A
Adjustable-Rate Mortgage (ARM):
A mortgage with a variable interest rate, which adjusts after an initial period (usually one, three, five or seven years), based on changes to an index, plus a margin. The rate can adjust monthly, biannually, or annually. Caps are typically set to limit the amount by which the rate can increase during each adjustment period, and throughout the loan term.
Amortization:
The gradual repayment of a loan, such as a mortgage, in regular payments over the specified loan term. Such payments must be sufficient to cover both principal and interest.
Annual Percentage Rate (APR):
The cost of your mortgage loan, expressed as a yearly rate. The APR includes origination fees, points, interest, mortgage insurance premiums and other costs associated with the loan, but not payments to other third parties (e.g., appraisers or title companies).
Appraisal:
A comprehensive assessment of the value of your property.
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.
B
Balloon Mortgage:
A short-term mortgage in which the balance of the borrowed principal is repaid, in full, in a single payment at the end of the loan period.
Biweekly Mortgage:
A mortgage loan payment plan where the borrower makes payments toward his/her principal and interest every two weeks instead of once monthly. The biweekly payment is exactly one half of the amount a monthly payment would be. This results in 26 (rather than 24) payments per year.
Bridge Loan:
A sum of money lent by a bank to cover an interval between two transactions, typically the buying of one house and the selling of another.
Buy-Down:
The act of obtaining a lower interest rate (buying down the rate) by paying additional points to the mortgage lender. The lower rate may apply to the full duration of the loan, or just the first few years.
C
Caps:
Initial, periodic, and lifetime payment caps on how much and how frequently an interest rate can change on an adjustable-rate mortgage.
Cash-In Refinance:
A refinance transaction in which the borrower pays in money at the time of the transaction in order to lower their mortgage balance.
Cash-Out Refinance:
A mortgage refinance transaction in which the new mortgage amount is greater than the existing mortgage amount (plus loan settlement costs), and the difference is paid out to the borrower. The purpose of a cash-out refinance is to extract equity from the borrower's home.
Certificate of Reasonable Value (CRV):
A document issued by the Department of Veterans Affairs (VA) that establishes the maximum value and loan amount for a VA mortgage on a particular property, based on a VA-approved appraisal of the property.
Closing:
The final step in the loan process, when the borrower, seller (if applicable) and lender sign final loan documents at an escrow or title company, and funds legally change hands. On a refinance, there is no transfer of ownership, but the closing includes repayment of the mortgage held by the old lender.
Closing Disclosure:
A written document provided by a mortgage lender to the borrower at least three business days prior to consummation of the mortgage transaction. The Closing Disclosure contains the actual terms and costs of the transaction. The form integrates and replaces the HUD-1 Settlement Statement and final Truth-in-Lending Disclosure.
Conforming Loan:
Any mortgage loan that meets the guidelines set by Fannie Mae and Freddie Mac. These guidelines limit the amount of the loan as well as loan debt-to-income ratio. Conforming loans have lower interest rates than non-conforming loans.
Conventional Mortgage:
Any mortgage loan that is not insured or guaranteed by the federal government.
Credit Report:
A detailed report of an individual's credit history prepared by a credit bureau and used by a lender to in determining a loan applicant's creditworthiness.
D
Debt-to-Income Ratio (DTI):
The percentage of a borrower's monthly gross income that goes toward paying debts. Calculated by dividing the borrower's liabilities and housing expenses by their monthly gross income.
Deed of Trust:
A written document legally conveying (transferring) interest in property by a mortgagor (borrower) to a mortgagee (lender) to secure payment of a mortgage loan. Deeds of trust contain a trustee, an independent third party such as a title or escrow company that does not represent the borrower or the lender. The trustee holds the "Power of Sale" in the event of default, and also conveys title to the property once the loan is paid in full. It differs from a mortgage in that the bank can foreclose on the property without judicial proceedings.
Deferred Interest:
The amount of interest that is added to the principal balance of a loan when the contractual terms of that loan allow for a scheduled payment to be made that is less than the interest due.
Delinquency:
The failure to make a monthly mortgage payment on time. Delinquency can eventually lead to a notice of default, and ultimately foreclosure.
Down Payment:
An initial payment made by the homebuyer toward the property purchase price. The remainder of the sales prices makes up the amount of the loan. Down payments generally range from 5 to 20 percent.
E
Earnest Money:
A deposit made to a seller showing the buyer's good faith in a transaction. Earnest money allows the buyer additional time when seeking financing. Earnest money is typically held jointly by the seller and buyer in a trust or escrow account.
Equal Credit Opportunity Act (ECOA):
A Federal law enacted in 1974, that makes it unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction, on the basis of race, color, religion, national origin, sex, marital status, or age, or to the fact that all or part of the applicant's income derives from a public assistance program; or to the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act.
Escrow:
Funds held by a third party on behalf of the lender, seller, and borrower in a mortgage transaction. The funds are held by the escrow service until it receives the appropriate written or oral instructions to disburse funds, or until obligations have been fulfilled.
