Not all mortgage loans are the same. One type of mortgage is potentially illegal. The answer is in the mortgage glossary!
2-1 and 3-2-1 Buy Down Mortgage for Lower Initial Interest Rates
In the 3-2-1 buydown mortgage the interest rate for the first year is 3% lower than the permanent interest rate that starts at the beginning of the fourth year. During the second year the interest rate is 2% lower, and the third year is 1% lower.
The 2-1 buydown mortgage is identical to the 3-2-1 buydown, except it only lasts for two years.
How Does the Buydown Save Me Money?
You pay cash up-front to get the lower interest rates. However, that reduces the monthly payment during the buydown period to a more affordable level. This permits a buyer to purchase a more expensive home than they would normally be able to buy. Presumably, the amount of money saved during the buydown will be greater than the up-front cost.
When Should I Get A 3-2-1 Buydown Mortgage?
Will your income increase during the buydown time period? Will that increased income permit paying the full interest rate starting in the fourth year? Yes? Then go ahead and buy that home.
However, if your income won’t be enough to cover the increased mortgage payments, consider refinancing the mortgage. Especially if you are certain that interest rates will decrease significantly in three years.
Acceleration Clause
If a payment is missed or some other condition of the loan has been broken, the lender can require immediate full repayment of the loan amount. The terms of the loan will list actions that will trigger the acceleration clause. Also, the acceleration clause should spell out how much money must be repaid.
What Will Trigger an Acceleration Clause?
Filing for bankruptcy, not having homeowner’s insurance, not keeping the home in livable condition, transferring ownership, missing payments.
Home loans have a grace period for making late payments without penalties. However, not making a payment can start the acceleration clause process.
Before you miss a payment contact the lender to see what your options are. Oftentimes, refinancing the loan will be the best solution.
Additional Principal Payment
This can be any amount of money paid in addition to the scheduled monthly payment. Making an additional principal payment will pay off the mortgage much faster and reduces the total amount of interest paid over the years.
If you have a variable rate mortgage and the interest rate drops lower, keep making the same payment amount. That will create an automatic monthly additional principal payment.
Also, if you get a pay raise or a tax refund, consider making an additional payment.
Adjustable-Rate Mortgage (ARM) and Variable Rate Mortgages
The interest rate on Adjustable-Rate Mortgages adjusts up or down at the end of each year. Which is great if interest rates go down or stay the same. However, rising interest rates can make mortgage payments unbearable. So, Variable Rate Mortgages may be what is needed.
3 year and 5 year Adjustable-Rate Mortgages are quite popular and are called Variable Rate Mortgages. The interest rate for the first 3 or 5-year period (respectively) stays the same. However, at the beginning of the 4th or 6th year (respectively) the interest rate will be reset each year.
The interest rate is in direct relationship to a Benchmark which is determined by the lender. Common benchmarks are:
- The Prime Rate which is set by the Federal Reserve
- One-Year T-Bill auctions
- The Monthly Treasury Average
- Sterling Overnight Index Average (SONIA)
- The London Interbank Offered Rate (LIBOR) which is being phased out by 2023
The benchmark interest rate plus a lender set predetermined Margin Rate are added together to determine the total interest rate for the year. The Benchmark interest rate changes every year, but the Margin Rate stays the same each year.
The Margin Rate and the Benchmark used will be stated clearly on the loan application documents.
Adjustable Mortgage Loans (AML)
The same thing as a Variable-Rate Mortgage or an Adjustable-Rate Mortgage. See the Adjustable-Rate Mortgage description.
Adjusted Basis
For a home this is the purchase price, plus the cost of any substantial improvements to the house, minus depreciation (if any).
Adjustment Date for Adjustable-Rate Mortgages
On any type of adjustable-rate mortgage (ARM) the interest rate will change on this date. Typically, that is the day after the end of the first year, and each year thereafter. Normally mortgages are due on the first of the month. So, if your mortgage ends its first year on July 31st, then the Adjustment Date would be on August 1st.
Adjustment Period for Adjustable-Rate Mortgages
This is the one-year period between the Adjustment Dates for Adjustable-Rate Mortgages.
Affordability Analysis for Home Mortgages
This considers the borrowers monthly income, the amount of payments on other debts such as student loans, car loans, and credit card debt. Add up your current monthly payments and the expected monthly mortgage payment. That total should be equal to or less than 28 percent of your monthly gross income.
