with a balance of $15,000. The first mortgage lender can collect $90,000 plus any unpaid interest and foreclosure costs. The second mortgage lender can collect only what is left of the $100,000.
Fixed rate mortgage (FRM)
A mortgage on which the interest rate and monthly mortgage payment remain unchanged throughout the term of the mortgage. See Fixed Rate Mortgages.
An Upfront Mortgage Lender who discloses his wholesale price and markup. See A New Approach to Selecting a Loan Provider.
Flexible payment ARM.
Same as Option ARM.
Allowing the rate and points to vary with changes in market conditions. The borrower may elect to lock the rate and points at any time but must do so a few days before the closing. Allowing the rate to float exposes the borrower to market risk, and also to the risk of being taken advantage of by the loan provider. See Is it Wise to Float?
A rate lock, plus an option to reduce the rate if market interest rates decline during the lock period. Also called a cap. A float-down costs the borrower more than a lock because it is more costly to the lender. Float-downs vary widely in terms of how often the borrower can exercise (usually only once), and exactly when the borrower can exercise. See What Is a Float-Down? Do not confuse with interest rate increase caps and payment increase caps.
The legal process by which a lender acquires possession of the property securing a mortgage loan when the borrower defaults. See Can a Mortgage Lender Profit From Foreclosure?
An agreement by the lender not to exercise the legal right to foreclose in exchange for an agreement by the borrower to a payment plan that will cure the borrower’s delinquency. See Mortgage Payment Problems: What If You Can't Pay?
One of two Federal agencies that purchase home loans from lenders. The other is Fannie Mae.
Mortgage broker income paid by the borrower, as distinguished from the fee paid by the lender, which is "back-end".
Fully amortizing payment
The monthly mortgage payment which, if maintained unchanged through the remaining life of the loan at the then-existing interest rate, will pay off the loan over the remaining life. See Mortgage Amortization: How Does It Work? On FRMs the payment is always fully amortizing, provided the borrower has made no prepayments. (If the borrower makes prepayments, the monthly payment is more than fully amortizing). On GPMs, the payment in the early years is always less than fully amortizing. On ARMs, the payment may or may not be fully amortizing, depending on the type of ARM. See How Does Negative Amortization on a Mortgage Work?
Fully indexed interest rate
The current index value plus the margin on an ARM. Usually, initial interest rates on ARMs are below the fully indexed rate. If the index does not change from its initial level, after the initial rate period ends the interest rate will rise to the fully indexed rate after a period determined by the interest rate increase cap. For example, if the initial rate is 4% for 1 year, the fully indexed rate 7%, and the rate adjusts every year subject to a 1% rate increase cap, the 7% rate will be reached at the end of the third year. See What Is an Adjustable Rate Mortgage? and What Is the Real Price of an Adjustable Rate Mortgage?
Prices that assume a more or less standardized set of transaction characteristics that generally command the lowest prices. Generic prices are distinguished from transaction specific prices, which pertain to the characteristics of a specific transaction. See What Mortgage Market Niche Are You In?
Gift of equity
A sale price below market value, where the difference is a gift from the sellers to the buyers. Such gifts are usually between family members. Lenders will usually allow the gift to count as down payment. See Avoiding Taxes on a Gift of Equity.
Good fairy syndrome
A belief that somewhere out there is a good fairy who will solve all our financial (and other) problems. See Mortgage Fraud and Belief in a Good Fairy.
Good faith estimate
The form that lists the settlement charges the borrower must pay at closing, which the lender is obliged to provide the borrower within three business days of receiving the loan application. See Why Do Lenders Itemize Loan Charges? and How to Shop Settlement Costs.
Government National Mortgage Association (GNMA)
A Federal agency that guarantees mortgage securities that are issued against pools of FHA and VA mortgages.
The period after the payment due date during which the borrower can pay without being hit for late fees. Grace periods apply only to mortgages on which interest is calculated monthly. Simple interest mortgages do not have a grace period because interest accrues daily. See What Are Simple Interest Mortgages?