Escrow Company:
Firms that act as neutral third parties to ensure that all conditions that the buyer, seller and lender establish in a real estate transaction are met.
F
Federal Home Loan Mortgage Corporation (Freddie Mac):
One of two Federal agencies that buy mortgages from lending institutions, pools them with other loans, and then sells shares to investors in the secondary market. (The other agency is Fannie Mae.)
Federal National Mortgage Corporation (Fannie Mae):
A Federal agency buys mortgage loans from lending institutions, and packages and resells them in the secondary market.
FHA Loan:
A mortgage issued by federally qualified lenders and insured by the Federal Housing Administration (FHA). FHA loans are designed for low to moderate income borrowers who are unable to make a large down payment. FHA loans allow the borrower to borrow up to 97% of the value of the home. The 3% down payment requirement can come from a gift or a grant, which makes FHA loans popular with first-time buyers.
Fixed-Rate Mortgage:
A mortgage in which the interest rate stays the same throughout the life of the loan.
Foreclosure:
The legal process by which a bank or lender sells a property after a borrower fails to meet the repayment terms of the loan.
G
Graduated Payment Mortgage:
A mortgage in 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. Intended for younger borrowers who are unable to make the full mortgage payment initially, but whose income will increase over time.
H
Hard Money Loan:
A loan of 'last resort', or a short-term bridge loan. Hard money loans are backed by the value of the property, not by the credit worthiness of the borrower. Traditional lenders (like banks) do not make hard money loans.
Hazard Insurance:
Insurance which protects a property owner from damages caused by fire or severe weather.
Home Equity:
The market value of a homeowner's unencumbered interest in their real property, meaning the difference between the home's fair market value and the outstanding balance of all liens on the property
Home Equity Line of Credit (HELOC):
A line of credit in which loan's collateral is the borrower's home equity.
I
Impound Account:
An account maintained by a mortgage company to automatically collect and pay the borrower's hazard insurance, property taxes, private mortgage insurance, and other required payments.
Interest Only Payment:
A mortgage payment that includes interest only. This means none of the payment goes to paying down the principal balance of the loan.
J
Jumbo Loan:
A mortgage loan in an amount that exceeds conforming loan limits set by Fannie Mae and Freddie Mac. These loans typically carry higher interest rates than conforming loans. Conforming loan limits are typically higher in more expensive counties, including King, Pierce, and Snohomish Counties. To view current conforming loan limits, visit the Federal Housing Finance Agency website.
L
Lender Credit:
A credit paid by the lender to the borrower to cover some or all of the loan closing costs, in exchange for a higher interest rate.
Lien:
A claim against a property by a bank or lender to secure repayment of a debt, typically in the form or a mortgage. Basically, the legal right of a creditor to sell the collateral property, if the borrower fails to meet the obligations of the loan.
Loan Consultant:
An employee of a bank or mortgage broker who originates mortgages on behalf of the bank or mortgage company.
Loan Estimate:
A written document provided by a mortgage lender or broker for closed-end credit transactions secured by real property (other than reverse mortgages). This disclosure provides good-faith estimates of credit costs and transaction terms of the credit transaction, and is given within three business days from receipt of the loan application. The form replaces the Good Faith Estimate of Settlement Costs and the initial Truth-in-Lending Disclosure for these transactions.
Loan Origination:
The process by which a borrower applies for a new loan, and a lender processes that application. Origination generally includes all the steps from taking a loan application up to disbursal of funds (or declining the application).
Loan Processor:
The employee of the bank or mortgage company who handles all the paperwork associated with processing your loan application and closing your loan.
Loan-to-Value (LTV) Ratio:
The loan amount divided by the lesser of the selling price or the appraised value of the property. Also referred to as LTV. The LTV and down payment are different ways of expressing the same set of facts. A down payment of 20% would create a loan-to-value of 80%.
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.
M
Margin:
On an adjustable rate loan, the amount added to the interest rate index to determine the fully indexed interest rate. This portion is retained as profit by the lender.
Mortgage:
A loan used to finance the purchase of real property, or to refinance an existing home loan.
Mortgage Broker:
An independent loan originator. Brokers don't represent a single bank, but rather work with numerous lenders.
Mortgage Discount Points:
A form of prepaid interest the borrower pays at closing, in order to lower the interest rate on the mortgage loan. One point equals 1% of the loan amount.
Mortgagee:
The mortgage lender.
Mortgage Insurance:
Insurance required on a mortgage, if the down payment amount is less than 20% of the home's value, and the lender is the only one financing the property. The insurance protects the lender against a loss in the event of borrower default.
Mortgage Lender:
An institution that originates mortgage loans.
Mortgage Payment:
The amount you pay on your mortgage, usually monthly. The payment amount usually includes both interest and principal, as well as insurance premiums and taxes.
Mortgage Rate:
The interest charged by a lender on a mortgage loan.
Mortgage Term:
The length of your mortgage loan. Most fixed-rate loans have a term of 30 years, though 15 years is also common.