Lenders will also consider the amount of cash that is available for a down payment and closing costs. Of course, the interest rate on the mortgage, the type of mortgage, and even where the home is located are important.
Amortization
Part of a mortgage loan payment is the amount of interest paid. This amount decreases each month. At the same time the amount of principal paid each month goes up until the loan is paid off. This is why making Additional principal Payments earlier in the loan will save much more money than doing so later.
Amortization Term
This is how long the mortgage is for. Usually, it is 30 years (360 months), 20 years (240 months) or 15 years (180 months).
Annual Percentage Rate (APR)
This is the best way to compare one mortgage offer from another, because it includes origination fees plus the (Note Rate) interest rate on the mortgage. So, two mortgages could have the same (Note Rate) interest rate, but also have vastly different origination fees. The mortgage with the lower origination fees and therefore a lower APR is the better choice.
The Annual Percentage Rate also includes the cost of mortgage insurance.
Appraisal
A qualified licensed appraiser prepares a written appraisal determining the marketplace value of the property. Usually this includes a comparison of the property to be purchased with several comparable homes that have recently sold.
This is similar to what a real estate agent will do, but the real estate agent is not licensed as an appraiser. So, lenders require a separate appraisal to be completed during the loan application process.
Appraised Value
A qualified licensed appraiser determines the appraised value during the written appraisal process. This value is based upon the appraiser’s experience and knowledge of the local real estate market.
Sometimes, the Appraised Value is less than what the buyer is willing to pay. Which means the lender will not lend any more than what the appraised value is. In this case the seller must reduce the sales price or the buyer won’t qualify for the mortgage.
Asset
Everything a person owns that has monetary value. That includes cash, stocks and bonds, a retirement account, real estate, and personal property. Also, that would include income from a legal settlement, or a business partnership that provides income.
Assignment
Transferring the ownership of a mortgage from one mortgage lender to a different lender. At the same time the Note (not the mortgage) which is the promise from the borrower to pay the lender, is also Endorsed (signed over) to the new lender.
Assumability
This permits a home buyer to assume the loan of the seller without getting a new loan. Many loans do not allow Assumability. However, if the seller’s mortgage interest rate is lower than the current mortgage rates, the buyer could save huge amounts of money.
Typically, the lender will require the buyer to pass a credit review and pay an assumption fee. Any due-on-sale clause will prevent the loan from being assumed by a buyer.
Assumption Fee
This fee is normally paid by the buyer to the lender when a home mortgage is assumed by the buyer.
Balance Sheet
A financial statement created by a buyer’s accountant. It provides a buyer’s net worth on the date that the balance sheet was created. The net worth is determined after listing all assets and deducting all liabilities.
Balloon Mortgage
The purchaser makes the same monthly payment for a predefined number of months. After which the entire remaining balance must be paid in full. Which is called a balloon payment.
Balloon Payment
The last payment on a balloon mortgage, which is typically a very large amount of money. Normally, the purchaser plans on refinancing the mortgage to pay off the balloon payment.
Before-tax Income
The total of all income received before taxes are deducted. Instead of one monthly payment, two payments are made each month.
Biweekly Payment Mortgage
A method of saving a huge amount of interest over the life of a home loan. This is a total of 26 or 27 payments during the year, instead of 12 payments.
Bridge Loan or Swing Loan
This is used to buy a new home before the current home is sold. A loan is made to the homeowner that is secured by using the collateral in the existing home to purchase a new home.
Broker
Often times this is a single person, but it could also be a company. The purpose of a broker is to help a borrower to find and process a mortgage loan with a lender. This borrower-broker-lender relationship speeds up the application process. That’s because the broker understands what needs to be done and when. Both for the borrower and for the lender.
Buydown
A way to reduce monthly payments during the early years of a home loan. An upfront fee is paid to the lender by the home purchaser, the home builder, or even the seller. This can be part of a negotiating tactic, but is more likely a matter of who wants to make the deal more than the others. This can be part of a fixed rate mortgage or an adjustable rate mortgage.
Cap or Payment Cap
This is a limit on how high a mortgage payment can rise. Usually, there is a yearly cap and a maximum cap during the life of the loan. A payment cap could create a kind of balloon payment at the end of the loan. This is because the lender still receives the same amount of interest. Which means that the payments might not be enough to pay down the principal loan balance.
