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Mortgage Glossary

Adjustable Rate Mortgage:
ARMs are mortgages for which interest rate and payment may change over the life of the loan. Usually at the commencement of the loan, there is a period over which the interest rate is fixed. After the fixed period is over, the interest rate and payment may change based on changes to a specified index.

Adjustment Period :
The period between the adjustment dates for an ARM.

Amortization:
Amortization is payment of the loan by diving it into equal periodic payments such that the entire loan is paid off at the end of the fixed period, including accrued interest.

Amortization table:
A table that shows the gradual decline in the loan balance over the term of the loan.

Amortization term:
The length of time over which the loan is amortized. It is typically expressed in terms of months. For e.g. 360 months for a 30 year fixed rate mortgage.

Annual Percentage Rate:
Annual percentage rate popularly referred to as the APR of the loan measures the full cost of the loan including interest and loan fees expressed as a yearly percentage rate.

Basis point:
one hundredth of a % point. The difference between 7.01 % and 7.02 % is 1 basis point.

Biweekly mortgage payment:
Some lenders offer bi-weekly mortgage payments. This allows the borrower to make mortgage payments twice a month instead of the standard monthly payment resulting, typically, in 13 monthly payments a year instead of 12 standard monthly payments. This results in interest savings for the borrowers. Sometimes lenders may charge borrowers a small fee for biweekly mortgages.

Borrower:
One who applies for and receives the mortgage with the obligation to pay it in full.

Broker:
Different kind of brokers may get involved in mortgage transactions. Real estate brokers typically assist their clients in identifying properties, negotiations, closure of sale and sometimes arranging for funds. Brokers may charge their clients fees typically expressed as a % of the sale price of the property.

Buy down mortgage:
A home loan in which the lender charges below-market interest in exchange for discount points.

Collateral:
Property pledged as security for debt. For e.g. In a mortgage the house acts as a collateral for the mortgage. If the borrower defaults on the mortgage, the lender may have the option to sell the property and recover the money.

Condominium:
Is a property or space that the owner holds title to in a multi-unit dwelling. Common areas are jointly owned by the owners.

Contract:
Contract is the legal document that is employed by the buyers and sellers of the real estate in their negotiations, offer and counter offer.

Convertible ARM:
It is an ARM that can be converted into a fixed rate mortgage based on certain criteria or conditions.

Credit history:
Is a record of a person's debt payments. Borrowers should track their credit history closely and maximize their credit scores prior to purchase of real estate.

Debt:
Money owned by a person to another entity - person, firm etc.

Deed:
A document that provides title to property and is filed with a country recorder

Discount points:
Discount points are the sum a borrower pays the lender to lower his or her interest rate. Discount points, as the name suggests, are typically expressed as a % of the loan amount.

Equity:
Is the difference between the unpaid principle balance and the fair market value of the property. As the loan is paid down, the equity increases as it does with appreciation in the market value of the property.

Escrow:
An account in which a neutral third party holds the documents and money in a real-estate transfer until all conditions of a sale are met. Also, an account in which money for property taxes and insurance is held until paid; money is added to the account every time a mortgage payment is made. Reference: bankrate.com

Fair Market Value:
Also referred to as FMV, it is the price an item will sell for. In real estate different methods including sales comparison method are used in determining the fair market value of a property. The lender may appoint an appraiser to determine the fair market value of a property before disbursement of funds.

First mortgage:
Is the primary loan. It has priority over all other claims to the title.

Fixed rate mortgage:
A fixed rate mortgage is a mortgage for which the interest rate does not change during the entire term of the mortgage. E.g. 30 year fixed, 15 year fixed.

Gross income:
This is all the income you earn before any other deductions like taxes, expenses etc.

Home equity:
The part of the home's value that the borrower owns outright. It is the difference between the fair market value of the house and the principal balances of all mortgage loans for that property.

HUD-1 statement:
It is a document published by the Department of Housing and Urban Development (HUD). It contains an itemized listing of the closing costs payable at the closing or settlement meeting when buying the property.

Index:
A table of yields or interest rates being paid on debt (such as Treasury notes or bank deposits) that is used to determine interest-rate changes for adjustable-rate mortgages and other variable rate loans such as credit card debt. Some of the most common indices are: the one-year Treasury Constant Maturity Yield etc.

Interest rate:
Cost of borrowing or the amount charged on a home or personal loan.

Interest only loan:
On such a loan the borrower only pays the interest amount on the loan amount and not the principal. This results in a lower monthly payment as compared to an ARM or a fixed rate mortgage. As these loans are typically anchored to some index, the payments can vary based on the movement of such an index. Interest only loans have a fixed period after which the borrower starts paying both interest and the principal.