Mortgagor:
The borrower or homeowner.
N
Negative Amortization:
An increase in the principal balance of the loan when the mortgage payment is less than the amount of interest due.
Note:
A written promise to repay the mortgage principal, plus interest, which includes the name of the borrower, issuing lender, and all the terms and provisions.
O
Option Arm:
A type of mortgage in which the borrower has several options to which type of payment they will make to the lender. Includes standard interest and principal payments, as well as smaller payment options such as interest-only or minimum payments. (Seattle Mortgage does not offer option arm loans)
Origination Fee:
A fee charged by the lender for processing a mortgage application.
P
Par Rate:
The wholesale interest rate a borrower qualifies for, before rate increases to cover lender costs. It is the mortgage interest rate at zero points.
Piggyback Mortgage:
A second mortgage that closes simultaneously with the first mortgage and is taken out to reduce the total necessary down payment on the home.
Points:
A form of prepaid interest the borrower pays at closing, in order to lower the interest rate on the loan. One point equals 1% of the loan amount. Also, Mortgage Discount Points.
Pre-Qualification:
Prequalification is a lender's estimate of how much you could be eligible to borrow and to help you decide on a price range for a home to purchase. You may be asked to supply inforamtion about your income, savings, assets and debt. The lender will review this information and decide how much you might be able to borrow. A pre-qualification is not a committment to lend.
Prepayment Penalty:
The fee sometimes charged by the mortgage lender if the mortgage is paid off before the agreed upon terms of the loan.
Principal:
The amount of money financed by the mortgage loan that remains unpaid. Does not include interest.
Q
Quitclaim Deed:
A document by which a person either disclaims interest in a property or transfers interest to another person, typically a spouse.
R
Refinance:
The act of paying off your existing mortgage by taking out a new mortgage on the same property, usually to lower the borrower's interest rate, or to access the equity in your home.
Reverse Mortgage:
A type of mortgage reserved for homeowners aged 62 or older, in which they can borrow money against the value in their home. Instead of making monthly loan payments, reverse mortgage borrowers receive monthly payments. The loan is not repaid until the homeowner dies, sells the house or moves out permanently. However, the homeowner is required to pay insurance premiums and annual property taxes during the loan term.
Right of Rescission:
A right under the Truth in Lending Act which gives the homeowner the right to rescind (cancel) a contract to refinance their primary residence, within three days of signing loan documents, on a no-questions-asked basis.
S
Second Mortgage:
A mortgage taken out on a property that is already mortgaged. Can be after the fact or concurrent to the first mortgage.
Seller Carryback:
A situation in which the seller of the property lends the buyer money in order to complete the transaction.
Short Sale:
An alternative to foreclosure, in which a property is sold for less than the balance of the mortgage. Occurs when a borrower cannot afford the payments on their home, and the lender decides to sell the property at a loss rather than forcing the borrower into foreclosure.
Short Refinance:
A refinance transaction in which the lender agrees to lower the rate and/or change the term of the loan, even though the loan exceeds the amount of the current property value. Used to avoid foreclosure in cases where the borrower is currently in default on his or her mortgage payments.
Streamline Refinance:
An expedited refinance process that requires limited underwriting and may even forego the need for an appraisal.
Subprime Mortgage:
A home loan generally extended to those who have marginal credit history or difficulty qualifying for a traditional loan. Characterized by higher interest rates and less favorable terms.
T
Teaser Rate:
The initial, discounted interest rate offered on an adjustable-rate mortgage (ARM). The teaser rate will be in effect for only a few months, at which point the rate will gradually climb until it reaches the full indexed rate, which will be a static margin rate plus the floating rate index to which the mortgage is tied (usually the LIBOR index).
Total Interest Percentage (TIP):
This is a disclosure required by the Dodd-Frank Act. The TIP tells you how much interest you will pay over the life, or term, of your mortgage loan compared to the amount you borrowed. The calculation assumes you will keep the loan for the entire loan term. As an example, if you have a loan for $100,000 and your TIP is 50 percent, that means you will pay $50,000 in interest over the life of the loan, in addition to the $100,000 that you borrowed. The TIP is disclosed on page 3 of the Loan Estimate, and on page 5 of the Closing Disclosure.
U
Underwater Mortgage:
A mortgage with a higher unpaid balance than the current market value of the home. Can prevent a borrower from selling or refinancing their home.
Underwriter:
The employee of the lender who evaluates a mortgage application and either approves, suspends, or declines it.
USDA Rural Housing Mortgage:
USDA loans are insured by the U.S. Department of Agriculture. Via the USDA, you can finance 100% of a home's purchase price while getting access to better-than-average mortgage rates. Upfront mortgage insurance is required and is added to your loan balance. These loans are available to first-time buyers and repeat homebuyers alike. Note: Seattle Mortgage does not offer USDA Mortgages.
V
VA Mortgage:
A mortgage offered to veterans of the armed services that is guaranteed by the Department of Veterans Affairs. VA Loans can cover up to 100% of the loan value, meaning that no down payment is necessary.