Graduated payment mortgage (GPM)
A mortgage on which the payment rises by a constant percent for a specified number of periods, after which it levels out over the remaining term and amortizes fully. For example, the payment might increase by 7.5% every 12 months for 60 months, after which it is constant for the remaining term at a fully amortizing level. See What is a Graduated Payment Mortgage (GPM)?
The interval at which the payment rises on a GPM.
The percentage increase in the payment on a GPM.
Guaranteed Mortgage Price Agreement
A proposal by HUD in 2002 to allow lenders and others to offer packages of loans and settlement services at a single price. See HUD's Proposals For Reform.
Insurance purchased by the borrower, and required by the lender, to protect the property against loss from fire and other hazards. Also known as "homeowner insurance", it is the second "I" in PITI. See Questions About Home Owners Insurance.
The assumption that the index value to which the rate on an ARM is tied follows the same pattern as in some prior historical period. In meeting their disclosure obligations in connection with ARMs, some lenders show how the mortgage payment would have changed on a mortgage originated some time in the past. That is not very useful. Showing how a mortgage originated now would change if the index followed a historical pattern would be useful, but nobody does it.
Homebuyer protection plan
A plan purporting to protect FHA homebuyers against property defects. See Is FHA Responsible For the Leaky Roof?
Insurance purchased by the borrower, and required by the lender, to protect the property against loss from fire and other hazards. It is the second "I" in PITI. See Questions About Home Owners Insurance.
Home equity line of credit (HELOC)
A mortgage set up as a line of credit against which a borrower can draw up to a maximum amount, as opposed to a loan for a fixed dollar amount. For example, using a standard mortgage you might borrow $150,000, which would be paid out in its entirety at closing. Using a HELOC instead, you receive the lender’s promise to advance you up to $150,000, in an amount and at a time of your choosing. You can draw on the line by writing a check, using a special credit card, or in other ways. See What Is a HELOC and How Do You Shop For a HELOC?
Home Equity Conversion Mortgage (HECM)
A reverse mortgage program administered by FHA. See Reverse Mortgages.
Home equity line
Same as HELOC.
Home equity loan
Same as second mortgage.
A reverse mortgage program administered by Fannie Mae. See Reverse Mortgages.
Home Owners Loan Corporation
A Federal Government agency established by Congress in 1933 to help families avoid having their homes foreclosed. See Home Owners Loan Corporation II - a Fable.
A government-owned or affiliated housing lender. With minor exceptions, government in the US has never loaned directly to consumers, but housing banks are widespread in many developing countries. Read Government as Mortgage Lender.
A marked increase in house prices fueled partly by expectations that prices will continue to rise. See A Look at Housing Bubbles.
The sum of mortgage payment, hazard insurance, property taxes, and homeowner association fees. Same as PITI and "monthly housing expense."
Housing expense ratio
The ratio of housing expense to borrower income, which is used (along with the total expense ratio and other factors) in qualifying borrowers. See Qualifying for a Mortgage.
The amount invested in a house, equal to the sale price less the loan amount. See How Much House Should You Buy?
The form a borrower receives at closing that details all the payments and receipts among the parties in a real estate transaction, including borrower, lender, home seller, mortgage broker and various other service providers.
An ARM on which the initial rate holds for some period, during which it is "fixed-rate", after which it becomes adjustable rate. Generally, the term is applied to ARMs with initial rate periods of 3 years or longer.
Same as Escrow.
An ARM on which the interest rate adjusts mechanically based on changes in an interest rate index, as opposed to a "discretionary ARM" on which the lender can change the rate at any time subject only to advance notice. All ARMs in the US are indexed. See Peace of Mind With an Adjustable Rate Mortgage?
Initial interest rate
The interest rate that is fixed for some specified number of months at the beginning of the life of a an ARM. The initial rate is sometimes referred to as a "teaser" when it is below the fully indexed interest rate. See Information to Evaluate an Adjustable Rate Mortgage.
Initial rate period
The number of months for which the initial rate holds, ranging from 1 month to 10 years. See Information to Evaluate an Adjustable Rate Mortgage.
