|
Glossary
1 Month Option ARM 100% loan A loan with no down payment. The loan amount equals the property value. 12 MTA An interest rate index that is used on some ARMs. It is the
average of the most recent 12 monthly values of the Treasury One-Year Constant
Maturity series. 12 MTA Pay Option ARM 125% loan A loan for 125% of property value. 3.95% ARM A monthly ARM on which the initial rate is 3.95%. 3/2 Downpayment Programs offered by some lenders under which a borrower who is able to secure a grant or gift equal to 2% of the down payment will only have to provide a 3% down payment from their own funds. This can be a good deal for a cash-short borrower. 40-Year Mortgage A mortgage with a term of 40 years 80/10/10, 80/15/5, and 80/20/0 loan plans Combination first mortgages for 80% of sale price or value and second mortgages for 10%, 15%, or 20%. The purpose is to avoid mortgage insurance, which is required on first mortgages that exceed 80% of value. Acceleration The right of the mortgagee (lender) to demand the immediate repayment of the mortgage loan balance upon the default of the mortgagor (borrower), or by using the right vested in the Due-on-Sale Clause. Acceleration clause 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. Accrued interest A-Credit A consumer with the best credit rating, deserving of the lowest prices that lenders offer. Most lenders require a FICO score above 720. There is seldom any payoff for being above the A-credit threshold, but you pay a penalty for being below it. 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. Adjustment interval 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. Affordability 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. Affordability 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? And How Much House Should You Buy? Agreement of sale A contract signed by buyer and seller stating the terms and conditions under which a property will be sold. Alt-A A mortgage risk categorization that falls between prime and sub-prime, but is closer to prime. Also referred to as "A minus". Alternative documentation 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. Amortization 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. Amortization schedule 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. Amount financed 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. Annual percentage rate Application 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. Application fee 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. Appraisal A written estimate of a property's current market value prepared by an appraiser. Appraisal fee A fee charged by an appraiser for the appraisal of a particular property. 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. Approval APR The Annual Percentage Rate, which must be reported by lenders under Truth in Lending regulations. It is a comprehensive measure of credit cost to the borrower that takes account of the interest rate, points, and flat dollar charges. It is also adjusted for the time value of money, so that dollars paid by the borrower up-front carry a heavier weight than dollars paid ten years down the road. 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. ARM Assumable 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. Assumption 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. Authorized user 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. Automated underwriting 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 Prospectorâ€. Back-end fee or commission Mortgage broker income paid by the lender, same as yield-spread premium and Negative points. Bad-faith estimate The practice of low-balling figures for settlement costs on the Good Faith Estimate to make them appear more attractive to mortgage shoppers. Balance 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. Balloon The loan balance remaining at the time the loan contract calls for full repayment. Balloon mortgage 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. Balloon mortgage 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. Bimonthly mortgage 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. Biweekly mortgage 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. Bridge loan 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. To qualify for a bridge loan, the borrower must have a contract to sell the existing house. Builder-financed construction Having the builder finance the construction. Buy-down A permanent buy-down is the payment of points in exchange for a lower interest rate. A temporary buy-down concentrates the rate reduction in the early years. Buy-up Paying a higher interest rate in exchange for a rebate by the lender which reduces upfront costs. Cap Cash Flow Option Loan Cash-Out refi 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, Closing 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. Closing costs Closing date The date on which the closing occurs. CMG plan A technique for repaying a loan early that involves using the mortgage as a substitute for a checking account. Co-Borrowers 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. COFI Cost of funds index. One of many interest rate indexes used to determine interest rate adjustments on an adjustable rate mortgage. Conforming mortgage A loan eligible for purchase by the two major Federal agencies that buy mortgages, Fannie Mae and Freddie Mac. Construction financing The method of financing used when a borrower contracts to have a house built, as opposed to purchasing a completed house. Contract knavery 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. Conventional mortgage A home mortgage that is neither FHA-insured nor VA-guaranteed. Conversion option 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. Correspondent 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. COSI Cost of savings index. One of many interest rate indexes used to determine interest rate adjustments on an adjustable rate mortgage. Co-signing a note A report from a credit bureau containing detailed information bearing on credit-worthiness, including the individual's credit history. Credit score 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?
Credit score 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? Cumulative interest 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. Current index value The most recently published value of the index used to adjust the interest rate on an indexed ARM. Deadbeat A borrower who doesn't pay. Debt consolidation Rolling short-term debt into a home mortgage loan, either at the time of home purchase or later. For columns on the subject, Debt elimination Scams designed to relieve you of your money by promising to eliminate your mortgage debt. Debtaholic A borrower who cannot handle debt except by complete abstinence. Deed in lieu of foreclosure Deeding the property over to the lender as an alternative to having the lender foreclose on the property. Default 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. Deferred interest Delinquency A mortgage payment that is more than 30 days late. For articles on payment problems. Don't confuse with Late payment. Demand clause A clause in the note that allows the lender to demand repayment at any time for any reason. Direct lender Discount mortgage broker A mortgage broker who claims to be compensated entirely by the lender rather than by the borrower. Discount points Discretionary ARM 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. Discretionary ARM 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? Documentation requirements 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. Down payment 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 Dual apper A borrower who submits applications through two loan providers, usually mortgage brokers. 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. Due-on-sale clause 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. Effective rate 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.