Certificate of Eligibility
This is a statement from the Department of Veterans Affairs (VA) certifying that a veteran is eligible to receive a VA mortgage.
Certificate of Reasonable Value (CRV)
Another document from the Department of Veterans Affairs (VA) stating the maximum value of a home, and therefore, the maximum loan amount for a VA mortgage.
Change Frequency
This is how often an adjustable-rate mortgage (ARM) can change the interest rate, and therefore the monthly payment amount. The frequency is stated by the number of months.
Closing or Settlement
The time and place where the seller and buyer are scheduled to complete the purchase of the property. The buyer officially signs the mortgage documents. Also, the seller, real estate agent, title company and others are paid what is due to them.
Closing Costs
Expenses paid by the seller and buyer at the closing (see above). There are quite a few different closing costs. Typically, they include: property appraisal fees, real estate taxes, escrow fees, title insurance, loan origination fee, and others.
Compound Interest
Additional unpaid interest that has accrued on the loan in addition to the interest that is due on the principal loan amount.
Consumer Reporting Agency (or Bureau)
The main ones are Equifax, TransUnion, and Experian. However, there are about 50 of them. They collect information about a person’s credit history. Which is used by lenders to determine if they will offer a loan to someone, and what the terms and conditions of the loan will be.
Conversion Clause
It lets the borrower convert an Adjustable-Rate Mortgage to a fixed rate mortgage. This may be an extra expense to the borrower. The conversion clause typically states that the conversion happens at the end of the first adjustment period.
Credit Report
The credit history of a person that is used by lenders to help decide if that person meets the loan qualification terms.
Credit Risk Score
The FICO® score, was created by the Fair, Issac and Company. It is the most commonly used credit risk score. It is the result of a computer model that compares specific data points across the entire U.S. population. It is a 3-digit number from 300 to 850. With the 850 credit risk score being the best.
Higher FICO® scores result in lower interest payments and the ability to borrow larger sums of money. The FICO® credit risk score is the most important factor when lenders are qualifying borrowers for a loan.
Deed of Trust
This is essentially the same as a mortgage. Some States use the Deed of Trust instead of a mortgage. In those States the deed is conveyed to a Trustee.
Default
A mortgage is in default when the monthly payments have not been paid. Also, default occurs when other terms of the loan are broken. Such as not having insurance protecting the property.
Delinquency
When a mortgage payment is paid late, the loan is in delinquency. A delinquency can be cured by making the payment plus any additional fees during the Grace Period. Typically, the Grace Period is for 15 days. Delinquency precedes a default (see above) resulting from one unpaid mortgage payment.
Deposit
Money used to bind a real estate purchase agreement. The deposit is kept by the seller if the buyer does not complete the purchase. Otherwise, the deposit is usually applied towards the final purchase price.
Also, deposits are required to assure that services are paid for before completion of those services. Such as mortgage closing fees.
Discount
This applies to an Adjustable-Rate Mortgage where the lender reduces the interest rate in order to reduce the monthly payments. The discount is usually for one year or less. The discount is designated by the number of interest rate points deducted. When the discount period has ended, the interest rate resets according to the predetermined index rate formula.
Down Payment
The amount of cash paid up front to lower the total mortgage loan amount. Larger down payments are used to prevent the need to pay for Private Mortgage Insurance (PMI).
Effective Gross Income
The total amount of dependable income. Such as hourly wages, guaranteed overtime pay or bonuses. Other sources of income may be counted if it is reliable and a significant amount. Such as alimony or lawsuit settlements.
Equity
Deduct the amount owed from the fair market value of the property to determine the amount of equity.
Escrow
Either money, documents or something of value that is held by a third party that is delivered when the purpose of the escrow has been completed. A common example is the paying for escrow services, title services, or closing costs.
Escrow Disbursements
Money placed into an escrow account is used to pay for mortgage insurance, real estate taxes, or property insurance. Or for any other reason that the escrow account was created.
Escrow Payment
It is the amount paid by the borrower in addition to the mortgage principal and interest. The money is held by the mortgage servicing company in an escrow account. At the appropriate time those funds are used to pay for property taxes, home insurance, mortgage insurance, etc.