Interest accrual period
The period over which the interest due the lender is calculated. If the interest accrual period on a 6 % mortgage for $100,000 is a year, as it is on some loans in the UK and India, the interest for the year is .06($100,000) = $6,000. If interest accrues monthly, as it does on most mortgages in the US, the monthly interest is .06/12($100,000) = $500. If interest accrues biweekly, as on a few programs in the US, the biweekly interest is .06/26($100,000) = $230.77. And if interest accrues daily, as HELOCs and some other mortgages in the US do, the daily interest is .06/365($100,000) = $16 .44.
A time-adjusted measure of cost to a mortgage borrower. It is calculated in the same way as the APR except that the APR assumes that the loan runs to term, and is always measured before taxes. The formula is shown in Mortgage Formulas. Interest cost is measured over the individual borrower's time horizon, and it may be measured after taxes at the individual borrower's tax rate. In addition, the cost items included in interest cost may be more or less inclusive than those included in the APR. See Annual Percentage Rate Versus Interest Cost.
The amount of interest, expressed in dollars, computed by multiplying the loan balance at the end of the preceding period times the annual interest rate divided by the interest accrual period. It is the same as interest payment except when the scheduled mortgage payment is less than the interest due, in which case the difference is added to the balance and constitutes negative amortization.
A mortgage on which for some period the monthly mortgage payment consists of interest only. During that period, the loan balance remains unchanged. See Interest Only Mortgages.
The dollar amount of interest paid each month. It is the same as interest due so long as the scheduled mortgage payment is equal to or greater than than the interest due. Otherwise, the interest payment is equal to the scheduled payment.
The rate charged the borrower each period for the loan of money, by custom quoted on an annual basis. A rate of 6%, for example, means a rate of 1/2% per month. A mortgage interest rate is a rate on a loan secured by a specific property. See Mortgage Interest Rates.
Interest rate adjustment period
The frequency of rate adjustments on an ARM after the initial rate period is over. The rate adjustment period is sometimes but not always the same as the initial rate period. As an example, a 3/3 ARM is one in which both periods are 3 years while a 3/1 ARM has an initial rate period of 3 years after which the rate adjusts every year. See Information to Evaluate an Adjustable Rate Mortgage.
Interest rate ceiling
The highest interest rate possible under an ARM contract; same as "lifetime cap." It is often expressed as a specified number of percentage points above the initial interest rate. See Information to Evaluate an Adjustable Rate Mortgage.
Interest rate floor
The lowest interest rate possible under an ARM contract. Floors are less common than ceilings. See Information to Evaluate an Adjustable Rate Mortgage.
Interest rate increase cap
The maximum allowable increase in the interest rate on an ARM each time the rate is adjusted. It is usually 1 or 2 percentage points, but may be 5 points if the initial rate period is 5 years or longer. See Information to Evaluate an Adjustable Rate Mortgage.
Interest rate decrease cap
The maximum allowable decrease in the interest rate on an ARM each time the rate is adjusted. It is usually 1 or 2 percentage points. See Information to Evaluate an Adjustable Rate Mortgage.
Interest rate index
The specific interest rate series to which the interest rate on an ARM is tied, such as "Treasury Constant Maturities, 1-Year," or "Eleventh District Cost of Funds." All the indices are published regularly in readily available sources. For a listing and discussion of various indices, see Adjustable Rate Mortgage Indexes and Which Adjustable Rate Mortgage Index Is the Best?
Interest rate risk premium
The rate premium above the rate on the least risky or "prime" loan. See Why the System is Vulnerable to Crisis.
An ill-advised scheme to avoid a prepayment penalty by refinancing twice instead of once. Read The Interim Mortgage Refinance Scam.
Mortgages delivered using the internet as a major part of the communication process between the borrower and the lender. See Using the Internet.
In real estate, a borrower who owns or purchases a property as an investment rather than as a residence.
A mortgage larger than the maximum eligible for purchase by the two Federal agencies, Fannie Mae and Freddie Mac, $417,000 in 2008 (see Non-conforming mortgage). However, in that year, the agencies were given limited authority to purchase jumbos. See Shopping For a Jumbo Mortgage in a Distressed Market.
A derogatory term for lender fees expressed in dollars rather than as a percent of the loan amount. See What Are Junk Fees on a Mortgage?
