Financing

Types of Mortgages:

Q: What types of mortgages are available?

A: Different mortgages meet different needs. The type of mortgage you qualify for impacts your interest rate and mortgage terms. The mortgage types available include:

  • Conventional prime
  • Government (FHA and VA)
  • Nonprime - provided/on a limited basis based on market conditions
  • Alternative-A (Alt-A) - provided based on market conditions

Conventional prime, government-insuredmortgages have interest rates that are usually lower than the interest rates on nonprime or Alt-A mortgages.

Q: What is a conventional prime mortgage?

A: The most common category mortgages, sometimes referred to as "A-Paper" mortgages in the industry.

  • They come in "conforming" mortgage amounts (limits are set each year by the federal government) and "jumbo" mortgage amounts (any amount above the conforming limit).
  • They are not insured or guaranteed by a government agency, but may be the least expensive.

Who benefits? Customers who:

  • Have good, though n6t necessarily perfect, credit histories.
  • Want the most favorable rates and terms available and can satisfy conventional qualifications.

What are the drawbacks?

  • If your down payment for a purchase, or home equity in the case of a refinance, is less than 20%, you will have to pay for private mortgage insurance (PMI).
  • Some customers may not have the credit, income, down payment, documentation or property requirements to qualify.
  • Some customers have financing needs that exceed the conforming mortgage limits. Nonconforming prime mortgages usually have a higher interest rate.

Q: What is a government mortgage?

A: A mortgage for which repayment to the lender is insured by a government agency such as the Federal Housing

Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA). /

  • The interest rates and terms are similar to conventional prime mortgages.
  • There may be more flexibility in qualifying guidelines than with conventionmortgages.

Who benefits? Customers who:

  • Seek a mortgage witha lower down payment requirement.
  • Need to use funds from other sources for closing costs.
  • May need more-flexible qualifying guidelines due to limited or less-than-perfect credit history.
  • For a VA mortgage, have served or are the spouse of someone who has served in the armed forces.

What are the drawbacks?

  • You must pay for FHA insurance or the VA guarantee.
  • You must demonstrate your VA eligibility.
  • The FHA has caps (limits) on the mortgage amount based on the county where the home is located.

Q:What is anonprime or subprime mortgage?

A: A nonprime mortgage accommodates customers with qualifying challenges. ,Nonprlme mortgages are sometimes known as "subprime" or "B- or C-Paper" in the industry.

  • Nonprime mortgages generally come in both conforming and jumbo mortgage amounts.

Who benefits? Customers who:

  • Have had credit challenges that are reflected in low or lower credit scores, but want to purchase or refinance a home.
  • Have higher loan-to-value ratios.
  • Have higher debt-to-income ratios.

What are the drawbacks?

  • Nonprime mortgages are not provided by some lenders in certain market conditions.
  • Interest rates for nonprime mortgages are typically higher than for othermortgages.
  • To qualify and receive the lowestpossible nonprime interest rate, you may need to consider:
    • Choosing an ARM instead fixed-rate mortgage.
    • Accepting a prepayment penalty.

Q: What is an Alternative-A Mortgage?

Also known as "Alt-A," these mortgages provide a qualifying alternative to "A-paper" conventional prime programs and generally come in both conforming and jumbo mortgage amounts.

Who benefits? Customers who:

  • Have good credit scores but cannot meet other criteria for a conventional or government mortgage because of property type or the need for reduced or alternative documentation.
  • Have income that is irregular or hard to evaluate.

What are the drawbacks?

  • Alt-A mortgages are not offered y some lenders in certain market conditions.
  • Interest rates for Alt-A mortgage are typically higher than conventionalprime and government mortgages.

Q: What is a piggy-back, combination, or simo loan?

A: A first mortgage combined with a home equity loan or line of credit in second position is a common type of financing for a number of different reasons, depending on market conditions.

Who benefits? Customers who:

  • Want to avoid the higher rate on a jumbo mortgage by obtaining a conforming mortgage up to the permitted limit and covering the balance of what they need to borrow with a home equity loan/line.

Sometimes this "blended jumbo" combination (conforming mortgage plus the home equity financing) has lower monthly payments and interest rates than a single jumbo mortgage.

  • Have financing needs for which the entire amount is not needed at once, such as home improvement.

With a home equity line of credit, customers only pay interest on the amount drawn on the account.

What are the drawbacks?

  • You will need to qualify for two loans: the mortgage and the home equity loan or line of credit.
  • You need to make two payments, one for the home equity loan or line of credit and one for your mortgage.
  • If the combined loan amount is high in relation to your home's value, and its value declines, you may find yourself owing more money than the home is worth.

Q: What is a mortgage term?

A: The term, which is established in your mortgage documents, is the number of years it will take to repay your mortgage if you make no more than the required principal and interest payments every month.

  • Typically, mortgage terms are 10, 15, 20, 30 or 40 years, but any number of years in between might be available as long as you qualify for the monthly payment amount.
  • Generally, the shorter the term, the lower the interest rate, but the higher the monthly payment.

Q: What is a shorter-term mortgage?

A: Generally speaking, mortgages with terms of 20 years or less are viewed as shorter-term mortgages.

Your lender will accommodate any term length on its first mortgages, such as 10 years, 11 years, 18 years, etc., but there is a minimum term for a first mortgage of10 years. Less than that can be accommodated by a different type of loan.'

Who benefits? Customers who:

  • Want to take advantage of a lower interest rate on the shorter-term mortgage, saving money on the total interest paid over the mortgage term.
  • Would like to pay off their mortgage and own their home outright sooner.

What are the drawbacks?