Fannie Mae
A shareholder-owned company that is the country’s biggest supplier of home mortgage funds. It was congressionally chartered to provide money for lenders to loan money for mortgages.
FHA Mortgage or Federal Housing Administration (FHA) Mortgage
A government mortgage that permits lenders to loan money to people who cannot qualify for conventional mortgages. The Federal Government guarantees the lender a certain percentage of the loan amount if the borrower defaults on the loan. This guarantee lowers the risk level for the lender and encourages them to lend to people with less than perfect credit scores.
FICO Score or Fair, Issac, and Company Credit Score
This FICO® score, was created by the Fair, Issac and Company. FICO scores are used by lenders as one of the most import loan qualification factors. The FICO credit Score system is the most widely used credit scoring system.
The score is the result of a computer model that compares specific data points for all borrowers in the entire U.S. population.
First Mortgage
Known as the primary lien on the property. It is the first loan obtained by using the property as collateral for the loan.
Fixed Installment
The monthly or bi-weekly mortgage payment that includes a partial principle payment and the accrued interest.
Fixed-Rate Mortgage (FRM)
The interest rate on the mortgage stays the same for the entire length of the mortgae.
Fully Amortized ARM
This is where the monthly payment is large enough to completely amortize (pay off) the Adjustable-Rate Mortgage at the current interest rate during the length of the loan.
GNMA or Government National Mortgage Association
Commonly referred to as Ginnie Mae. It’s a government agency that guarantees on time payments on mortgages directly backed and guaranteed by the U.S. Government. Such as FHA loans, VA loans, USDA Rural Housing Service (RHS) loans, and HUD’s Native American loans.
Growing-Equity Mortgage (GEM)
The interest rate remains the same, but the payment amount increases over the agreed to period of months. The purpose is to make additional principal payments as the monthly payment amount increases. Thus paying off the mortgage at an accelerated pace.
Guarantee Mortgage
A third party (organization) guarantees the repayment of the loan.
Housing Expense Ratio
There are two parts to the Housing Expense Ratio the top and bottom ratios. Normally the “top ratio” should not be more than 28% of the gross monthly income. To get it, divide the mortgage payment by the monthly gross income amount.
The “bottom ratio” needs to be less than 36%. To get that ratio, add together the monthly mortgage payment amount and all other monthly debt payments. Divide that amount by gross monthly income.
HUD-1 Statement
This document is presented to the buyer and seller at the time of closing. Although it is usually available before the closing so that any errors can be caught. It shows what the buyer and seller will pay or receive at the closing after deductions for initial escrow amounts, commissions, loan fees, points paid, etc.
Hybrid ARM (3/1 ARM, 5/1 ARM, 7/1 ARM)
For example: These Adjustable-Rate Mortgages provide a set interest rate for three years in the 3/1 ARM. Then at the end of the third year the interest rate adjusts to the then current rate. The interest rate continues to adjust each year thereafter.
Generally, they provide lower interest rates than other current mortgage rates. They are best for buyers that intend to move or refinance before the interest rate adjusts. However, I have personally kept a 5/1 ARM for 8 years, because interest rates continued to go lower. I then refinanced at the lowest interest rate possible, as interest rates started to increase again.
Index or Index Rate
There are several index setting financial markets. Such as the yield on Treasury bills, the one-year constant maturity treasury (CMT) value, the Prime Lending Rate, and the soon to be phased out LIBOR index.
These index rates are used by lenders to set the Index used to calculate the new interest rate for an Adjustable-Rate Mortgage. The Index Rate is added to the Adjustable-Rate Mortgage Margin or ARM Margin, to determine the new ARM interest rate. Essentially, the ARM Margin is the amount of gross profit the lender wants to make.
Initial Interest Rate
Sometimes called a “teaser” rate or a “starting rate” on an Adjustable-Rate Mortgage. Quite simply, this is the interest rate charged when the loan is first started.
Installment
The monthly or other periodic payment (such as bi-weekly or every payday) on a loan made to the lender.
Insured Mortgage
Any mortgage that is backed by some type of insurance. Such as private mortgage insurance (MI), the Federal Housing Administration (FHA), or the Veterans Administration (VA).
Interest
The money paid for the use of the money borrowed.
Interest Accrual Rate
The percentage of interest that accrues on the mortgage. Normally, it is used to calculate the monthly interest payments.