Fees that lenders are entitled to collect from borrowers who don't pay within the grace period. Most mortgage notes offer borrowers a 10 or 15-day grace period, with a late charge of about 5% on payments received on the 16th or later. Read Are These Mortgage Late Fees Kosher?
A payment received after the grace period stipulated in the note. Most mortgage grace periods are 10 or 15 days.
A mortgage web site designed to provide leads (potential customers) to lenders. Where a referral site provides information about lenders to consumers, with consumers contacting the lenders, a lead-generation site provides information about the consumers to the lenders, and the lenders contact the consumers. They are sometimes called "auction sites" because lenders post their prices directly to the consumer. See Mortgage Auction (or Lead Generation) Sites .
A transaction in which a hopeful home buyer leases a home with an option to buy it within a specified period. See Lease-to-Own House Purchases.
See Mortgage lender.
The lender’s right to claim the borrower’s property in the event the borrower defaults. If there is more than one lien, the claim of the lender holding the first lien will be satisfied before the claim of the lender holding the second lien, which in turn will be satisfied before the claim of a lender holding a third lien, etc.
The amount the borrower promises to repay, as set forth in the mortgage contract. It differs from the amount of cash disbursed by the lender by the amount of points and other upfront costs included in the loan.
The process of raising cash periodically through successive cash-out refinancings. It is a scam initiated by mortgage brokers that victimizes wholesale lenders, with the connivance of borrowers. See Periodic Mortgage Refinacings: Who Gets Conned?
Loan discount fee
The term used to describe points on the Good Faith Estimate.
See Mortgage modification.
Employees of lenders or mortgage brokers who find borrowers, sell and counsel them, and take applications. See Mortgage Lenders, Mortgage Brokers and Loan Officers.
A lender or a mortgage broker.
The loan amount divided by the lesser of the selling price or the appraised value. Also referred to as LTV. The LTV and down payment are different ways of expressing the same set of facts. See What Is the Down Payment?
An option exercised by the borrower, at the time of the loan application or later, to "lock in" the rates and points prevailing in the market at that time. The lender and borrower are committed to those terms, regardless of what happens between that point and the closing date. See Locking the Price of a Mortgage Loan, and Mortgage Concepts Home Buyers Should Know.
Lock commitment letter
A written statement from a lender verifying that the price and other terms of a loan have been locked. Borrowers who lock through a mortgage broker should always demand to see the lock commitment letter. See Did You Pay For Insurance You Didn't Get?
The inability or unwillingness of a lender to honor a mortgage price that a borrower had believed was guaranteed. See Questions About the Failure of Mortgage Locks.
A borrower, usually refinancing rather than purchasing a home, who allows a lock to expire when interest rates go down in order to lock again at the lower rate. See Is the Borrower Committed by a Mortgage Lock?
The number of days for which any lock or float-down holds. Ordinarily, the longer the period, the higher the price to the borrower.
The array of laws and regulations dictating the information that must be disclosed to mortgage borrowers, and the method and timing of disclosure. See Mandatory Mortgage Disclosure.
A house built entirely in a factory, transported to a site and installed there. They are usually built without knowing where they will be sited, and are subject to a Federal building code administered by HUD. See Manufactured Housing: a Messy Picture.
The amount added to the interest rate index, ranging generally from 2 to 3 percentage points, to obtain the fully indexed interest rate on an ARM. See Information to Evaluate an Adjustable Rate Mortgage.
A particular combination of loan, borrower and property characteristics that lenders use in setting prices and underwriting requirements. These characteristics are believed to affect the default risk or cost of the loan. As examples, borrowers who don't intend to occupy the house they purchase pay more than those who do, and borrowers who refinance only the balance on their existing loan pay less than those who take "cash out". Read What Mortgage Market Niche Are You In?
The period until the last payment is due. This is usually but not always the term, which is the period used to calculate the mortgage payment.
Maximum loan amount
The largest loan size permitted on a particular loan program. For programs where the loan is targeted for sale to Fannie Mae or Freddy Mac, the maximum will be the largest loan eligible for purchase by these agencies. On FHA loans, the maximums are set by the Federal Housing Administration, and vary somewhat by geographical area. On other loans, maximums are set by lenders.
Maximum loan to value ratio
The maximum allowable loan-to-value ratio on the selected loan program.