  • Although the interest rate is lower on a shorter-term mortgage, your monthly payments may be higher because the mortgage amount will be repaid in a shorter period of time.
  • You must be able to qualify for the potentially larger monthly payment.
  • Since you pay less interest and your mortgage will be paid off sooner, you may lose a tax deduction that may be beneficial to your overall financial profile (consult your tax advisor).

Q: What is a longer-term mortgage?

A: Generally speaking, mortgages with terms of 25, 30 or 40 years are viewed as longer-term mortgages.

Your lender may accommodate any term length between 20 and 40 years, such as 22 years, 34 years, etc., on its mortgages.

Who benefits? Customers who:

  • Seek lower monthly payments than might result from a shorter-term mortgage.

What are the drawbacks?

  • The interest rate is typically higher than a shorter-term mortgage, which means you will pay more interest because of the higher rate and longer term of your mortgage.
  • If you only make the scheduled payments, you will repay your mortgage more slowly than a shorter-term mortgage.
  • Some 40-year term mortgages have a maturity date of 30 years, even though the amount of the monthly payments has been based on the full 40 years. Some 40-year mortgages may require you to make a "balloon" payment at the end of the 30 year, or refinance.

Interest Rates:

Q: What is an interest rate?

A: The annual rate you pay on the funds you borrow. You may have the option of choosing:

  • A fixed-rate mortgage (FRM)
  • An adjustable-rate mortgage (ARM)
  • A hybrid (or intermediate) adjustable-rate mortgage (hybrid ARM)
  • A temporary buydown of the interest rate

Q: What is an annual percentage rate (APR)?

A: When you choose your mortgage, you are quoted an "interest rate," which may vary until it's locked in, that

establishes the initial amount of your monthly principal and interest payments.

  • You should see both an "interest rate" and an "annual percentage rate (APR)" in various documents. The APR, which is usually higher than the interest rate, expresses the total cost of the mortgage as an ongoing annual rate and includes certain fees, points, closing costs and other expenses (even though they are paid at application, or before or at closing).
  • APRs can help you compare types of mortgages and the total costs between mortgages or lenders, but remember that the APR is different from the actual interest rate on your mortgage.

Q: How is the interest rate determined?

A: Many factors determine the interest rate on a particular mortgage. Your rate will reflect conditions in the financial markets and your mortgage type, as well as an assessment of the risk of your specific mortgage. This is why a "quick rate quote" during a phone call to a lender or a rate pulled from an online or newspaper advertisement may not provide enough information or reflect the interest rate you will receive once a lender has assessed your specific circumstances.

  • Mortgages reflect conditions in the financial markets. Complex variables affect the rise and fall of interest rates. It's most important to understand that there is no "one mortgage rate." Rates can fluctuate daily, even hourly, with movements in the financial markets, and by mortgage type and mortgage amount.
  • In addition, the interest rate on your mortgage depends on the risk your mortgage features represent. When lending money to customers to finance their homes, lenders and their investors take the risk that these customers will, in fact, pay back the money loaned to them.
    • Lenders typically offer lower mortgage rates on mortgages that present less risk.
    • Based on decades of lending, factors that reduce or increase risk have been identified, which include down payment amount, credit score, and other factors. For example: Because a customer has more money invested in a mortgage with a higher down payment, it is considered less risky than a mortgage with a lower down payment. Customers with higher credit scores have historically defaulted less often (so there's less risk) than those with lower credit scores.
    • Other factors are similarly considered: your debt level in relation to your mortgage amount, whether your home is your residence or an investment property, whether it's a single-family or multi-family home, the mortgage term you need or want, the amount of documentation you provide, etc.
  • Be careful if you decide to "shop rates" among several lenders.
    • A rate that's not based on the full details of your specific circumstances can only be a guess.
    • A guess you obtain today from one lender versus a guess you obtained yesterday or a week ago from another lender offers little basis for an accurate comparison.
    • Different mortgage types and different mortgage termshave different rates.
    • Be sure to understand whether the rate you are quoted is an introductory rate, sometimes called a "teaser rate," that might rise dramatically a short time after closing

Q: What is a fixed-rate mortgage (FRM)?

A: A mortgage with an interest rate that remains the same over the entire term of the mortgage, regardless of how interest rates change in the marketplace.

Who benefits? Customers who:

  • Finance their home when rates are relatively low.
  • Want the security of predictable principal and interest payments over the long term.
  • Seek protection from rising rates and monthly payments.

What are the drawbacks?

  • Generally, the interest rate is higher than the initial interest rate of an ARM or hybrid ARM.
  • Your rate will not adjust to a lower rate unless you refinance to a new mortgage.

Q: What is an adjustable-rate mortgage (ARM)?

  • A: A mortgage with an interest rate that changes at scheduled dates to reflect market conditions.
  • The initial rate is usually lower than on a fixed-rate mortgage, making your initial payments lower too.
  • After the initial period, the rate adjusts at certain times (up or down), based on a market index.
  • A one-year ARM adjusts up or down for the first time after one year, then every year after that.
  • A six-month ARM adjusts up or down every six months.
  • A one-month ARM adjusts up or down every month.

Who benefits? Customers who:

  • Will sell their home before rates adjust up "too high."
  • Want to save as much money as possible during their first year(s) of homeownership.
  • Finance their home when fixed rates are comparatively high.
  • Know their income will increase over time, helping them keep pace with potentially increasing payments.
  • Are willing to take a chance that their rate will stay the same or decrease when it adjusts.

What are the drawbacks?

  • If your rate increases at adjustment, you may experience "payment shock" if your monthly payments increase to an amount you may not be able to afford along with your other monthly obligations. If refinancing or selling is not an option, you could be at risk of losing your home.

