Acceleration Clause - Provision in a mortgage that allows the lender to demand payment of the entire principal balance if a monthly payment is missed or some other default occurs. The only way the bank can "Accelerate" on a mortgage is when you don't follow your agreement, like making payments on time.

Additional Principal Payment - A way to reduce the remaining balance on the loan by paying more than the scheduled principal amount due. (Go to calculator)

Adjustable-Rate Mortgage (ARM) - A mortgage with an interest rate that changes during the life of the loan. Sometimes they are called AML (adjustable mortgage loans) or VRM (variable rate mortgages), they all work the same way. They start with an interest rate that is fixed for a period of time. The fixed rate can be from 1 month to 7 years (according to your contract). Then the interest rate adjustment is calculated by adding an Index rate and margin to give an actual interest rate for the next contracted period of time. When the Index rate increases, so does your interest rate, and your payment. ARM mortgages have built-in caps to protect the borrower from extreme payment changes.
ARM Mortgages have lower interest rates than Fixed Rate Mortgages which make it easier to qualify for a mortgage. The higher the fixed period on the ARM, the higher the initial interest rate.
Some lenders are now offering Conversion Clauses.

Adjustment Period - The period of time in an ARM mortgage when an adjustment of the interest rate will occur. They are required to give you at least 30 days notification of the change (or no change) of the interest rate.

Amortization - The gradual repayment of a mortgage loan. When shown in a schedule, is shows both principal and interest payments each month until the total principal balance is zero (or balance at the end of the period requested).

Amortization Term - The length of time required to amortize the mortgage loan. For example, for a 30-year mortgage, the Amortization Term is 360 months.

Annual Percentage Rate (APR) - The cost of credit, expressed as a yearly rate including interest and mortgage insurance and loan origination fees. If there are no mortgage insurance or closing costs, than the APR will be the same as your contractual interest rate.

Appraisal - A written analysis estimating the value of a property, and is prepared by a qualified appraiser. The appraiser uses his/her best judgment to give a value of the property using standard practices and his/her knowledge of the area. The appraisal is what lenders use to base loan acceptability and a complete and accurate description of the property.

Appraiser - A professional who determines the market value of properties.

APR - The Annual Percentage Rate of a mortgage as calculated on the Truth and Lending Statement. The APR calculates all other costs that are included into the loan to come up with the actual interest rate you are charged on the INITIAL balance of the mortgage. Often you will see that the APR rate is higher than what you are actually given. This is because of the added costs you "rolled into" the loan. If no costs were added in, then the rate should be equal to the actual interest rate you were charged.

Assignment - The transfer of a mortgage from one person to another.

Assumable - When you have an assumable mortgage clause, it means the mortgage can be transferred from the seller to the new buyer. The new borrower is generally required to have a credit review and lenders may charge a fee for the assumption. If a mortgage contains a due-on-sale (Acceleration) clause, the mortgage may not be assumed by the new buyer. Most loans in today's market are NOT assumable.

Balloon Mortgage - This is a fixed mortgage payment that amortizes like the standard term (say 30 year term). The difference in this mortgage is they stipulate the mortgage will not be held for any longer than a specified term and the balance must be paid off in full by that date (say in 5 years).

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 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 and the mortgage would be paid off earlier than the standard 30 year mortgage.

Bridge Loan - Also known as "swing loan", it is loan 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.

Buydown - When the seller, builder or buyer pays an amount of money up front to the lender to reduce interest rates on the mortgage. Buydowns can occur in both fixed and adjustable rate mortgages.

Cap - Limits how much the interest rate or the monthly payment can increase on an ARM mortgage. There are two numbers you will have and they are generally written as a 2/6 cap. It shows the borrower you have a 2% increase/decrease cap annually while the maximum increase is maximized at 6% for the life of the loan. Sometimes, they add an additional number (for example 6/2/6) designating the adjustment period. In this case, the increase can happen every 6 months. The caps only protect you from your payment increases but do not limit the amount of interest the lender is earning and may cause negative amortization.

Certificate of Eligibility - A document issued by the federal government (Department of Veterans Affairs) certifying a veteran's eligibility for a VA mortgage.

Certificate of Reasonable Value (CRV) - The VA appraises the house and issues a document that establishes the maximum value and loan amount for a VA mortgage.

Closing - This is the time when you are finalizing the sale (or refinance) of a property. The buyer signs the mortgage documents and pays closing costs per the settlement statement (HUD-1) and the seller receives his proceeds.

Closing Costs - These are expenses over and above the price of the property that are incurred when the financing or refinancing of a mortgage occurs. 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.

Consumer Reporting Agency (or Credit 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 from other sources and issues a Credit Report.