The longest period for which the lender will lock the rate and points on any program. The most common maximum lock period is 60 days, but on some programs the maximum is 90 days; only a few go beyond 90 days. See Why Is Locking Unique to Mortgages?
Minimum down payment
The minimum allowable ratio of down payment to sale price on any program. If the minimum is 10%, for example, it means that you must make a down payment of at least $10,000 on a $100,000 house, or $20,000 on a $200,000 house. For articles on down payment, see Down Payment.
Monthly housing expense
Same as Housing expense.
Monthly debt service
Monthly payments required on credit cards, installment loans, home equity loans, and other debts but not including payments on the loan applied for.
Monthly total expenses
Same as Total housing expense.
A written document evidencing the lien on a property taken by a lender as security for the repayment of a loan. The term “mortgage” or “mortgage loan” is used loosely to refer both to the lien and the loan. In most cases, they are defined in two separate documents: a mortgage and a note.
Mortgage auction site
See Lead generation site.
Same as mortgage company.
An independent contractor who offers the loan products of multiple lenders, termed wholesalers. A mortgage broker counsels on the loans available from different wholesalers, takes the application, and usually processes the loan. When the file is complete, but sometimes sooner, the lender underwrites the loan. In contrast to a correspondent, a mortgage broker does not fund a loan. For articles on mortgage brokers and how to deal with them, see Mortgage Brokers.
A mortgage lender who sells all loans in the secondary market. As distinguished from a portfolio lender, who retains loans in its portfolio. Mortgage companies may or may not service the loans they originate.
A packet of information about a consumer who a loan provider might be able to convert into a borrower. You become a lead when you fill out a questionnaire about yourself on-line in response to a sexy ad. See Mortgage Leads: Are You One?
Equations used to derive common measures used in the mortgage market, such as monthly payment, balance, and APR. See Mortgage Formulas.
A broker web site with many attractive features, and one not so attractive. See Mortgage Grader: A Better Type of Web Site?
Insurance against loss provided to a mortgage lender in the event of borrower default. In most cases, the borrower pays the premiums. For articles on mortgage insurance, see Mortgage Insurance.
Mortgage insurance disclosure
Read Disclosure Rules About Mortgage Insurance.
Mortgage insurance premium
The up-front and/or periodic charges that the borrower pays for mortgage insurance. There are different mortgage insurance plans with differing combinations of up-front, monthly and annual premiums. The most widely used premium plan is a monthly charge with no upfront premium. For a sample of monthly premiums, see Sample Mortgage Insurance Premiums.
Mortgage insurance cancellation
Canceling a mortgage insurance policy. Read Canceling Private Mortgage Insurance (I), and Canceling Private Mortgage Insurance (II).
The party who disburses funds to the borrower at the closing table. The lender receives the note evidencing the borrower's indebtedness and obligation to repay, and the mortgage which is the lien on the subject property.
A change in the terms of a loan, usually the interest rate and/or term, in response to the borrower's inability to make the payments under the existing contract. See See What If You Can't Pay? and Mortgage Loan Modifications.
The monthly payment of interest and principal made by the borrower. The formula used to calculate it is shown in Mortgage Formulas.
The interest rate, points and fees paid to the lender and/or mortgage broker. On ARMs, the price also includes the fully indexed rate and the maximum rate. Read What Is the "Price" of a Mortgage?
A bundle of mortgage characteristics that lenders see fit to distinguish as a distinct instrument. These include whether it is an FRM, ARM, or Balloon; the term; the initial rate period on an ARM; whether it is FHA-insured or VA-guaranteed; and if is not FHA or VA, whether it is "conforming" (eligible for purchase by Fannie Mae or Freddie Mac) or "non-conforming".
Advice on where to go to get a mortgage. See Mortgage Referrals: Who Can You Trust?
Deceptive and exploitative schemes by lenders, brokers, home sellers and sometimes even borrowers. See Mortgage Scams.
Trying to find the best deal on a mortgage. See How to Shop For a Mortgage.
Offers for great mortgage deals that appear unbidden in your email. See What Should I Do With Mortgage Spam?
The doctrine that mortgage lenders should be held liable for providing loans that are not suitable for the borrower. See Mortgage Suitability.