Q: What is a hybrid adjustable-rate mortgage (hybrid ARM)?

A: A kind of adjustable-rate mortgage (known as hybrid or intermediate ARM) with an initial interest rate that is fixed for a number of years, typically three, five, seven or 10 years, and then adjusts every year thereafter.

  • Hybrid ARMs are often referred to as 3/1,5/1,7/1 and 10/1 ARMs. For example, a 3/1 ARM adjusts for the first time after three years, and then every year after that.
  • At each adjustment, the rate goes up or down based on a market index plus the margin.
  • The rate during the fixed period is usually lower than a traditional fixed-rate mortgage, but higher than a one-year ARM.

Who benefits? Customers who:

  • Intend to sell their home just before or soon after the fixed period ends.
  • Understand they may need/want to refinance at the end of the fixed period.
  • Have sufficient income to manage a potentially increasing payment if refinancing or sale is not an option.

What are the drawbacks?

  • Like any ARM, you may experience payment shock at the end of the fixed period.
  • You may not have the opportunity to refinance or sell if you can't make the higher payment.

Q: How do rates on an ARM or hybrid ARM adjust?

A: When any type of ARM reaches each adjustment date, the rate will adjust based on a published "index," such as the Prime Rate, US Treasury or LlBOR, plus a predetermined "margin" identified in your mortgage documents. Adjustments are subject to caps that limit the amount the rate can rise or fall.

  • For example: Let's say your current 5/1 ARM rate is 5.5%, with a predetermined margin of 2.25%. On your ARM's adjustment date in year 6, let's say the published index is 3%. The 3% index rate added to the 2.25% margin would give you a new, lower 5.25% rate.
  • As another example: Let's say the published index is at 5% when your 5.5% 5/1 ARM adjusts. The index of 5% added to the margin of 2.25% would give you a rate of 7.75%. The higher rate means your payments will increase significantly.
  • Annual and lifetime limits (caps) on increases at adjustment provide some protection from extreme rate increases. Your rate can never go higher than your original rate plus whatever the lifetime cap is.
  • Pay attention to the caps because different mortgages have different caps. For example, many ARMs have a cap of 2% per adjustment and a lifetime cap of 6%. Others can have a first adjustment cap of 5%, a 2% cap on subsequent adjustments, and a lifetime cap of 5%. The margins may be higher or lower than the examples provided above, based on the terms of your mortgage.

Q: What is an interest rate buydown?

A:Lenders typically provide two ways to lower the rate on your mortgage, one permanently and one temporarily.

You can:

Permanently buy down the interest rate by prepaying your interest in the form of "points." Each point (equal to one percent of the mortgage amount) lowers your rate by an amount calculated by your lender.

Temporarily buy down your rate for a one- to three-year period. You can pay the buydown yourself or use funds from the builder, seller, or other party.

Who benefits? Customers who:

  • In the case of a permanent buydown, have cash-on-hand to lower all future monthly payments, particularly if the customer expects to stay in the home for more than a few years.
  • In the case of a temporary buydown, are fortunate to receive money-saving assistance from a third party or who have the extra cash to temporarily buy down their own rate in the early years of their mortgage.
  • Seek the long-term security of fixed-rate payments, but want lower payments in the first year or longer.

What are the drawbacks?

  • Temporary and permanent buydowns must be paid for and there may be limits to the buydown amount.
  • For some temporary buydowns, you must be qualified at application for the higher fixed-rate payment after the buydown ends. This is to ensure you can make the higher payment when the buydown ends.
  • If you sell or refinance before the temporary buydown ends, you may not recoup its cost.

Q: What does it mean to lock in a range of rates or float a rate?

A: You can lock in your range of rates at application or at a set time prior to closing, when it will lock automatically.

The interest rate on the day the rate is locked will be the rate you obtain at closing, assuming you close within the lock-in period (normally 30,60 or 90 days). An unlocked rate can float up or down until it's locked into the market rate.

Who benefits? Customers who:

  • Lock their rate know that neither the rate nor the mortgage will change, assuming the closing takes place within the lock-in schedule. At lock-in, a one-time float-down option can be purchased in case rates fall.
  • Float the rate have the opportunity to obtain a lower interest rate should market rates decline.

What are the drawbacks?

  • Floating puts your rate at risk (should rates rise) and your mortgage choice at risk (should the mortgage you've chosen be discontinued).
  • If rates go higher you may no longer qualify for the mortgage amount for which you've been approved.
  • Locked rates can't be lowered if market rates decline, unless a float-down option has been purchased.

Vocabulary:

7/23 and 5/25 Mortgages

Mortgages with a one time rate adjustment after seven years and five years respectively.

3/1, 5/1, 7/1 and 10/1 ARMs

Adjustable rate mortgages in which rate is fixed for three year, five year, seven year and 10-year periods, respectively, but may adjust annually after that.

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.

Adjustable Rate Mortgage (ARM)

A mortgage in which the interest rate is adjusted periodically based on a pre-selected index. Also sometimes known as a renegotiable rate mortgage, variable rate mortgage or Canadian rollover mortgage.

Adjusted Basis

The cost of a property plus the value of any capital expenditures for improvements to the property minus any depreciation taken.

Adjustment Date

The date that the interest rate changes on an adjustable rate mortgage (ARM).

Adjustment Interval

On an adjustable rate mortgage, the time between changes in the interest rate and/or monthly payment, typically one, three or five years depending on the index.

Adjustment Period

The period elapsing between adjustment dates for an adjustable rate mortgage (ARM).

Affordability Analysis
An analysis of a buyer s ability to afford the purchase of a home. Reviews income, liabilities, and available funds, and considers the type of mortgage you plan to use, the area where you want to purchase a home, and the closing costs that are likely.