Conversion Clause - A provision in an ARM allowing the loan to be converted to a fixed-rate during a set timeframe. The conversion feature may cost extra. Specific requirements may be needed to qualify for the conversion during that set timeframe, one being that there are no late payments on the mortgage qualification period.

Credit Report - A detailed report of an individual's credit history that is prepared by a credit bureau and used by a lender to determine a loan applicant's credit worthiness.

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.
Some of the items that NEGATIVELY affect credit scores are: Late Payments, Collections, Judgments, Bankruptcy, Foreclosures, Maximizing Credit, too many Inquiries (looking everywhere for credit) etc.
The one item that POSITIVELY affect credit scores are: Timely Payments.

Deed of Trust - The document used in some states instead of a mortgage. Title is conveyed to a trustee as collateral security for payment of the debt. The trustee then has the right to sell the land to pay the debt in the event of default.

Default - It's the failure to make mortgage payments on a timely basis or to comply with other requirements of a mortgage.

Delinquency - To be delinquent, you have failed to make mortgage payments on time.

Deposit - This is a sum of money given to bind the sale of real estate, or a sum of money given to ensure payment or an advance of funds in the processing of a loan.

Discount - In an ARM with an initial rate discount, the lender gives up a number of percentage points in interest to reduce the rate and lower the payments for part of the mortgage term (usually for one year or less). After the discount period, the ARM rate usually increases according to its index rate.
Down Payment - Like the deposit, it is part of the purchase price of a property that is paid in cash and not financed with a mortgage.

Equity - The amount of financial interest in a property. Equity is the difference between the appraised value of the property and the balance on the mortgage.

Equity Line of Credit - An agreement by a commercial bank or other financial institution to extend credit up to a certain amount for a certain time and is secured by your property.

Escrow - An escrow account is a special fund set up for future disbursements. This may be for taxes and/or insurance on the property, or for the deposit of funds or documents with into an escrow account to be disbursed upon the closing of a sale of real estate. Escrows are used for mortgage or real estate transactions.

Escrow Payment - As part of a mortgage, it is the payment of taxes, hazard insurance, mortgage insurance, lease payments, and any other items escrowed as they become due. Each item is generally paid in annual installments and the escrow money would be part of your loan payment. It is calculated in 12 monthly installments and added to your mortgage payment.
As a Real Estate transaction, the down payment would be disbursed.

Fannie Mae - A congressionally chartered, shareholder-owned company that is the nation's largest supplier of home mortgage funds. They do not guarantee mortgages but are the largest investor in mortgages in the country.

FHA - Federal Housing Agency is a federal agency under HUD (Housing and Urban Development). This mortgage is backed by the FHA through an insurance policy, which the homeowner funds as part of the loan.

FHLMC - Better known as Freddie Mac, this government agency is similar to GNMA except that they deal only with Savings and Loan Associations. They are regulated by the Office of Thrift Supervision (OTS) and back the loans to the investors. The initials stand for Federal Home Loan Mortgage Corporation.
Fixed-Rate Mortgage - A mortgage that the interest stays fixed throughout the entire term of the loan. This is generally the preferred mortgage but not always the best for your particular situation.

GNMA - It is better known as Ginnie Mae. As part of HUD (Housing and Urban Development), this government-owned corporation pools FHA and VA mortgages and issues pass through certificates to investors. The certificates (and of course the mortgages) are guaranteed by the government, and the investors receive monthly payments just as if they were the mortgage holder.

Housing Expense Ratio - The percentage of gross monthly income budgeted to pay housing expenses. These expenses generally include PITI (Principal, Interest, Taxes, Insurance), and Homeowner/Association Fees.

HUD-1 Statement - A document that provides an itemized listing of all funds that are payable at closing. Items that appear on the statement include real estate commissions, loan fees, points, and initial escrow amounts. The totals at the bottom of the HUD-1 statement show the seller's net proceeds and the buyer's net payment at closing for a purchase. A refinance also lists all closing costs listed above except Real Estate commissions, and there would be no seller's net proceeds.

Index - The index is a published measure of interest rate used in determining the actual interest rate an ARM mortgage or Equity line of credit will be charged. The index is generally a number or percentage, such as the average interest rate or yield on Treasury bills. Some index rates tend to be higher than others and some more volatile.

Initial Interest Rate - This refers to the original interest rate of the mortgage at the time of closing and is in an adjustable-rate mortgage (ARM).

Installment - The regular periodic (mainly monthly) payment that a borrower agrees to make to a lender.

Interest - The fee that is charged for borrowing money.

Interest Rate Ceiling

- For an adjustable-rate mortgage (ARM), the maximum interest rate that can be charged, as specified in the mortgage note.

