Common Mortgage Terms
Ginnie
Mae
see Government National Mortgage Association
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.
Guaranty
Apromise 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
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.
Impound
That 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.
Lien
A claim upon a piece of property for the payment or satisfaction of a debt or obligation.
Loan-to-Value Ratio
The relationship between the amount of the mortgage loan and the appraised value of the
property expressed as a percentage.
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.
MIP (Mortgage Insurance Premium)
It is insurance from FHA to the lender against incurring a loss on account of the
borrower's default.
Mortgage Insurance
Money paid to insure the mortgage when the down payment is less than 20 percent. See private
mortgage insurance, FHA mortgage insurance.
Negative Amortization
Occurs 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 danger of
negative amortization is that 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: The signed obligation to pay a debt, as a mortgage
note.
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.
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.
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 making mortgage loans directly to borrower's such as savings and loan
associations, commercial banks, and mortgage companies. These lenders sometimes sell their
mortgages into the secondary mortgage markets such as to FNMA or GNMA,
etc.
Principal
The amount of debt, not counting interest, left on a loan.
Private Mortgage Insurance (PMI)
In the event that you do not have a twenty percent down payment, lenders will allow a
smaller down payment - as low as three 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 you loan's structure.
Recision
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
Acronym for the Real Estate Settlement Procedures Act. RESPA is a federal law that allows
consumers to review information on known or estimated settlement cost once after
application and once prior to or at a 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 asSatisfaction of Mortgage: The document issued by the
mortgagee when the mortgage loam 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.
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.
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.
Survey
A measurement of land, prepared by a registered land surveyor, showing the location of the
land with reference to know points, its dimensions, and the location and dimensions of any
buildings.
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 born 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.
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 2.25 percent (depending on the size of the down payment) paid on a
VA-backed loan. On a $100,000 fixed-rate mortgage with no down payment, this would amount
to $2,250 either paid at closing or added to the amount financed.
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 emloyer 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.
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