Amortization

Loan payment divided into equal periodic payments calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance.

Amortization Term

The length of time required to amortize the mortgage loan expressed as a number of months. For example, 360 months is the amortization term for a 30-year fixed rate mortgage.

Annual Percentage Rate (APR)

The measurement of the full cost of a loan including interest and loan fees expressed as a yearly percentage rate. Because all lenders apply the same rules in calculating the annual percentage rate, it provides consumers with a good basis for comparing the cost of different loans.

Appraisal

An estimate of the value of property made by a qualified professional called an "appraiser."

Appraised Value

An opinion of a property's fair market value, based on an appraiser's knowledge, experience, and analysis of the property.

Assessment

A local tax levied against a property for a specific purpose, such as a sewer or street lights.

Assignment

The transfer of a mortgage from one person to another.

Assumability

An assumable mortgage can be transferred from the seller to the new buyer. Generally requires a credit review of the new borrower and lenders may charge a fee for the assumption. If a mortgage contains a due on sale clause, it may not be assumed by a new buyer.

Assumption

The agreement between buyer and seller where the buyer takes over the payments on an existing mortgage from the seller. Assuming a loan can usually save the buyer money since this is an existing mortgage debt, unlike a new mortgage where closing cost and new, probably higher, market rate interest charges will apply.

Assumption Fee

The fee paid to a lender (usually by the purchaser of real property) when an assumption takes place.

Balloon Mortgage

A loan which is amortized for a longer period than the term of the loan. Usually this refers to a thirty year amortization and a five or seven year term. At the end of the term of the loan, the remaining outstanding principal on the loan is due. This final payment is known as a balloon payment.

Balloon Payment

The final lump sum paid at the maturity date of a balloon mortgage.

Biweekly Payment Mortgage

A plan to reduce the debt every two weeks (instead of the standard monthly payment schedule). The 26 (or possibly 27) biweekly payments are each equal to one half of the monthly payment required if the loan were a standard 30-year fixed rate mortgage. The result for the borrower is a substantial savings in interest.

Blanket Mortgage

A mortgage covering at least two pieces of real estate as security for the same mortgage.

Borrower(Mortgagor)

One who applies for and receives a loan in the form of a mortgage with the intention of repaying the loan in full.

Bridge Loan

A second trust that is collateralized by the borrower's present home allowing the proceeds to be used to close on a new house before the present home is sold. Also known as "swing loan."

Broker

An individual in the business of assisting in arranging funding or negotiating contracts for a client but who does not loan the money himself. Brokers usually charge a fee or receive a commission for their services.

Buy Down

When the lender and/or the home builder subsidized the mortgage by lowering the interest rate during the first few years of the loan. While the payments are initially low, they will increase when the subsidy expires.

Cash Flow

The amount of cash derived over a certain period of time from an income producing property. The cash flow should be large enough to pay the expenses of the income producing property (mortgage payment, maintenance, utilities, etc...).

Caps(interest)

Consumer safeguards which limit the amount of change to the interest rate for an adjustable rate mortgage.

Caps(payment)

Consumer safeguards which limit the amount of change to the monthly payments for an adjustable rate mortgage.

Certificate of Eligibility

The document given to qualified veterans which entitles them to VA guaranteed loans for homes, business and mobile homes. Certificates of eligibility may be obtained by sending form DADA (Separation Paper) to the local VA office with VA form 1880 (Request for Certificate of Eligibility).

Certificate of Reasonable Value(CRV)

An appraisal issued by the Veterans Administration showing the property's current market value.

Certificate of Veteran Status

The document given to veterans or reservists who have served 90 days of continuous active duty (including training time). It may be obtained by sending DD 214 to the local VA office with form 26-8261a (Request for Certificate of Veteran Status). This document enables veterans to obtain lower down payments on certain FHA insured loans.

Change Frequency

The frequency (in months) of payment and/or interest rate changes in an adjustable rate mortgage (ARM).

Closing

The meeting between the buyer, seller and lender or their agents where the property and funds legally change hands, also called settlement. Closing costs usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement. The cost of closing usually are about 3 percent to 6 percent of the mortgage amount.

Closing Costs

Expenses over and above the price of the property that are incurred by buyers and sellers when transferring ownership of a property. Closing costs normally include an origination fee, property taxes, charges for title insurance and escrow costs, appraisal fees, etc. Closing costs will vary according to the area country and the lenders used.

COFI

An adjustable-rate mortgage with a rate that adjusts based on a cost-of-funds index, often the 11th District Cost of Funds.

Construction Loan

A short term interim loan to pay for the construction of buildings or homes. These are usually designed to provide periodic disbursements to the builder as he or she progresses.

Consumer Reporting Agency (or Bureau)

An organization that handles the preparation of reports used by lenders to determine a potential borrower's credit history. The agency gets data for these reports from a credit repository and other sources.

Contract Sale or Deed:

A contract between purchaser and a seller of real estate to convey title after certain conditions have been met. It is a form of installment sale.

Conventional Loan

A mortgage not insured by FHA or guaranteed by VA.

Conversion Clause

A provision in an ARM allowing the loan to be converted to a fixed-rate at some point during the term. Usually conversion is allowed at the end of the first adjustment period. The conversion feature may cost extra.

Credit Report

A report documenting the credit history and current status of a borrower's credit standing.

Credit Risk Score

A credit risk score is a statistical summary of the information contained in a consumer's credit report. The most well known type of credit risk score is the Fair Isaac or FICO score. This form of credit scoring is a mathematical summary calculation that assigns numerical values to various pieces of information in the credit report. The overall credit risk score is highly relative in the credit underwriting process for a mortgage loan.

