Adjustable Rate Mortgage
An adjustable rate mortgage (ARM) is a loan type that allows the lender to adjust the interest rate during the term of the loan. The rate and payment adjustments are calculated based on a margin and an index. The index used is based on the loan program, and could be a Treasury Bill, LIBOR, COFI or other market index. ARM’s have caps (maximums), both annual and lifetime on your rate payment can change.

Amortization
Amortization is the method by which a mortgage loan is repaid. The monthly payment includes regular amounts that are applied to the principal balance of your loan, and amounts that are applied to the interest portion of your payment. Mortgage payments during the first years of repayment are generally applied mostly to the interest portion, with a small amount to principal. As the years pass, the amount of the monthly payment applied to principal increases, as the interest portion is repaid.

Amortization Schedule
An amortization schedule shows the amount of each payment applied to interest and principal, and reflects the remaining balance after each payment is made.

Annual Membership Fee
An amount that may be charged annually for having a line of credit available. It is often charged regardless of whether or not you use the line, and is also referred to as a "participation fee."

Annual Percentage Rate (APR)
The cost of credit on a yearly basis, expressed as a percentage. The APR is required to be disclosed by the lender under the federal Truth in Lending Act, Regulation Z. Includes up-front costs paid to obtain the loan, and is, therefore, usually a higher amount than the interest rate stipulated in the mortgage note. The APR does not include the cost of title insurance, appraisal nor the credit report. Your actual monthly payments are based on the note rate, or periodic interest rate, not the APR.

Application
An initial statement of personal and financial information which is required to approve your loan.

Application Fee
Fees that are paid to a lender or broker to initiate the mortgage application process.

ARM
- See Adjustable Rate Mortgage.

Assumable Mortgage
Some mortgage loans allow for an existing mortgage to be transferred to the new owner of a property. The buyer assumes the debt and takes over the payment on the mortgage. The new buyer must qualify and meet the criteria set forth by the lender in order to assume the lien. When the loan is assumed (when the property is transferred), the seller is paid the difference between the sales price and balance on the loan.

Automated Underwriting
An automated system that renders a loan recommendation on a mortgage application. Automated underwriting systems streamline the processing of a loan by determining the documentation a borrower must provide upfront. In many circumstances these systems will allow for greatly reduced documentation.

Balloon Mortgage
A fixed rate loan that provides for smaller payments for a certain period of time, and one large payment (balloon payment) of the entire balance due at the end of the loan term.

Bi-weekly Payment Mortgage
A bi-weekly payment mortgage allows a loan to amortize more rapidly since payments are made every two weeks instead of monthly. This results in a more rapid pay down of the mortgage principal, with a result of savings in interest over the term of the mortgage.

Blanket Mortgage
A single mortgage that is secured by more than one property.

Bridge Loan
A bridge loan provides a borrower with the ability do a cash out refinance on their current primary residence in order to purchase a new home when their present home will not be sold prior to the purchase of the new property.

Buydown
A temporary buydown provides the borrower with the ability to lower the interest rate on their mortgage by paying points to a lender in order to lower their monthly payments for the first few years of the loan. The points paid are used to finance the difference between the actual monthly payment and the bought down monthly payment. A permanent buydown reduces the interest rate over the entire life of the loan.

Cap
The maximum allowable increase, in either payment or interest rate, for a specified amount of time on an adjustable rate mortgage.

Cash Out Refinance
A refinance loan that provides the borrower with the availability of cash that exceeds existing mortgage liens on a property. A cash out refinance pays the existing liens on a property, and the excess amount is paid in cash to the borrower.

Ceiling
The maximum allowable interest rate over the life of the loan on an adjustable rate mortgage.

Closing Costs
Any fees paid by the borrowers or sellers during the closing of the mortgage loan. This normally includes an origination fee, discount points, attorney´s fees, title insurance, survey, and any items which must be prepaid, such as taxes and insurance escrow payments.

City/County Tax Stamp
Some cities and towns collect a tax when a property is sold, or when a new mortgage is placed on a property. The tax varies from state to state.

Collateral
Collateral is an asset that is pledged as security for a debt, which, in the case of a mortgage loan, is the property on which the mortgage is placed.