Jumbo mortgage:
A jumbo mortgage is a home loan that exceeds the limits set by Fannie Mae and Freddie Mac ($359,650 in 2005; $539,475 in Alaska, Hawaii and the U.S. Virgin Islands).

Loan origination fee:
The fee that the lender levies for underwriting the loan.

Loan term:
The period specified in the promissory note. Most mortgages have a loan term of 15 or 30 years.

Lock-in period:
It is the period guaranteed by the lender during which the interest rate does not change. For e.g. After identifying a property, the potential owner may 'lock in' the rate.

Market value:
The price that a property sells for between an informed buyer and a seller who discloses all pertinent information about the property that may influence the decision of the buyer.

Mortgage:
A legal document that pledges property to a lender as security for the repayment of the loan. Reference: Fannie Mae website.

Mortgage insurance:
Also known as MI or PMI (for private mortgage insurance) is a policy that protects the lender by paying the costs of foreclosing on a house if the borrower stops paying the loan. It is typically paid monthly by the borrower.

Mortgage Refinance:
The borrower pays off an old loan with a new loan. If interest rates declines such that the savings from switching to a loan with lower interest rate outweigh the costs of securing a new loan at lower interest rate, then refinancing may be advisable.

Mortgage-interest deduction:
Interest expense on a home loan that governments allow homeowners to subtract from their income before computing their income tax.

Negative amortization:
An increase in debt that occurs when monthly payments do not cover the principal and the interest.

One year adjustable:
mortgages whose rates change annually.

Origination fee:
Is the fee a lender may charge to process a loan. It may include the cost to prepare the loan documents, run a credit check on the buyer and may also include property appraisal expenses.

Principal:
The amount of money borrowed or the amount of money owned minus the interest.

Points:
1 point stands for 1% of the loan amount. Sometimes lenders charge borrowers 'points' to cover origination costs or to reduce the interest rate on the mortgage.

Property tax:
A levy by a state or local government on real estate and personal property whose amount varies depending on the property's value. Reference bankrate.com

Purchase agreement:
Is a document in which the buyer and seller approve the price and other terms and conditions that may govern the sale of the property.

Private Mortgage insurance (PMI):
Also known as MI or PMI (for private mortgage insurance) is a policy that protects the lender by paying the costs of foreclosing on a house if the borrower stops paying the loan. It is typically paid monthly by the borrower

Rate:
Cost of borrowing usually expressed in terms of annual percentage rate or APR.

Rate lock:
Lender's guarantee that rate quoted to the potential homebuyer will not change for a specific period.

Recording fee:
A fee charged by local government for recording sale of real estate transactions.

Refinance:
The borrower pays off an old loan with a new loan. If interest rates declines such that the savings from switching to a loan with lower interest rate outweigh the costs of securing a new loan at lower interest rate, then refinancing may be advisable.

Second mortgage:
A loan using a home's equity as collateral and which is subordinate to the original mortgage (i.e., the first mortgage has priority before all others).

Tax deduction:
Tax deduction is an expense that the government allows you to subtract from your gross income before computing income tax. If the sum of the interest on the mortgage, property tax and sometimes points exceeds the standard deductions available to you, then you may itemize the above items in your tax filings.

Term:
Time to maturity for a loan. For e.g. For a 30 year fixed it is 30 years or 360 months.

Title:
Ownership of real estate property such that nobody else can claim a right to the property. The title is recorded in a deed and held at the county recorder's office.

Title Company:
A company that checks the property's title for any liens, fixes any problems and facilitates smooth closing of the property while ensuring that the purchase is processed correctly.

Title insurance:
A policy that guarantees that an owner properly has title to a property and can legally transfer title to someone else. Reference bankrate.com

Transfer Tax:
Transfer tax is a tax that is levied by a local government on change of ownership of real estate.

Underwriting:
The process by which a lender decides whether to lend money, based on the value of the property, the borrower's credit history and any other relevant factors.

US Department of Housing and Development:
This department enforces housing policy and oversees the Federal Housing Administration

Variable Rate:
The rate or cost incurred by the borrower. Unlike fixed rate, as the name suggests variable rate moves in tandem with a specified index.

Wall Street Journal prime rate:
The prime rate published by the Wall Street Journal. It publishes this rate based on a survey of rates offered by various banks. A Variable rate may often use the Wall Street journal or WSJ prime rate as an index.

Yield curve:
Is a graph that shows the relationship between the yields and maturity.