Debt-to-Income Ratio

The ratio, expressed as a percentage, which results when a borrower's monthly payment obligation on long term debts is divided by his or her gross monthly income. See housing expenses-to-income ratio.

Deed of Trust

In many states, this document is used in place of a mortgage to secure the payment of a note.

Default

Failure to meet legal obligations in a contract, specifically, failure to make the monthly payments on a mortgage.

Deferred Interest

When a mortgage is written with a monthly payment that is less than required to satisfy the note rate, the unpaid interest is deferred by adding it to the loan balance. See negative amortization.

Delinquency

Failure to make payments on time. This can lead to foreclosure.

Department of Veterans Affairs (VA)

An independent agency of the federal government which guarantees long term, low-or-no-down payment mortgages to eligible veterans.

Discount Point

See point

Down Payment

Money paid to make up the difference between the purchase price and the mortgage amount.

Due-on-Sale-Clause

A provision in a mortgage or deed of trust that allows the lender to demand immediate payment of the balance of the mortgage if the mortgage holder sells the home.

Earnest Money

Money given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment.

Entitlement

The VA home loan benefit is called an entitlement (i.e. entitlement for a VA guaranteed home loan). This is also known as eligibility.

Equal Credit Opportunity Act(ECOA)

A federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status or receipt of income from public assistance programs.

Equity

The difference between the fair market value and current indebtedness, also referred to as the owner's interest. The value an owner has in real estate over and above the obligation against the property.

Escrow

An account held by the lender into which the home buyer pays money for tax or insurance payments. Also earnest deposits held pending loan closing.

Escrow Disbursements

The use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, and other property expenses as they become due.

Escrow Payment

The part of a mortgagor s monthly payment that is held by the servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due.

Fannie Mae

See Federal National Mortgage Association

Farmers Home Administration(FmHA)

Provides financing to farmers and other qualified borrowers who are unable to obtain loans elsewhere.

Federal Home Loan Bank Board(FHLBB)

The former name for the regulatory and supervisory agency for federally chartered savings institutions. The agency is now called theOffice of Thrift Supervision

Federal Home Loan Mortgage Corporation(FHLMC) also called "Freddie Mac"

A government sponsored entity that purchases conventional mortgage from insured depository institutions and HUD-approved mortgage bankers.

Federal Housing Administration(FHA)

A division of the Department of Housing and Urban Development. Its main activity is the insuring of residential mortgage loans made by private lenders. FHA also sets standards for underwriting mortgages.

Federal National Mortgage Association(FNMA) also know as "Fannie Mae"

A government sponsored entity that purchases and sells conventional residential mortgages as well as those insured by FHA or guaranteed by VA.

FHA Loan

A loan insured by the Federal Housing Administration open to all qualified home purchasers. While there are limits to the size of FHA loans, they are generous enough to handle moderately priced homes almost anywhere in the country.

FHA Mortgage Insurance

Requires a fee (up to 2.25 percent of the loan amount) paid at closing to insure the loan with FHA. In addition, FHA mortgage insurance requires an annual fee of up to 0.5 percent of the current loan amount, paid in monthly installments. The lower the down payment, the more years the fee must be paid.

FHLMC

The Federal Home Loan Mortgage Corporation provides a secondary market for savings and loans by purchasing their conventional loans. Also known as "Freddie Mac."

Firm Commitment

A promise by FHA to insure a mortgage loan for a specified property and borrower. A promise from a lender to make a mortgage loan.

First Mortgage

The primary lien against a property.

Fixed Installment

The monthly payment due on a mortgage loan including payment of both principal and interest.

Fixed Rate Mortgage

The mortgage interest rate will remain the same on these mortgages throughout the term of the mortgage for the original borrower.

Fully Amortized ARM

An adjustable rate mortgage (ARM) with a monthly payment that is sufficient to amortize the remaining balance, at the interest accrual rate, over the amortization term.

FNMA

The Federal National Mortgage Association is a secondary mortgage institution. FNMA buys VA, FHA, and conventional mortgages from primary lenders. Also known as "Fannie Mae."

Foreclosure

A legal process by which the lender or the seller forces a sale of a mortgaged property because the borrower has not met the terms of the mortgage. Also known as a repossession of property.

Freddie Mac

See Federal Home Loan Mortgage Corporation

Ginnie Mae

See Government National Mortgage Association

Government National Mortgage Association (GNMA)

Also known as "Ginnie Mae." Provides sources of funds for residential mortgages, insured or guaranteed by FHA or VA.

Graduated Payment Mortgage(GPM)

A type of flexible payment mortgage where the payments increase for a specified period of time and then level off. This type of mortgage has negative amortization built into it.

Growing Equity Mortgage (GEM)

A fixed rate mortgage that provides scheduled payment increases over an established period of time. The increased amount of the monthly payment is applied directly toward reducing the remaining balance of the mortgage.

Guaranty

A promise by one party to pay a debt or perform an obligation contracted by another if the original party fails to pay or perform according to a contract.

Guarantee Mortgage

A mortgage that is guaranteed by a third party.

Hazard Insurance

A form of insurance in which the insurance company protects the insured from specified losses, such as fire, windstorm and the like.

Housing Expenses-to-Income Ratio

The ratio, expressed as a percentage, which results when a borrower's housing expenses are divided by his/her gross monthly income. See debt-to-income ratio.

HUD-1 Statement

A document that provides an itemized listing of the funds that are payable at closing. Items that appear on the statement include real estate commissions, loan fees, points and initial escrow amounts. Each item on the statement is represented by a separate number within a standardized numbering system. The totals at the bottom of the HUD-1 statement define the seller's net proceeds and the buyer's net payment at closing.

