Mortgage Glossary

Adjustable Rate Mortgage(ARM)

A loan in which the interest rate changes periodically based on a standard financial index. Most ARM’s have caps on them.

Amortization

The distribution of loan repayments into monthly installments, as determined by an amortization schedule. Each payment is applied to both principal and interest with a greater amount of the payment going toward interest at the beginning of the loan and more toward principal at the end.

Annual Percentage Rate (APR)

Standardized method of calculating the cost of a mortgage, determined as a yearly rate, which includes such items as interest, mortgage insurance and certain points or credit costs. Because it includes other charges, it is higher than the interest rate a lender will quote.

Appraisal

A written report by a qualified appraiser estimating the value of the property.

Closing Costs

Expenses incurred as part of the loan closing. Closing costs normally include origination fees, attorney’s fee, taxes, escrow payments, title insurance and sometimes discount points. Lenders must provide estimates of closing costs to prospective home buyers. These are generally fixed fees between the lender, the title company, and third-party vendors involved in the origination and closing of the transaction.

Closing Disclosure (CD)

The Closing Disclosure (often referred to as the CD) is a 5-page form that provides the final details about the mortgage. This breaks down the loan terms, your monthly payment, and a detailed itemization of fees associated with the loan. This is required to be signed and returned within 24 hours of receipt. Failure to provide the signed CD can result in an unnecessary delay in closing.

Debt-to-Income Ratio

A debit-to-income ratio is the comparison of your gross income (before taxes) to your monthly expenses, both with and without your housing expenses. Most programs require your monthly mortgage payment to be no more than 29% of your monthly gross income and the mortgage payment combined with other expenses should not exceed 41% of your income. These requirements vary so it is important to speak with an expert Loan Officer.

Down Payment

The amount of a property’s purchase price that the buyer pays up front and does not finance with a mortgage. Most mortgages require a down payment between 5-20%; however, low down payment options may be available for those who qualify. When a down payment is less than 20%, most programs require Private Mortgage Insurance (PMI).

Escrow

Escrows (also called “impounds”) are when a customer has taxes and insurance included as part of the monthly mortgage payment. An account is established and when the taxes and insurance come due, the escrow provider will issue payment to these entities. Mortgage payments that include taxes and insurance are sometimes referred to as PITI payments (see PITI below). Also: 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. (For example, California is an Escrow state and requires the use of an escrow company to close on the purchase of a home).

Equity

Equity is the difference between the current market value of a property and the total debt obligations against the property. On a new purchase loan, the down payment represents the equity in your home.

FHA (Federal Housing Administration) Loans

FHA loans are loans insured by the U.S. Department of Housing and Urban Development (HUD). FHA loans are designed to make housing more affordable, particularly for first-time homebuyers. FHA loans typically permit borrowers to buy a home with a lower down payment than conventional loans or refinance with less home equity.

Fixed-Rate Mortgage

A home loan in which the interest rate will remain the same through the life of the loan, most often 15 or 30 years.

Foreclosure

The legal process by which a homeowner is in default on a mortgage. This usually involves a forced sale of the property at a public auction with the proceeds of the sale being applied to the mortgage debt.

Funds to Close

The total amount required, including down payment and closing costs, to be brought to closing by the borrower. Your trusted Loan Officer will discuss this information in detail with you. This is also disclosed on the Closing Disclosure (CD) prior to closing to ensure there are no surprises when you get to the closing table.

Guideline Ratios

There are two guideline ratios used to qualify you for a mortgage. The first is called the front-end ratio, or top ratio, and is calculated by dividing your new total monthly mortgage payment by your gross monthly income. The second is called the back-end, or bottom ratio, and is equal to your new total monthly mortgage payment plus your total monthly debt divided by your gross monthly income.

Homeowner’s Insurance

An insurance policy that includes hazard coverage for the loss or damage to a property, as well as coverage for personal liability and theft.

Interest Rate

A basic mortgage payment is made up of principal and interest. The principal is the amount borrowed from the lender. The interest rate is the cost of borrowing that money, which is secured by the property. The amount of interest you owe the lender depends on the interest rate and loan amount—the lower the interest rate, the less interest you owe.

Jumbo Loan

Jumbo loans are mortgages larger than the limits set every January by government agencies such as Fannie Mae (FNMA) and Freddie Mac (FHLMC).

Loan-To-Value

Loan-to-value (LTV) is the ratio of how much you borrow compared to the value of the home. (Loan Amount / Appraised Value = LTV)

Margin

On an adjustable rate mortgage (ARM), the margin is a fixed percentage rate that is added to an indexed rate to determine the fully indexed interest rate. While the margin does not adjust, the index can, therefore the fully indexed rate can adjust also.

Origination Fees

Loan origination fees are fees charged by a lender to cover the administrative costs of processing a loan. The origination fee is also used in the calculation of the annual percentage rate.

PI Payment (Principal & Interest)

PI (Principal & Interest) are the components of a monthly mortgage payment. Payments are split with a portion going to the principal balance of the mortgage and a portion going toward paying off the interest on the amount borrowed. The payment is typically more toward interest at the beginning of the loan and more toward principal toward the end of the loan.

PITI (Principal, Interest, Taxes, Insurance)

PITI (Principal, Interest, Taxes and Insurance) are the components of a monthly mortgage payment. Payments of principal and interest go directly toward repaying the loan while the portion of the PITI payment that covers taxes and insurance go into an escrow account to cover the associated charges when they are due.

Points

Factored into the loan’s APR, a point equals 1 percent of the loan amount. ‘Origination Points’ are points charged on the loan that are paid by the borrower at closing, whereas ‘Discount Credits’ are points provided to the borrower as a credit toward closing costs on the loan.

Prepaid Closing Costs

These are the amounts paid at closing prior to being due to establish the escrow account. This includes taxes, homeowners insurance,

flood insurance, private mortgage insurance, and per diem (daily) interest.

Principal

The amount of debt, excluding interest, left on a loan.

Private Mortgage Insurance (PMI)

An insurance policy that protects the lender against default on loans by providing a way for mortgage companies to recoup the costs of foreclosure. PMI is usually required if the down payment is less than 20% of the sale price.

Term

The duration of the life of the loan. For example, a 30-year fixed loan has a term of 30 years.

Title

The title is the actual document that indicates the rights of ownership and possession of the property. Individuals who will have legal ownership in the property are considered ‘on title’ and will sign the mortgage and other documentation. Before your closing, a title search will be conducted to ensure that a chain of ownership for the property is documented, and that it is not subject to any unacceptable liens.

Title Insurance

A policy that guarantees that an owner has title to a property and can legally transfer title to someone else. Should a problem arise, the title insurer pays any legal damages. A policy may protect the mortgage lender, the home buyer, or both.

Underwriting

Mortgage underwriting includes a review of the potential borrower’s credit and employment history, financial statements and a judgement of the quality of the property. The person who completes the underwriting service is called an underwriter.