Community Home Buyer’s Program
A mortgage program designed to enable low to moderate income families to purchase a home. This program has income requirements based on census tract information, has more flexible guidelines, and requires the borrower to complete a homebuyer education seminar.

Contract of Sale
The agreement between the buyer and seller containing the purchase price, terms, and conditions necessary to both parties in conveying the title to the buyer.

Conforming Loan
A loan amount that is within the guidelines for most mortgage investors. The maximum conforming loan limits are set annually by secondary market investors (Fannie Mae, Freddie Mac). These limits differ dependending on the property type (single family/condominium, one, two, three and four unit properties). A loan that exceeds the guidelines is referred to as a jumbo mortgage.

Contingency
A condition that must be met before a contract is legally binding. For example, a lender’s commitment to provide mortgage financing may be contingent on receipt of a satisfactory appraisal.

Convertibility Clause
Some adjustable-rate-mortgages (ARM’s) allow a borrower to change from an ARM to a fixed rate mortgage at a specified period within the term of the loan.

Cost of Funds Index (COFI)
An index that is used to determine the interest rate changes of an adjustable rate mortgage (ARM) based on the Cost of Funds Index (COFI). The Cost of Funds Index is the weighted average of interest rates set by Federal Home Loan Banks.

Credit Report
A record of an individual´s current and past debt repayment patterns. A credit history helps a lender to determine whether a borrower has a history of repaying debts in a timely manner.

Deed Stamp
A tax that is required in some municipalities if a property changes hands. The amount of this tax can vary with each state, city, and county.

Discount Points
Fees that are collected by the lender in exchange for a lower interest rate. Each discount point is 1% of the loan amount.

Discount Rate
The interest rate that the Federal Reserve charges member banks for loans using government securities or eligible paper as collateral. This provides a floor on interest rates since banks set their loan rates a notch above the discount rate.

Down Payment
The difference between the purchase price and that portion of the purchase price being financed.

Draw Period
Generally associated with home equity lines of credit, the draw period is the period of time that you can access funds from a home equity line of credit.

Due on Sale
If a mortgagor (borrower) sells, transfers, or encumbers a property in an unacceptable manner, the mortgagee (lender) has the legal right to demand payment of the outstanding balance.

Effective Interest Rate
The cost of credit, on a yearly basis, expressed as a percentage. It includes up-front costs paid to obtain the loan, and is, therefore, usually a higher amount than the interest rate stipulated in the mortgage note. The effective interest rate is useful in comparing loan programs with different rates and points.

Encumbrance
A claim against a property by another party which usually affects the ability to transfer ownership of the property.

Equity
The difference between the fair market value (appraised value) and the outstanding mortgage balance on your home.

First Mortgage
A mortgage which is in first lien position, taking priority over all other liens (which are financial encumbrances).

FHA Loan
More appropriately termed "FHA Insured Loan." A loan for which the Federal Housing Administration insures the lender against losses the lender may incur due to your default.

Fixed Rate Mortgage
A mortgage in which the monthly principal and interest payments remain the same throughout the life of the loan. Fixed rate mortgages are most common for a 30 or 15 year term. The interest paid on a 15 year mortgage is significantly less than on a 30 year term mortgage.

Flood Certification
An inspection required to determine if a property is located in a flood zone. The Federal government determines whether an area is in a flood plain. If a flood certification indicates a property is in a flood zone, flood insurance is required to obtain a mortgage.

Flood Insurance
Insurance that protects a homeowner from the cost of damages to a property due to flooding or high water.

Good Faith Estimate
A written estimate of the closing costs the borrower is required to pay at closing. Under the Real Estate Settlement Procedures Act (RESPA), a lender is required to provide this disclosure to the borrower within three days of receiving a loan application.

Grace Period
A period of time during which a loan payment may be paid after its due date without incurring a late penalty. Such late payments may be reported on your credit report.

Gross Income
For qualifying purposes, the income of the borrower before taxes or expenses are deducted.

Home Equity Line of Credit
A loan providing you with the ability to borrow funds at the time and in the amount you choose, up to the maximum credit limit for which you have qualified. Repayment is secured by the equity in your home. Simple interest (interest-only payments on the outstanding balance) is usually tax-deductible. They are often used for home improvements, major purchases or expenses, and debt consolidation.