Impound

The portion of a borrower's monthly payments held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also known as reserves.

Index

A published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments (such as one, three, and five year U.S. Treasury security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average costs-of-funds incurred by savings and loans), which is then used to adjust the interest rate on an adjustable mortgage up or down.

Indexed Rate

The sum of the published index plus the margin. For example if the index is 4% and the margin is 2.75%, the indexed rate would be 6.75%. Often, lenders charge less than the indexed rate the first year of an adjustable rate mortgage.

Initial Interest Rate

This refers to the original interest rate of the mortgage at the time of closing. This rate changes for an adjustable rate mortgage (ARM). It's also known as "start rate" or "teaser."

Installment

The regular periodic payment that a borrower agrees to make to a lender.

Insured Mortgage

A mortgage that is protected by the Federal Housing Administration (FHA) or by private mortgage insurance (MI).

Interest

The fee charged for borrowing money.

Interest Accrual Rate

The percentage rate at which interest accrues on the mortgage. In most cases, it is also the rate used to calculate the monthly payments.

Interest Rate Buydown Plan

An arrangement that allows the property seller to deposit money to an account. That money is then released each month to reduce the mortgagor's monthly payments during the early years of a mortgage.

Interest Rate Ceiling

For an adjustable rate mortgage (ARM), the maximum interest rate, as specified in the mortgage note.

Interest Rate Floor

For an adjustable rate mortgage (ARM), the minimum interest rate, as specified in the mortgage note.

Interim Financing

A construction loan made during completion of a building or a project. A permanent loan usually replaces this loan after completion.

Investor

A money source for a lender.

Jumbo Loan

A loan which is larger than the limits set by the Federal National Mortgage Association and theFederal Home Loan Mortgage Corporation. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.

Late Charge

The penalty a borrower must pay when a payment is made a stated number of days after the due date.

Lease-Purchase Mortgage Loan

An alternative financing option that allows low and moderate income home buyers to lease a home with an option to buy. Each month's rent payment consists of principal, interest, taxes and insurance (PITI) payments on the first mortgage plus an extra amount that accumulates in a savings account for a down payment.

Liabilities

A person's financial obligations. Liabilities include long term and short term debt.

Lien

A claim upon a piece of property for the payment or satisfaction of a debt or obligation.

Lifetime Payment Cap

For an adjustable rate mortgage (ARM), a limit on the amount that payments can increase or decrease over the life of the mortgage.

Lifetime Rate Cap

For an adjustable rate mortgage (ARM), a limit on the amount that the interest rate can increase or decrease over the life of the loan. See cap.

Loan

A sum of borrowed money (principal) that is generally repaid with interest.

Loan to Value Ratio

The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage.

Lock

A lender's guarantee that the mortgage rate quoted will be good for a specific number of days from the day of application.

Margin

The amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate.

Market Value

The highest price that a buyer would pay and the lowest price a seller would accept on a property. Market value may be different from the price a property could actually be sold for at a given time.

Maturity

The date on which the principal balance of a loan becomes due and payable.

MIP (Mortgage Insurance Premium)

Insurance from FHA to the lender against incurring a loss on account of the borrower's default.

Monthly Fixed Installment

The portion of the total monthly payment that is applied toward principal and interest. When a mortgage negatively amortizes, the monthly fixed installment does not include any amount for principal reduction and doesn't cover all of the interest. The loan balance therefore increases instead of decreasing.

Mortgage

A legal document that pledges a property to the lender as security for payment of a debt.

Mortgage Banker

A company that originates mortgages for resale in the secondary mortgage market.

Mortgage Broker

An individual or company that charges a service fee to bring borrowers and lenders together for the purpose of loan origination.

Mortgagee

The lender.

Mortgage Insurance

Money paid to insure the mortgage when the down payment is less than 20 percent. Seeprivate mortgage insurance, FHA mortgage insurance.

Mortgage Life Insurance

A type of term life insurance. In the event that the borrower dies while the policy is in force, the mortgage debt is automatically paid by insurance proceeds.

Mortgagor

The borrower or homeowner.

Negative Amortization

When your monthly payments are not large enough to pay all the interest due on the loan. This unpaid interest is added to the unpaid balance of the loan. The home buyer ends up owing more than the original amount of the loan.

Net Effective Income

The borrower's gross income minus federal income tax.

Non Assumption Clause

A statement in a mortgage contract forbidding the assumption of the mortgage without the prior approval of the lender.

Note

A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.

Office of Thrift Supervision (OTS)

The regulatory and supervisory agency for federally chartered savings institutions. Formally known asFederal Home Loan Bank Board

One Year Adjustable Rate Mortgage

Mortgage where the annual rate changes yearly. The rate is usually based on movements of a published index plus a specified margin, chosen by the lender.

Origination Fee

The fee charged by a lender to prepare loan documents, make credit checks, inspect and sometimes appraise a property; usually computed as a percentage of the face value of the loan.

Owner Financing

A property purchase transaction in which the party selling the property provides all or part of the financing.

Payment Change Date

The date when a new monthly payment amount takes effect on an adjustable rate mortgage (ARM) or a graduated-payment mortgage (GPM). Generally, the payment change date occurs in the month immediately after the adjustment date.

Periodic Payment Cap

A limit on the amount that payments can increase or decrease during any one adjustment period.

Periodic Rate Cap

A limit on the amount that the interest rate can increase or decrease during any one adjustment period, regardless of how high or low the index might be.

Permanent Loan

A long term mortgage, usually ten years or more. Also called an "end loan."

PITI

Principal, interest, taxes and insurance. Also called monthly housing expense.