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. Equity In connection with a home, the difference between the value of the home and the balance of outstanding mortgage loans on the home. Equity grabbing A type of predatory lending where the lender intends for the borrower to default so the lender can grab the borrower's equity. Escrow 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 Escrow abuse The practice of using escrow accounts inappropriately to generate more income from hapless borrowers. Fallout Loan applications that are withdrawn by borrowers, sometimes because they have found a better deal. Fannie Mae 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. Fees 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. FHA mortgage 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 FICO Score Final prices Financing points Including points in the loan amount. First mortgage 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. Fixed-Markup UML An Upfront Mortgage Lender who discloses his wholesale price and markup. Flexible payment ARM. Float 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. Float-down 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.Do not confuse with interest rate increase caps and payment increase caps. Forbearance agreement 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. Foreclosure The legal process by which a lender acquires possession of the property securing a mortgage loan when the borrower defaults. Freddie Mac One of two Federal agencies that purchase home loans from lenders. The other is Fannie Mae. Front-end fee 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. 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. 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. Generic prices 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. 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. Good fairy syndrome A belief that somewhere out there is a good fairy who will solve all our financial (and other) problems. 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. Government National Mortgage Association (GNMA) A Federal agency that guarantees mortgage securities that are issued against pools of FHA and VA mortgages. Grace period 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. 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. Graduation period The interval at which the payment rises on a GPM. Graduation rate 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. Hazard insurance 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. Historical scenario 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. Home Equity Conversion Mortgage (HECM) A reverse mortgage program administered by FHA. Home equity line 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. Home equity loan Home Keeper A reverse mortgage program administered by Fannie Mae. Home Owners Loan Corporation A Federal Government agency established by Congress in 1933 to help families avoid having their homes foreclosed. Homebuyer protection plan A plan purporting to protect FHA homebuyers against property defects. Homeowner's equity Homeowners insurance 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. Housing bank 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. Housing bubble A marked increase in house prices fueled partly by expectations that prices will continue to rise. Housing expense 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. Housing investment The amount invested in a house, equal to the sale price less the loan amount. HUD1 form 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. Hybrid ARM 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. Impounds Indexed ARM 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. 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. Initial rate period The number of months for which the initial rate holds, ranging from 1 month to 10 years. 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. Interest cost 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. Interest due 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. Interest payment 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. Interest rate 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. 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. 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. 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. Interest rate floor The lowest interest rate possible under an ARM contract. Floors are less common than ceilings. 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. 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 Interest-only mortgage A mortgage on which for some period the monthly mortgage payment consists of interest only. During that period, the loan balance remains unchanged. Interim refinance An ill-advised scheme to avoid a prepayment penalty by refinancing twice instead of once. Internet mortgages Mortgages delivered using the internet as a major part of the communication process between the borrower and the lender Investor In real estate, a borrower who owns or purchases a property as an investment rather than as a residence. Jumbo mortgage A mortgage larger than the maximum eligible for purchase by the two Federal agencies, Fannie Mae and Freddie Mac, $333,700 in 2004. However, some lenders use the term to refer to programs for even larger loans, such as, e.g., greater than $500,000. Junk fees A derogatory term for lender fees expressed in dollars rather than as a percent of the loan amount. Late fees 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. Late payment A payment received after the grace period stipulated in the note. Most mortgage grace periods are 10 or 15 days. Lead-Generation site 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. Lease-to-own purchase A transaction in which a hopeful home buyer leases a home with an option to buy it within a specified period. Lender Lien 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. Loan "churning" 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. Loan amount 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. Loan discount fee Loan modification 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 term. Loan officer Employees of lenders or mortgage brokers who find borrowers, sell and counsel them, and take applications. Loan provider Loan-to-value ratio 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. Lock 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. 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. Lock failure The inability or unwillingness of a lender to honor a mortgage price that a borrower had believed was guaranteed. Lock jumper 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. Lock period The number of days for which any lock or float-down holds. Ordinarily, the longer the period, the higher the price to the borrower. Mandatory disclosure The array of laws and regulations dictating the information that must be disclosed to mortgage borrowers, and the method and timing of disclosure. Manufactured housing 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. Margin Market niche 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". Maturity 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 Maximum lock 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. 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. 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 housing expense Monthly total expenses Mortgage 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 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 Mortgage bank Mortgage broker 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 Mortgage company 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. Mortgage formulas Equations used to derive common measures used in the mortgage market, such as monthly payment, balance, and APR. Mortgage insurance 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 Mortgage insurance cancellation Canceling a mortgage insurance policy. Mortgage insurance disclosure 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 Mortgage lead 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. Mortgage lender 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. Mortgage payment The monthly payment of interest and principal made by the borrower. The formula used to calculate it is shown in Mortgage Formulas. Mortgage price 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. Mortgage program 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". Mortgage referrals Advice on where to go to get a mortgage. Mortgage scams Deceptive and exploitative schemes by lenders, brokers, home sellers and sometimes even borrowers. Mortgage shopping Trying to find the best deal on a mortgage. Mortgage spam Offers for great mortgage deals that appear unbidden in your email. Negative amortization A rise in the loan balance when the mortgage payment is less than the interest due. Sometimes called "deferred interest." Negative amortization arises most frequently on ARMs. 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. Negative points 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". On policy issues connected to negative points, Negative points 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? Net branch 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. Net jumping Using a broker's time and expertise to become informed and creditworthy, then jumping to the internet to get the loan. Niche Nichification Proliferation in the number of loan, borrower and property characteristics used by lenders to set mortgage prices and underwriting requirements. No asset loan A documentation requirement where the applicant's assets are not disclosed. 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. No income loan A documentation requirement where the applicant's income is not disclosed. 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. No-Cost mortgage |