Interest Rate Buydown Plan
Usually only used when the seller really wants to close the sale. The seller puts money into an account that is used by the lender to reduce the buyer’s monthly payments over a predetermined number of months.
Interest Rate Ceiling
The highest interest rate that an adjustable-rate mortgage (ARM) can adjust to. This could be an interest rate ceiling each year as the rate adjusts, or it could be the maximum rate allowed during the entire length of the loan.
Interest Rate Floor
The lowest interest rate possible during the length of the Adjustable-Rate Mortgage loan. This amount will be stated in the mortgage note along with the Interest Rate Ceiling.
Late Charge
This is a penalty for being more than 15 days (typically) late making a mortgage payment.
Lease-Purchase Mortgage Loan
The property is leased to the potential buyer. Added to the lease amount is an additional amount of money that accumulates and can be used as a down payment at a future date. The lease amount includes the principal, interest, taxes and insurance (PITI) payments on the seller’s mortgage.
Liabilities
All debts owed, either short term or long term. It can also include other financial obligations.
Lifetime Payment Cap
The lowest and the highest monthly payment amount allowed during the life of an adjustable-rate mortgage (ARM).
Lifetime Rate Cap
The lowest and the highest monthly interest rate allowed during the life of an adjustable-rate mortgage (ARM).
Line of Credit
A specified maximum amount of money that the borrower is qualified for and can use. It acts much like any checking account where any portion of that total amount can be used and repaid as needed. Typically, there is a set period of months during which that line of credit can be used.
Liquid Asset
Cash or something that can be turned into cash very quickly. For example: stocks, bonds and gold.
Loan
An amount of money that is borrowed, called the principal, that is repaid with interest.
Loan-to-Value (LTV) Percentage
If a home is appraised for, or sold for $100,000 and the mortgage is $90,000, the
Loan-to-Value amount is 90%. Typically, investors are only able to get a mortgage with an LTV of 75% or less. In other words, the investor needs to make a 25% or more down payment.
Lock-In Period
The lender guarantees the interest rate, points (if any) and loan term for a specified period of time. There may be a fee to lock in a mortgage. Do not accept a lock-in-period until you and the lender are positive that the loan can close within the lock-in-period. 30 days might be too short a time period during a time of high applications due to low interest rates. One mortgage that I took out myself took 28 days to close, even though I was fully pre-qualified.
Margin
The number of interest rate percentage points added to an Index to equal the interest rate for an Adjustable-Rate Mortgage. See Index.
Maturity
A specified date when the remaining principal loan amount must be paid.
Monthly Fixed Installment
The monthly payment that includes a portion of the loan principal and the accrued interest.
Mortgage
This is a legally binding contract that pledges the property as collateral for payment of the debt owed.
Mortgage Banker
A company that creates a mortgage (called origination) and then resells the mortgage on the secondary mortgage market (investors).
Mortgage Broker
A person or a company that acts as a middleman between the borrower and the lender. This arrangement helps the borrower through the qualifying and overall mortgage lending process. At the same time, it permits the lender to make more loans in the same amount of time, because they are not dealing with the public directly. The brokers know what the lenders want and need and makes sure that the borrower provides all of that information. In other words, the broker does some of the work that the lender would otherwise have to do themselves.
Mortgage Insurance
This is much like car insurance that is required by the lender to make sure the lender is paid in full if the car is totaled in a car cash. Mortgage insurance makes sure the lender gets paid if the borrower defaults on the mortgage. The insurance could be provided by the government or by a private company.
Mortgage Insurance Premium (MIP)
The dollar amount paid by the borrower to have mortgage insurance.
Mortgage Life Insurance
A life insurance policy that pays off the mortgage if the person insured dies.
Mortgagor
The person that borrows the money from the lender.
Negative Amortization
The opposite of Amortization. Where Amortization reduces the amount of principle with each mortgage payment. So, with Negative Amortization, the interest rate is so high that the monthly payment amount doesn’t reduce the principal loan amount. Worse yet, if the payment amount doesn’t even pay all of the interest owed, the amount owed on the mortgage will increase. This can occur when an Adjustable-Rate Mortgage adjusts to a higher interest rate, in combination with a Payment Cap.
Net Worth
The total value of someone’s cash and other assets, after deducting debts and liabilities.