Pledged Account Mortgage(PAM):

Money is placed in a pledged savings account and this fund plus earned interest is gradually used to reduce mortgage payments.

Points(Loan Discount Points)

Prepaid interest assessed at closing by the lender. Each point is equal to 1 percent of the loan amount (e.g., two points on a $100,000 mortgage would cost $2,000).

Power of Attorney

A legal document authorizing one person to act on behalf of another.

Preapproval

The process of determining how much money you will be eligible to borrow before you apply for a loan.

Prepaid Expenses

Necessary to create an escrow account or to adjust the seller's existing escrow account. Can include taxes, hazard insurance, private mortgage insurance and special assessments.

Prepayment

A privilege in a mortgage permitting the borrower to make payments in advance of their due date.

Prepayment Penalty

Money charged for an early repayment of debt. Prepayment penalties are allowed in some form (but not necessarily imposed) in many states.

Primary Mortgage Market

Lenders, such as savings and loan associations, commercial banks, and mortgage companies, who make mortgage loans directly to borrowers. These lenders sometimes sell their mortgages to the secondary mortgage markets such as FNMA or GNMA, etc

Principal

The amount borrowed or remaining unpaid. The part of the monthly payment that reduces the remaining balance of a mortgage.

Principal Balance

The outstanding balance of principal on a mortgage not including interest or any other charges.

Principal, Interest, Taxes, and Insurance (PITI)

The four components of a monthly mortgage payment. Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the monthly cost of property taxes and homeowners insurance, whether these amounts are paid into an escrow account each month or not.

Private Mortgage Insurance(PMI)

In the event that you do not have a 20 percent down payment, lenders will allow a smaller down payment - as low as 3 percent in some cases. With the smaller down payment loans, however, borrowers are usually required to carry private mortgage insurance. Private mortgage insurance will usually require an initial premium payment and may require an additional monthly fee depending on your loan's structure.

Qualifying Ratios

Calculations used to determine if a borrower can qualify for a mortgage. They consist of two separate calculations: a housing expense as a percent of income ratio and total debt obligations as a percent of income ratio.

Rate Lock

A commitment issued by a lender to a borrower or another mortgage originator guaranteeing a specified interest rate and lender costs for a specified period of time.

Realtor

A real estate broker or an associate holding active membership in a local real estate board affiliated with the National Association of Realtors.

Real Estate Agent

A person licensed to negotiate and transact the sale of real estate on behalf of the property owner.

Real Estate Settlement Procedures Act (RESPA)

A consumer protection law that requires lenders to give borrowers advance notice of closing costs.

Recession

The cancellation of a contract. With respect to mortgage refinancing, the law that gives the homeowner three days to cancel a contract in some cases once it is signed if the transaction uses equity in the home as security.

Recording Fees

Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records.

Refinance

Obtaining a new mortgage loan on a property already owned often to replace existing loans on the property.

Renegotiable Rate Mortgage

A loan in which the interest rate is adjusted periodically. See adjustable rate mortgage.

RESPA

Short for the Real Estate Settlement Procedures Act. RESPA is a federal law that allows consumers to review information on known or estimated settlement costs once after application and once prior to or at settlement. The law requires lenders to furnish the information after application only.

Reverse Annuity Mortgage(RAM)

A form of mortgage in which the lender makes periodic payments to the borrower using the borrower's equity in the home as collateral for and repayment of the loan.

Revolving Liability

A credit arrangement, such as a credit card, that allows a customer to borrow against a pre-approved line of credit when purchasing goods and services.

Satisfaction of Mortgage

The document issued by the mortgagee when the mortgage loan is paid in full. Also called a "release of mortgage."

Second Mortgage

A mortgage made subsequent to another mortgage and subordinate to the first one.

Secondary Mortgage Market

The place where primary mortgage lenders sell the mortgages they make to obtain more funds to originate more new loans. It provides liquidity for the lenders.

Security

The property that will be pledged as collateral for a loan.

Seller Carry Back

An agreement in which the owner of a property provides financing, often in combination with an assumable mortgage. See owner financing.

Servicer

An organization that collects principal and interest payments from borrowers and manages borrower escrow accounts. The servicer often services mortgages that have been purchased by an investor in the secondary mortgage market.

Servicing

All the steps and operations a lender performs to keep a loan in good standing, such as collection of payments, payment of taxes, insurance, property inspections and the like.

Settlement/Settlement Costs

See closing/closing costs

Shared Appreciation Mortgage(SAM)

A mortgage in which a borrower receives a below market interest rate in return for which the lender (or another investor such as a family member or other partner) receives a portion of the future appreciation in the value of the property. May also apply to mortgage where the borrowers shares the monthly principal and interest payments with another party in exchange for part of the appreciation.

Simple Interest

Interest which is computed only on the principle balance.

Standard Payment Calculation

The method used to determine the monthly payment required to repay the remaining balance of a mortgage in substantially equal installments over the remaining term of the mortgage at the current interest rate.

Step Rate Mortgage

A mortgage that allows for the interest rate to increase according to a specified schedule (i.e., seven years), resulting in increased payments as well. At the end of the specified period, the rate and payments will remain constant for the remainder of the loan.

Survey

A measurement of land, prepared by a registered land surveyor, showing the location of the land with reference to known points, its dimensions, and the location and dimensions of any buildings.

Sweat Equity

Equity created by a purchaser performing work on a property being purchased.

Third Party Origination

When a lender uses another party to completely or partially originate, process, underwrite, close, fund, or package the mortgages it plans to deliver to the secondary mortgage market.

Title

A document that gives evidence of an individual's ownership of property.