A rise in the loan balance when the mortgage payment is less than the interest due. Sometimes called "deferred interest." It is explained in detail in How Does Negative Amortization on a Mortgage Work? Negative amortization arises most frequently on ARMs. See Should You Fear Negative Amortization and Is a 3.95% Adjustable Rate Mortgage a Good Deal?
Negative amortization cap
The maximum amount of negative amortization permitted on an ARM, usually expressed as a percentage of the original loan amount (e.g., 110%). Reaching the cap triggers an automatic increase in the payment, usually to the fully amortizing payment level, overriding any payment increase cap.
Negative Homeowners Equity
The condition of owing more on the house than the house is worth. See The Curse of Negative Equity: Is There an Escape?
Points paid by a lender for a loan with a rate above the rate on a zero point loan. For example, a wholesaler quotes the following prices to a mortgage broker. 8%/0 points, 7.5%/3 points, 8.75%/-3 points. On mortgage web sites, negative points are usually referred to as "rebates" because they are used to reduce a borrower's settlement costs. When negative points are retained by a mortgage broker, they are called a "yield spread premium". Read Can Mortgage Points Be Negative? and Ignore Lender Payments to My Broker? On policy issues connected to negative points, see HUD and Yield Spread Premiums, and A Better Approach to YSPs?
A facility offered by some lenders to mortgage brokers where de jure the brokers become employees of the lender but de facto they retain their independence as brokers. One of the advantages of this arrangement to brokers is that they need not disclose yield spread premiums received from lenders. See Must Mortgage Brokers Reveal All Their Charges?
Using a broker's time and expertise to become informed and creditworthy, then jumping to the internet to get the loan. See How About Borrowers' Tricks?
See Market niche.
Proliferation in the number of loan, borrower and property characteristics used by lenders to set mortgage prices and underwriting requirements. Read What Mortgage Market Niche Are You In?
No change scenario
On an ARM, the assumption that the value of the index to which the rate is tied does not change from its initial level.
A mortgage on which all settlement costs except per diem interest, escrows, homeowners insurance and transfer taxes are paid by the lender and/or the home seller. See Does "No-Cost" Mortgage Refinance Make Sense? and No-Cost Mortgages.
A mortgage that does not meet the purchase requirements of the two Federal agencies, Fannie Mae and Freddie Mac, because it is too large or for other reasons such as poor credit or inadequate documentation.
Non-Permanent resident alien
A non-citizen without a green card who is employed in the US. As distinct from a permanent resident alien, who has a green card and who lenders do not distinguish from US citizens. Non-permanent resident aliens are subject to somewhat more restrictive qualification requirements than US citizens.
No asset loan
A documentation requirement where the applicant's assets are not disclosed. See What Are Mortgage Documentation Requirements?
No Fee Mortgage Plus
A Bank of America program for home purchasers that eliminates all lender fees except points, and all third party fees. See No Fee Mortgage Plus.
No income loan
A documentation requirement where the applicant's income is not disclosed. See What Are Mortgage Documentation Requirements?
A condominium that does not meet meet lender requirements, see Warrantable condos.
No-Surprise adjustable rate mortgage
An ARM with a preset graduated payment combined with variable term. See The No-Surprise Adjustable Rate Mortgage.
Nominal interest rate
A quoted interest rate that is not adjusted for either intra-year compounding, or for inflation. A quoted rate of 6% on a mortgage, for example, is nominal. Adjusted rates are called "effective" see Effective rate.
No ratio loan
A documentation requirement where the applicant's income is disclosed and verified but not used in qualifying the borrower. The conventional maximum ratios of expense to income are not applied. See What Are Mortgage Documentation Requirements?
A document that evidences a debt and a promise to repay. A mortgage loan transaction always includes both a note evidencing the debt, and a mortgage evidencing the lien on the property, usually in two documents.
An adjustable rate mortgage with flexible payment options, monthly interest rate adjustments, and very low minimum payments in the early years. They carry a risk of very large payments in later years. See Option (Flexible Payment) ARMs.
An upfront fee paid by the buyer under a lease-to-own purchase, usually 1% to 5% of the price, which is credited to the purchase price when the option is exercised but is lost if it is not. See Lease-to-Own House Purchases.