Home Equity Loan
A fixed or adjustable rate loan obtained for a variety of purposes and secured by the equity in your home. Interest paid is usually tax-deductible. They are often used for home improvements or other real estate investments, and are recommended by many as a replacement or substitute for consumer loans whose interest is not tax-deductible, such as auto or boat loans, credit card debt, medical debt, and education loans.

Hazard Insurance
A contract between purchaser and insurer, for which a premium is paid to compensate the insured for loss of property due to hazards (fire, hail damage, etc.).

Housing Ratio
A standard calculation performed by mortgage lenders to determine if a borrower qualifies for a specific loan type and amount. It is calculated by dividing the monthly housing expense (Principal, Interest, Taxes and Insurance) by the borrower’s gross income.

HUD-1 Settlement Statement
The HUD-1 Settlement Statement is also referred to as the closing statement or the settlement statement. This statement provides a detailed record of the costs associated with a real estate transaction.

Index
A number, usually a percentage, upon which future interest rates for adjustable rate mortgages are based. Common indexes include treasury bills or securities, London Inter-bank Offering Rates (LIBOR) and Cost of Funds Index (COFI).

Impounds
An impound account, also called an escrow account, refers to the funds a mortgagor pays to the lender along with their monthly principal and interest payments for the payment of real estates taxes and hazard insurance. These funds are held by the lender to make payments for taxes and insurance when they are due.

Interest Rate Ceiling
The interest rate ceiling is the maximum interest rate for an adjustable-rate mortgage (ARM), as specified in the mortgage loan note.

Interest Rate Floor
The minimum interest rate for an adjustable-rate mortgage (ARM), as specified in the mortgage loan note.

Jumbo Mortgage
A jumbo mortgage, also known as a non-conforming loan, is a mortgage that exceeds the maximum loan amount guidelines set by secondary market lenders (Fannie Mae and Freddie Mac). Generally, the interest rates on a jumbo loan are higher than on a conforming loan.

Leasehold Estate
A way of holding title to a property wherein the mortgage does not actually own the property, but instead has a long-term recorded lease on it.

LIBOR
See London Inter-bank Offering Rate

Loan to Value Ratio (LTV)
A ratio determined by dividing the sales price or appraised value into the loan amount, expressed as a percentage. For example, with a sales price of $100,000 and a mortgage loan of $80,000, your loan to value ratio would be 80%. Loans with an LTV over 80% may require Private Mortgage Insurance, defined below.

Lock or Lock In
A commitment you obtain from a lender assuring you a particular interest rate or feature for a definite time period. Provides protection should interest rates rise between the time you apply for a loan, acquire loan approval, and, subsequently, close the loan and receive the funds you have borrowed.

London Inter-Bank Offered Rates (LIBOR)
An index used to establish the interest rate of some adjustable rate mortgages. LIBOR (London Inter-Bank Offered Rates) is the interest rate at which the highest rated banks offer to lend to one another in Eurodollars. LIBOR offers various maturities, including 1-month, 3-month, 6-month, and 1-year.

Margin
An amount, usually a percentage, which is added to the index to determine the interest rate for adjustable rate mortgages.

Minimum Payment
The minimum amount that you must pay, usually monthly, on a home equity loan or line of credit. In some plans, the minimum payment may be "interest only," (simple interest). In other plans, the minimum payment may include principal and interest (amortized).

Mortgage Banker
Originates mortgage loans, loaning you their funds and closing the loan in their name.

Mortgage Broker
As do mortgage bankers, mortgage brokers take loan applications and process the necessary paperwork. Unlike a mortgage banker, brokers do not fund the loan with their own money, but work on behalf of several investors, such as mortgage bankers, S and L´s, banks, or investment bankers.

Mortgage Insurance (MIP or PMI)
Insurance purchased by the borrower to insure the lender or the government against loss should you default. MIP, or Mortgage Insurance Premium, is paid on government-insured loans (FHA or VA loans) regardless of your LTV (loan-to-value). Should you pay off a government-insured loan in advance of maturity, you may be entitled to a small refund of MIP.