Title Insurance

A policy, usually issued by a title insurance company, which insures a home buyer against errors in the title search. The cost of the policy is usually a function of the value of the property, and is often borne by the purchaser and/or seller. Policies are also available to protect the lender's interests.

Title Search

An examination of municipal records to determine the legal ownership of property. Usually is performed by a title company.

Total Expense Ratio

Total obligations as a percentage of gross monthly income including monthly housing expenses plus other monthly debts.

Truth in Lending

A federal law requiring disclosure of the Annual Percentage Rate to home buyers shortly after they apply for the loan. Also known as Regulation Z.

Two Step Mortgage

A mortgage in which the borrower receives a-below-market interest rate for a specified number of years (most often seven or 10), and then receives a new interest rate adjusted (within certain limits) to market conditions at that time. The lender sometimes has the option to call the loan due with 30 days notice at the end of seven or 10 years. Also called "Super Seven" or "Premier" mortgage.

Underwriting

The decision whether to make a loan to a potential home buyer based on credit, employment, assets, and other factors and the matching of this risk to an appropriate rate and term or loan amount.

Usury

Interest charged in excess of the legal rate established by law.

VA Loan

A long term, low-or-no down payment loan guaranteed by the Department of Veterans Affairs. Restricted to individuals qualified by military service or other entitlements.

VA Mortgage Funding Fee

A premium of up to 1-7/8 percent (depending on the size of the down payment) paid on a fixed rate loan. On a $75,000 fixed-rate mortgage with no down payment, this would amount to $1,406 either paid at closing or added to the amount financed.

Variable Rate Mortgage(VRM)

See adjustable rate mortgage

Verification of Deposit(VOD)

A document signed by the borrower's financial institution verifying the status and balance of his/her financial accounts.

Verification of Employment(VOE)

A document signed by the borrower's employer verifying his/her position and salary.

Warehouse Fee

Many mortgage firms must borrow funds on a short term basis in order to originate loans which are to be sold later in the secondary mortgage market (or to investors). When the prime rate of interest is higher on short term loans than on mortgage loans, the mortgage firm has an economic loss which is offset by charging a warehouse fee.

Wraparound Mortgage

Results when an existing assumable loan is combined with a new loan, resulting in an interest rate somewhere between the old rate and the current market rate. The payments are made to a second lender or the previous homeowner, who then forwards the payments to the first lender after taking the additional amount off the top.

10 Important Questions

1. Can my interest rate go up over time? By how much and how often?

Adjustable-rate mortgages (ARMs) and hybrid ARMs have rates that may start low and then change over time at prescheduled adjustments. If your mortgage falls into the ARM category, be sure you know the adjustment schedule, plus the "index" and the "margin" on which the rate adjustment will be based.

2. Can my principal and interest payment go up over time? By how much and how often?

Payment increases can occur on certain types of mortgages and for multiple reasons other than an adjustment to your rate. It's important to know if the mortgage you're considering has the potential for payment increases because if you can't afford to make your payments, you could lose your home. It's also important to remember that even on mortgages with principal and interest payments that don't increase, your payments for items like property taxes and homeowners insurance may increase.

3. Can my mortgage balance go up, even if I make all payments in full and on time?

We do not provide what is referred to as a "negative amortization" feature or "neg am mortgages." If you are shopping other lenders, be aware that the low-payment feature on a negative amortization mortgage permits your balance to increase, even if you make minimum payments.

4. Will any scheduled payment exceed the normal monthly payment?

Balloon mortgages, which are not very common, are mortgages with a final payment that exceeds the normal monthly payment, usually significantly.

5. Will my regular monthly payment cover only interest at any point during the mortgage term?

Some mortgages allow you to make monthly payments that cover only the interest accrued during the month for an initial number of years. As a result, payments are lower than payments that include principal, but they do not reduce your mortgage balance and may increase substantially after the interest-only period ends.

6. Will my monthly payment include escrow payments (taxes, insurance, etc.)? If not, will I pay a fee for not including escrow payments in my monthly payment?

Normally your monthly payment will include funds for escrow. Your lender uses the funds you pay monthly into an "escrow account" to pay your property taxes, insurance, or other charges related to your home when they come due. If you want to pay these items yourself, you might be able to waive the escrow account requirement, but there may be a fee.

7. If I choose to provide the lender with less than complete documentation of my income or assets, will I pay additional costs?

Some mortgage customers qualify for a low-documentation feature at no extra cost. If you do not qualify for the no-cost feature and low-documentation is an available option, you will pay for that convenience in your rate and/or fees.

8. Will I have to pay a fee if I pay off the mortgage in full ahead of schedule? Will I have to pay a fee if I pay more than the required monthly payment?

Most mortgages have no prepayment fees whatsoever. We do not currently provide mortgages that have penalty fees for prepayment. As you shop for a mortgage, be sure you fully understand whether there will be a prepayment fee, how it will be calculated, and when it can be charged. You'll also need to understand if there is a prepayment fee only when you pay off the full balance within a certain period, or any time you make a payment above and beyond your scheduled payment. If you currently have a mortgage and are about to refinance or purchase a new home, call your mortgage servicer to see if you will have to pay a prepayment penalty or other fees, and to determine the amount.

9. Will I pay an additional fee if my payments are late? How much?

Late fees apply when you do not make a payment on time. Your lender may, or may not, give you a "grace period," during which you can pay late without incurring a late fee.

10. What is my initial interest rate and what are my settlement charges?

Be sure you know what your interest rate is and the estimate of your closing costs (settlement charges), particularly when you're shopping for the best mortgage package. A lower interest rate may be offered in exchange for higher settlement charges. In other cases, lower settlement charges may come with a higher interest rate.