Non-Liquid Asset
Any asset that can’t be quickly turned into cash. Such as real estate, equipment and collectables.
Note or Mortgage Note
The Note is a legal document that requires the borrower to pay the mortgage according to the terms of the mortgage. The note will specify the loan term and the interest rate.
Origination Fee
This fee pays for the lender to process the loan application. The Origination Fee is referred to as “points”. Each “point” is a percentage of the loan amount.
Owner Financing
The seller is the lender. Either entirely or partially. A Contract For Deed is a common form of owner financing.
Payment Change Date
The Payment Change Date happens in the month after the mortgage adjustment date on an Adjustable-Rate Mortgage or on a graduated-payment mortgage (GPM).
Periodic Payment Cap
The highest and lowest amounts the mortgage payments can adjust to from one adjustment period to the next.
Periodic Rate Cap
A maximum and minimum amount the interest rate can change from the current adjustment period to the next adjustment period.
PITI Reserves or Principal Interest Taxes and Insurance Reserves
Generally, this is an amount equal to three times the monthly mortgage payment including Principal Interest Taxes and Insurance. It is a requirement of the lender to be able to qualify for the loan. This is in addition to the down payment and closing costs.
Points
Each point is equal to one percent of the loan amount. As an example: A mortgage of $350,000 X 1% = $3,500 for one point. Points are usually paid by the buyer, but could be paid by the seller, or split between them.
Prepayment Penalty
Not as common as they used to be. If the borrower pays off the mortgage early, the lender loses interest income. So, the lender wants to be compensated by charging a prepayment penalty.
Pre-Approval
The lender has determined that the borrower will get the loan – if nothing changes before the closing. However, the lender might still find something that would disqualify the borrower from getting the loan as the various documents are processed before closing. This is particularly true if the borrower has lied or not revealed certain facts.
Pre-Qualfied
The Realtor or the lender have made an estimate of the amount that the borrower might be pre-approved for later in the loan application process. Being pre-qualified is based upon the borrower’s credit score and preliminary information provided by the borrower. Such as income, and other debts.
Prime Rate
The lowest interest rate that banks charge their best customers.
Principal
The original amount of the loan or the amount remaining to be paid. Also, each month (normally) the amount paid includes a part of the principle in addition to the interest.
Principal Balance
An amount still owed on the mortgage, not counting interest or fees.
Principal, Interest, Taxes, and Insurance (PITI)
Principal is the remaining unpaid loan amount. At the beginning of the loan the amount of principal paid off each month is quite low, and slowly increases during the term of the loan.
Interest is the fee charged for having borrowed the money.
Taxes refers to real estate taxes. Paying real estate taxes is a requirement of every mortgage. A portion of the monthly payment is (normally) held by the lender and is paid when due to the government.
Lenders require homeowner’s insurance and part of the monthly payment is escrowed to cover insurance costs and is paid when due.
Borrower’s are able to make the insurance and tax payments themselves, but it is easier and safer to let the lender do it for you.
Private Mortgage Insurance (PMI)
As opposed to government backed mortgage insurance (FHA, VA, USDA), private companies provide Private Mortgage Insurance. Which is required when the loan-to-value ratio is over 80%.
Private Mortgage Insurance must be dropped by the lender automatically when the principal has been reduced enough for the LTV to reach 78%. That’s a requirement of the Homeowners Protection Act
Qualifying Ratios
To qualify a borrower the lenders use two calculations during the lending process. First, the housing expense ratio as a percent of income. Second, the total debt obligations ratio as a percent of income.
Rate Lock
The lender issues a rate lock for a specified amount of time, including the locked interest rate and closing costs.
Real Estate Agent
A state licensed person that is authorized to negotiate and transact the sale of real estate for the buyer and seller.
Real Estate Settlement Procedures Act (RESPA)
A law that requires the lender to provide a list of closing costs prior to the closing date.
REALTOR®
A real estate agent that belongs to the National Association of Realtors which requires members to follow a very strict code of conduct and ethics. The REALTOR® emblem is a federal government registered mark of the trade membership organization.
Recording
A public record of a properly executed legal document located in the county’s registrar’s office. Such real estate related documents include: deeds to property, a mortgage on a property, liens against the property, mortgage satisfaction.