An upfront fee charged by some lenders, usually expressed as a percent of the loan amount. It should be added to points in determining the total fees charged by the lender that are expressed as a percent of the loan amount. Unlike points, however, an origination fee does not vary with the interest rate.
The difference between the price posted to its loan officers by a lender or mortgage broker, and the price charged the borrower. See What Is a Mortgage Overage?
The mortgage interest rate at zero points. In the secondary market, it is the security rate that trades at a price of 100.
Making a payment larger than the scheduled payment as a way of paying off the loan earlier. See Prepayment.
Belief that there is a special way to pay down the balance of a home mortgage faster, if you know the secret. See Are Some Mortgage Prepayment Methods Better? and Save With a Large Payment at Closing?
Payment adjustment interval
The period between payment changes on an ARM, which may or may not be the same as the interest rate adjustment period. Loans on which the payment adjusts less frequently than the rate may generate negative amortization.
Payment increase cap
The maximum percentage increase in the payment on an ARM at a payment adjustment date. A 7.5% cap is common.
Payment decrease cap
The maximum percentage decrease in the payment on an ARM at a payment adjustment date.
The period over which the borrower is obliged to make payments. On most mortgages, the payment period is a month, but on some it is biweekly.
A program begun by Fannie Mae in 2003-4 that allows a borrower to skip up to 2 mortgage payments in any 12 month period, and up to 10 over the life of a loan. See Mortgage Payment Flexibility Under "Payment Power" and How Would a Truly Flexible Mortgage Work?
The interest rate used to calculate the mortgage payment, which is usually but not necessarily the interest rate.
A very large increase in the payment on an ARM that may surprise the borrower. Also used to refer to a large difference between the rent being paid by a first-time home buyer, and the monthly housing expense on the purchased home.
The month in which the loan balance is paid down to zero. It may or may not be the term.
Per diem interest
Interest from the day of closing to the first day of the following month. In some cases, however, the borrower can get a credit at closing by making the first payment a month earlier. See Mortgage Closing Date: Does It Matter?
An ill-advised scheme to tap into equity for cash advances through periodic refinancings. See Periodic Mortgage Refinancing: Who Gets Conned?
Paying points as a way of reducing the interest rate.
Pick a Payment ARM
Same as Flexible Payment ARM.
A combination of a first mortgage for 80% of property value, and a second for 5%, 10%, 15%, or 20% of value. These combinations are designated as 80/5/15, 80/10/10, 80/15/5, and 80/20/0, respectively. Piggybacks are a substitute for mortgage insurance for borrowers who cannot put 20% down. See Piggyback Loans: Two Mortgages Cost Less than One?
The lender's risk that between the time a lock commitment is given to the borrower and the time the loan is closed, interest rates will rise and the lender will take a loss on selling the loan. See Why Is Locking Unique to Mortgages?
Shorthand for principal, interest, taxes and insurance, which are the components of the monthly housing expense.
Private mortgage insurance, as distinguished from insurance provided by government under FHA and VA. See Mortgage insurance.
An upfront cash payment required by the lender as part of the charge for the loan, expressed as a percent of the loan amount; e.g., "3 points" means a charge equal to 3% of the loan balance. It is common today for lenders to offer a wide range of rate/point combinations, especially on fixed rate mortgages (FRMs), including combinations with negative points. On a negative point loan the lender contributes cash toward meeting closing costs. Positive and negative points are sometimes termed "discounts" and "premiums," respectively. See Mortgage Points and Rebates.
A mortgage that can be moved from one property to another. These were introduced in the US by E*TRADE Mortgage in 2003. See Portable Mortgages: A Useful Option?
A lender that holds the loans it originates in its portfolio rather than selling them, as a temporary lender does.
The mortgage prices delivered by lenders to loan officers and mortgage brokers, as opposed to the final prices paid by borrowers. The distinction is discussed in Why Do Minorities Pay More For Mortgages?
A commitment by a lender to make a mortgage loan to a specified borrower, prior to the identification of a specific property. It is designed to make it easier to shop for a house. Unlike a pre-qualification, the lender checks the applicant's credit. See Mortgage Qualification Versus Mortgage Pre-Approval, and Mortgage Pre-Approval: What Is It Good For?
