A variable or flexible rate mortgage with an interest rate that varies
according to the financial index it is based upon. To limit the
borrower's risk, the ARM may have a payment or rate cap. See also: cap.
The liquidation of a debt by regular, usually monthly, installments of
principal and interest. An amortization schedule is a table showing the
payment amount, interest, principal and unpaid balance for the entire
term of the loan.
The actual interest rate, taking into account points and other finance
charges, for the projected life of a mortgage. Disclosure of APR is
required by the Truth-in-Lending Law and allows borrowers to compare the
actual costs of different mortgage loans.
An estimate of a property's value as of a given date, determined by a
qualified professional appraiser. The value may be based on replacement
cost, the sales of comparable properties or the property's ability to
An agreement between a buyer and a seller, requiring lender approval,
where the buyer takes over the payments for a mortgage and accepts the
liability. Assuming a loan can be advantageous for a buyer because there
are no closing costs and the loan's interest rate may be lower than
current market rates. Depending on what is in the mortgage or deed of
trust, the lender may raise the interest rate, require the buyer to
qualify for the mortgage, or not permit the buyer to assume the loan at
A loan requiring payments of principal and interest at two-week
intervals. This type of loan amortizes much faster than monthly payment
loans. The payment for a biweekly mortgage is half what a monthly
payment would be.
A loan to "bridge" the gap between the termination of one
mortgage and the beginning of another, such as when a borrower purchases
a new home before receiving cash proceeds from the sale of a prior home.
Also known as a swing loan.
Where the buyer pays additional discount points or makes a substantial
down payment in return for a below market interest rate; or the seller
offers 3-2-1 interest payment plans or pays closing costs such as the
origination fee. During times of high interest rates, buy-downs may
induce buyers to purchase property they may not otherwise have
A limit in how much an adjustable rate mortgage's monthly payment or
interest rate can increase. A cap is meant to protect the borrower from
large increases and may be a payment cap, an interest cap, a
life-of-loan cap or an annual cap. A payment cap is a
limit on the monthly payment. An interest cap is a
limit on the amount of the interest rate. A life-of-loan
cap restricts the amount the interest rate can increase
over the entire term of the loan. An annual cap limits
the amount the interest rate can increase over a twelve-month period.
Costs payable by both seller and buyer at the time of settlement, when
the purchase of a property is finalized. These costs can be up to ten
percent of the mortgage amount and usually include but are not limited
to the following:
Fees Paid to the Lender
Credit report fee
Assumption fee if loan is assumed
Fees Paid in Advance
Interest from the closing date to the beginning
of the 1st payment
An individually owned unit within a multi-unit building where others or
the Condominium Owners Association share ownership of common areas such
as the grounds, the parking facilities and the tennis courts.
A short-term loan financing improvements to real estate, such as the
building of a new home. The lender advances funds to the borrower as
needed while construction progresses. Upon completion of the
construction, the borrower must obtain permanent financing or pay the
construction loan in full.
handbook on adjustable rate mortgages (C.H.A.R.M.)
A disclosure required by the federal government to be given to any
borrower applying for an adjustable rate mortgage (ARM).
A mortgage loan that is not insured, guaranteed or funded by the
Veterans Administration (VA), the Federal Housing Administration (FHA)
or Rural Economic Community Development (RECD) (formerly Farmers Home
A document, used in many states in place of a mortgage,
held by a trustee pending repayment of the loan. The advantage of a deed
of trust is that the trustee does not have to go to court to proceed
with foreclosure should the borrower default on the loan.
The difference between the purchase price and mortgage amount. The down
payment becomes the property equity. Typically it should be cash
savings, but it can also be a gift that is not to be repaid or a
borrowed amount secured by assets.
A federal law prohibiting lenders and other creditors from
discrimination based on race, color, sex, religion, national origin,
age, marital status, receipt of public assistance or because an
applicant has exercised his or her rights under the Consumer Credit
Home Loan Mortgage Corporation (FHLMC or
A quasi-governmental, federally-sponsored organization that acts as a secondary market investor to buy and
sell mortgage loans. FHLMC sets many of the guidelines for conventional
mortgage loans, as does FNMA.
An agency within the Department of Housing and Urban Development that
sets standards for underwriting and insures residential mortgage loans
made by private lenders. One of FHA's objectives is to ensure affordable
mortgages to those with low or moderate income. FHA loans may be high
loan-to-value, and they are limited by loan amount. FHA mortgage
insurance requires a fee of 1.5 percent of the loan amount to be paid at
closing, as well as an annual fee of 0.5 percent of the loan amount
added to each monthly payment.
Mortgage Association (FNMA or Fannie Mae)
A private corporation that acts as a secondary market investor to buy and
sell mortgage loans. FNMA sets many of the guidelines for conventional
mortgage loans, as does FHLMC. The major purpose of this organization is
to make mortgage money more affordable and more available.