Refinance
Obtaining a new loan to pay off an existing loan. The property remains as the collateral for the new loan.
Revolving Liability
Typically, a credit card or a line of credit, either personal or business.
Secondary Mortgage Market
Where private investors buy and sell existing mortgages. Mortgage Bankers use this market place to sell the mortgages they create with borrowers. The mortgage bankers use their own funds to create the mortgage, but in order to free up those funds for reuse, the mortgage is sold in the secondary mortgage market.
Security
The property used as collateral (called: pledged) to protect the lender from losses if the borrower defaults on the loan.
Seller Carry-back
Another way of saying Seller Financing. Often times this is in conjunction with the buyer assuming an assumable mortgage.
Servicer
Any company that collects the monthly payments from the borrower and sends the payments to the owner of the mortgage. The servicer is a middleman between the borrower and the lender. Also, the servicer is the one that actually makes the homeowner’s insurance and real estate tax payments out of the escrow account. The escrow account is set up at the time of the loan closing.
Standard Payment Calculation
A method of determining the monthly mortgage payment amount. The goal is to use the interest rate, loan amount, and the term (in months), to determine equal monthly payments.
Step-Rate Mortgage
The interest rate increases a predetermined amount at predetermined dates over a number of years. Then the interest remains the same for the remainder of the loan term. This permits buyers to be able to afford a bigger house with the expectation that their income will rise to be able to afford the increased payments.
There are benefits for the lender also. If the lender expects interest rates to continue to rise, they must charge more now to cover the higher cost of money in the future. However, with a step-rate mortgage, they can charge less interest now and still receive the same overall profit margin.
Third-party Origination
The lender sub-contracts the entire lending process, or part of it, to another company. That could include: loan origination, underwriting, processing, and loan closing. It could also include packaging a number of loans together so they can be sold on the secondary mortgage market.
Total Expense Ratio
Add together all monthly housing expenses and other debt payments. Divide that amount by the gross monthly income to get the Total Expense Ratio.
Treasury Index
The Treasury Index is used to determine the interest rate on an adjustable-rate mortgage (ARM). The index amount is added to the index margin (lender’s gross profit) to get the interest rate charged to the borrower.
The Treasury Index is based upon the sale of securities (Treasury bills) sold by the U.S. Treasury.
Truth-in-Lending
This federal law requires that borrowers receive in writing a full disclosure of the annual percentage rate (APR), and all other terms and requirements of the mortgage.
Two-step Mortgage
Another kind of adjustable-rate mortgage (ARM) where the interest rate stays the same for a set number of years. Such as 5 or 7 years. After which the interest rate will change (just once) and remain the same for the remainder of the loan.
Underwriting
The process of determining the risk level for the lender to make the loan to the borrower. It considers the borrower’s creditworthiness as well as the type of property and its quality of construction.
VA Mortgage
This government mortgage is only for those who have served in the military. It is guaranteed by the Department of Veterans Affairs (VA). Which reduces the risk for the lender. That in turn permitted me to buy a home with no money down. When I paid off that loan, I became eligible for another V.A. mortgage.
Variable-Rate Mortgages (VRM)
The same thing as an Adjustable-Rate Mortgage or Adjustable Mortgage Loan. See the Adjustable-Rate Mortgage description.
“Wrap Around” Mortgage
First, be aware that the seller’s current mortgage might not allow for a Wrap Around mortgage.
Essentially the seller becomes the lender to the buyer. The seller continues to make the mortgage payments for their current mortgage. The money for that payment comes from the buyer’s payment to the seller. If the buyer stops paying the seller, the seller must still pay for the original loan. Even though they don’t own the house anymore.
If the buyer makes the payment to the seller, but the seller doesn’t make the payment on the original loan, the seller could lose the house to foreclosure.
For example: The seller still owes $50,000 on the original mortgage at 3% interest. The buyer agrees to buy the home for $300,000 at 6% interest. So, the seller is making 6% interest on $250,000. Plus 3% interest on $50,000. All of which comes from the buyer.
Mortgage Glossary Summary
I tried to give readers more than just a mortgage glossary. Knowing what a term means doesn’t tell readers how to make use of that information. So, I tried to give examples of how to use the information in this mortgage glossary. Thus, preventing mistakes that people make out of ignorance. Mistakes that could cost or save a lot of money.