A variety of unsavory lender practices designed to take advantage of unwary borrowers. See the articles on Predatory Mortgage Lending.
A payment made by the borrower over and above the scheduled mortgage payment. If the additional payment pays off the entire balance it is a "prepayment in full"; otherwise, it is a "partial prepayment." For articles on prepayment, see Mortgage Prepayment (Paying Off Early).
A charge imposed by the lender if the borrower pays off the loan early. The charge is usually expressed as a percent of the loan balance at the time of prepayment, or a specified number of months interest. Read Mortgage Prepayment Penalties.
Same as qualification.
Charging interest rates and/or fees that are excessive relative to what the same borrowers could have found had they shopped the market. Read What Is Predatory Lending? and Is This a Good Definition of Predatory Lending?
Pricing Notch Point (PNP)
A loan amount at which any increase will increase the interest rate, points or mortgage insurance premium. See Financing Closing Costs Is Sometimes a Bad Idea.
The house in which the borrower will live most of the time, as distinct from a second home or an investor property that will be rented. See What Is a "Primary" Residence?
The portion of the monthly payment that is used to reduce the loan balance. See Amortization.
The present value of a house, given the elderly owner's right to live there until death or voluntary move-out, under the FHA reverse mortgage program. See Which Reverse Mortgage Plan Do I Choose?
Private mortgage insurance
Mortgage insurance provided by private mortgage insurance companies, or PMIs. See Mortgage Insurance.
Compiling and maintaining the file of information about a mortgage transaction, including the credit report, appraisal, verification of employment and assets, and so on. The processing file is handed off to underwriting for the loan decision.
Successive sham home sales at progressively higher prices as part of a scheme to defraud FHA. See What Is Predatory Lending?
Purchase money mortgage
A mortgage offered by a house buyer as partial payment for the house. From the seller's point of view, it is seller financing.
The process of determining whether a prospective borrower has the ability, meaning sufficient assets and income, to repay a loan. Qualification is sometimes referred to as "pre-qualification" because it is subject to verification of the information provided by the applicant. Qualification is short of approval because it does not take account of the credit history of the borrower. Qualified borrowers may ultimately be turned down because, while they have demonstrated the capacity to repay, a poor credit history suggests that they may be unwilling to pay. For articles on qualification, see Qualifying For a Mortgage. Also see Mortgage Concepts Home Buyers Should Know.
The interest rate used in calculating the initial mortgage payment in qualifying a borrower. The rate used in this calculation may or may not be the initial rate on the mortgage. On ARMs, for example, the borrower may be qualified at the fully indexed rate rather than the initial rate.
Requirements stipulated by the lender that the ratio of housing expense to borrower income, and housing expense plus other debt service to borrower income, cannot exceed specified maximums, e.g., 28% and 35%. These may reflect the maximums specified by Fannie Mae and Freddie Mac; they may also vary with the loan-value ratio and other factors. See Qualifying For a Mortgage.
Standards imposed by lenders as conditions for granting loans, including maximum ratios of housing expense and total expense to income, maximum loan amounts, maximum loan-to-value ratios, and so on. Less comprehensive than underwriting requirements, which take account of the borrower's credit record. See Qualifying For a Mortgage.
See Interest Rate.
Limitations on the size of rate adjustments on an ARM, often expressed in a/b/c fashion: "a" is the maximum rate change at the first rate adjustment, "b" is the maximum at all subsequent adjustments, and "c" is the maximum increase over the initial rate during the life of the contract.
The period you must retain a mortgage in order for it to be profitable to pay points to reduce the rate. See The Break-Even Period For Paying Points on a Mortgage
All the combinations of interest rate and points that are offered on a particular loan program. On an ARM, rates and points may also vary with the margin and interest rate ceiling.
Protection for a borrower against the danger that rates will rise between the time the borrower applies for a loan and the time the loan closes. This protection can take the form of a "lock" where the rate and points are frozen at their initial levels until the loan closes; or a "float-down" where the rates and points cannot rise from their initial levels but they can decline if market rates decline. In either case,