PMI, or Private Mortgage Insurance, is paid on those loans which are not government-insured and whose LTV is greater than 80%. When you have accumulated 20% of your home´s value as equity, your lender may waive PMI at your request. Please note that such insurance does not constitute a form of life insurance which pays off the loan in case of death.

Mortgage Loan
A loan which utilizes real estate as security or collateral to provide for repayment should you default on the terms of your loan. The mortgage or Deed of Trust is your agreement to pledge your home or other real estate as security.

Mortgagee
The lender in a mortgage loan transaction.

Mortgagor
The borrower in a mortgage loan transaction.

Negative Amortization
Amortization in which the payment made is insufficient to fund complete repayment of the loan at its termination. This usually occurs when the increase in the monthly payment is limited by a ceiling. The portion of the payment which should be paid is added to the remaining balance owed. The balance owed may increase, rather than decrease, over the life of the loan.

Note Rate
The interest rate stated on a mortgage note. This is also called nominal rate or face interest rate.

NY Tax & Title Search
A fee charged by New York title companies or attorneys to cover the cost of searching the public record for court orders against the current owner or proposed purchaser and tax records that could affect the title of the property.

Payment Change Date
The date when a new monthly payment amount commences on an adjustable-rate mortgage. On most adjustable rate mortgages, the payment change date occurs in the month immediately after the adjustment date.

Periodic Payment Cap
On an adjustable-rate mortgage, a limit on the amount that payments can increase during a single adjustment period.

Periodic Rate Cap
On an adjustable-rate mortgage, the maximum adjustment to the interest rate that can occur during a single adjustment period.

Points
The amount paid either to maintain or lower the interest rate charged. Each point is equal to one percent (1%) of the loan amount (i.e., two points on a $100,000 mortgage would equal $2,000).

Prepaids
Certain items must be paid in advance when you close on a mortgage transaction. These items include real estate taxes and hazard insurance. Hazard insurance must be paid one year in advance on a purchase transaction, and a minimum of 6 month’s hazard insurance coverage must be paid in advance on a refinance transaction.

Prepayment
Any amount that is paid to reduce the principal balance, not including the interest, of a loan before the due date.

Prepayment Penalty
A fee paid to the lending institution for paying a loan prior to the scheduled maturity date.

Prime Rate
The interest rate that banks charge for short-term loans. Changes in the prime rate can influence changes in other interest rates.

Purchase Agreement
A written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold.

Qualifying Ratios
Debt to income ratios are used to determine your ability to repay a loan. The top ratio is calculated by dividing the monthly housing expense (principal, interest, taxes and insurance) by gross monthly income. The bottom ratio is calculated by dividing total debt, including monthly mortgage payment, taxes, insurance and all other monthly debts, by gross monthly income.

Recording Fees
A standard fee (set by each state) charged to record mortgage documents into public record.

Right to Rescission
The legal right to void or cancel your mortgage contract in such a way as to treat the contract as if it never existed. The right of rescission is applicable on the refinance of a primary residence, or the addition of a second lien such as line of credit on a primary residence.

Security Interest
An interest that a lender takes in the borrower´s property to assure repayment of a debt.

Settlement Statement
- See HUD-1 Settlement Statement

Servicing a Loan
The ongoing process of collecting your monthly mortgage payment, including accounting for and paying of your yearly tax and/or homeowners insurance bills.

Subordinate Financing
Any mortgage or other lien that has a lower priority than that of the first mortgage.

Title
The written evidence that proves the right of ownership of a specific piece of property.

Title Insurance
An insurance policy that protects the lender against loss due to disputes over the ownership of a property and defects in the title that were not found in the search of the public record. A mortgagor can also receive an owner’s title policy at an additional charge.

Transaction Fee
A fee which may be charged each time you draw on a home equity credit line.

Underwriting
The process of verifying data and approving a loan.

Variable Rate
An interest rate that changes periodically in relation to an index. Payments may increase or decrease accordingly.

VA Loan
More appropriately termed "VA Insured Loan." A loan for which the Veteran´s Administration insures the lender against losses the lender may incur due to your default. They are available only to veterans possessing a Certificate of Eligibility.

Note: The above definitions are excerpts from "Mortgage Banking Terms," published by the Mortgage Bankers´ Association of America.