The maximum form of ownership, with the right to occupy a property and
sell it to a buyer at any time. Upon the death of the owner, the
property goes to the owner's designated heirs. Also known as fee
A loan with a term of 15 years. Although the monthly payment on a
15-year mortgage is higher than that of a 30-year mortgage, the amount
of interest paid over the life of the loan is substantially less.
The Federal Flood Disaster Protection Act of 1973 requires that
federally-regulated lenders determine if real estate to be used to
secure a loan is located in a Specially Flood Hazard Area (SFHA). If the
property is located in a SFHA area, the borrower must obtain and
maintain flood insurance on the property. Most insurance agents can
assist in obtaining flood insurance.
A fixed-interest loan with lower payments in the early years than the
later years. The amount of the payment gradually increases over a period
of time and then levels off at a payment sufficient to pay off the loan
over the remaining amortization period.
A form of insurance that protects the insured property against physical
damage such as fire and tornadoes. Mortgage lenders often require a
borrower to maintain an amount of hazard insurance on the property that
is equal at least to the amount of the mortgage loan.
A thorough review of the physical aspects and condition of a home by a
professional home inspector. This inspection should be completed prior
to closing so that any repairs or changes can be completed before the
home is sold.
Indicates what proportion of homebuyers can afford to buy an
average-priced home in specified areas. The most well known housing
affordability index is published by the National Association of
A method used by real estate appraisers to predict a property's
anticipated future income. Income property includes shopping centers,
hotels, motels, restaurants, apartment buildings, office space and so
A published interest rate compiled from other indicators such as U.S.
Treasury bills or the monthly average interest rate on loans closed by
savings and loan organizations. Mortgage lenders use the index figure to
establish rates on adjustable rate mortgages (ARMs).
The amount of the entire mortgage loan which does not include the
principal. Also, as a part of PITI, the amount of the
monthly mortgage payment which does not include the principal,
taxes, and insurance.
A claim against a property for the payment of a debt. A mortgage is a
lien; other types of liens a property might have include a tax lien for
overdue taxes or a mechanics lien for unpaid debt to a subcontractor.
The relationship, expressed as a percentage, between the amount of the
proposed loan and a property's appraised value. For example, a $75,000
loan on a property appraised at $100,000 is a 75% loan-to-value.
The cost of the upkeep of the house. These costs may be minor in cost
and nature (replacing washers in the faucets) or major in cost and
nature (new heating system or a new roof) and can apply to either the
interior or exterior of the house.
The amount a lender adds to the index of an adjustable rate mortgage to
establish an adjusted interest rate. For example, a margin of 1.50 added
to a 7 percent index establishes an adjusted interest rate of 8.50
Money paid to insure the lender against loss due to foreclosure or loan
default. Mortgage insurance is required on conventional loans with less
than a 20 percent down payment. FHA mortgage insurance requires a
payment of 1.5 percent of the loan amount to be paid at closing, as well
as an annual fee of 0.5 percent of the loan amount added to each monthly
A situation in which a borrower is paying less interest than what is
actually being charged for a mortgage loan. The unpaid interest is added
to the loan's principal. The borrower may end up owing more than the
original amount of the mortgage.
Charges levied by the lender based on the loan amount. Each point equals
one percent of the loan amount; for example, two points on a $100,000
mortgage is $2,000. Discount points are used to buy down the interest
rate. Points can also include a loan origination fee, which is usually
When a borrower's principal dwelling is going to secure a loan, the
borrower has three business days following signing of the loan documents
to rescind or cancel the transaction. Any and all money paid by the
borrower must be refunded upon rescission. The right to rescind does not
apply to loans to purchase real estate or to refinance a loan under the
same terms and conditions where no additional funds will be added to the
At the end of the construction loan period, the borrower's file is
delivered to Bank One Mortgage Loan Servicing Dept. Prior to delivery,
CLD contacts the borrower and obtains funds for the tax and insurance
escrows, a final title policy and homeowner's policy. This process is
called a rollover.
The responsibility of collecting monthly mortgage payments and properly
crediting them to the principal, taxes and insurance, as well as keeping
the borrower informed of any changes in the status of the loan.
joint tenancy - equal ownership of property by
two or more parties, each with the right of survivorship.
tenancy by the entireties - ownership of
property only between husband and wife in which neither can sell
without the consent of the other and the property is owned by
the survivor in the event of death of either party.
tenancy in common - equal ownership of property
by two or more parties without the right of survivorship.
tenancy in severalty - ownership of property by
one legal entity or a sole party.
tenancy at will - a license to use or occupy a
property at the will of the owner.
The federal agency responsible for the VA loan guarantee program as well
as other services for eligible veterans. In general, qualified veterans
can apply for home loans with no down payment and a funding fee of 1
percent of the loan amount.
The ability of local governments to specify the use of private property
in order to control development within designated areas of land. For
example, some areas of a neighborhood may be designated only for
residential use and others for commercial use such as stores, gas