Interest Rate Floor - For an adjustable-rate mortgage (ARM), the minimum interest rate that can be charged, as specified in the mortgage note.

Late Charge - The penalty a borrower must pay when a payment is not made on the due date. The late charge is generally assessed 15 days after the contracted due date.

Lease-Purchase - 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 a standard rental fee plus an extra amount that accumulates in a savings account for a down-payment. Generally the rental must be within the market guidelines and is determined by the appraiser at time of purchase.

Liabilities - A list of a person's financial obligations. Liabilities include long-term and short-term debt.

Line of Credit - An agreement by a commercial bank or other financial institution to extend credit up to a certain amount for a certain time and is generally secured by your property.

Liquid Asset - A cash asset or an asset that is easily converted into cash.

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

Loan-to-Value (LTV) Percentage - The relationship between the principal balance of the mortgage and the appraised value (or sales price if it is lower) of the property. For example, a $100,000 home with an $80,000 mortgage has an LTV of 80 percent.

Lock-In Period - The guarantee of an interest rate for a specified period of time by a lender, including loan term and points, if any, to be paid at closing. Many lenders may permit a borrower to lock a loan for 30 days or more prior to submission of the loan application. The lender must have this money set aside solely for the purpose of your mortgage and can not allocate that to anyone else.

Margin - The number of percentage points the lender adds to the index rate to calculate the ARM or Equity Line of Credit interest rate at each adjustment period.

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

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

Mortgage Broker - An individual or company that brings borrowers and lenders together for the purpose of loan origination. Their purpose is to find the best institution to fit your individual needs so you don't have to do the shopping (and possibly miss a great program not offered at your particular institution/bank).

Mortgage Insurance - A contract that insures the lender against loss caused by a mortgagor's default on a government mortgage or conventional mortgage. Mortgage insurance can be issued by a private company (PMI) or by a government agency (MI).

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

Negative Amortization - Negative amortization means that monthly payments are not large enough to pay the interest due on your mortgage. The interest cost that isn't covered is added to the unpaid principal balance. This means that even after making many payments, you could owe more than you did at the beginning of the loan. Negative amortization occurs when an ARM has a payment cap that results in monthly payments not high enough to cover the interest due.

Net Worth - The value of all of a person's assets, including cash - LESS any outstanding liabilities.

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

Origination Fee - A fee paid to a lender for processing a loan application. The origination fee is stated in the form of points. One point = 1 percent of the mortgage amount.

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 because they have to give at least 30 days notice.

PITI Reserves - A cash amount that a borrower must have on hand after making a down payment and paying all closing costs for the purchase of a home. The principal, interest, taxes, and insurance (PITI) reserves must equal the amount that the borrower would have to pay for PITI for a predefined number of months (usually three) and available in a bank account or other liquid asset.

Points - A point is equal to one percent of the principal amount of your mortgage. For example, if you get a mortgage for $165,000, one point means $1,650 to the lender. Points usually are collected at closing and may be paid by the borrower, the home seller, split between them, or even added to the mortgage.

Prepayment Penalty - A fee that may be charged to a borrower who pays off a loan before it is due. These penalties generally are for a very short period of time (1-5 years) at the beginning of the loan to assure the investor a return on investment.

Pre-Approval - The process of determining how much money you will be eligible to borrow before you apply for a loan. This is always subject to receiving final documents that match what was stated at the beginning of the process.

Prime Rate - The interest rate that banks charge to their preferred customers. Changes in the prime rate influence changes in other rates, including mortgage interest rates.

Principal - The amount borrowed or remaining unpaid balance of your mortgage.

Principal, Interest, Taxes, and Insurance (PITI) - These are 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, and may be paid into an escrow account each month.

Qualifying Ratios - The lender uses these calculations used to determine if a borrower can qualify for a mortgage. There are two separate calculations: a housing expense ratio and total debt ratio. All is based as a percent of your qualifying income. Each lender uses different guidelines to determine these ratios. FHA loans use 29% for housing expense ratio and 41% as total debt ratio for guidelines while other lenders may go as high as 60% for total debt ratio.
Rate Lock - Commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified interest rate and lender costs for a specified period of time. Rate locks require a signature from both parties to be binding.

Real Estate Settlement Procedures Act (RESPA) - A federal consumer protection law that requires lenders to give borrowers (and sellers) advance notice of all closing costs.

Recording - The placing of the details of a properly executed legal document, such as a deed, a mortgage note, a satisfaction of mortgage, or an extension of mortgage, thereby making it a part of the public record in the registrar's office of the state.
Refinance - Paying off one loan with the proceeds from a new loan using the same property as security. The general reasons for refinancing is for a lower interest rate or to receive cash out for payment of debt or anticipated debt.

Revolving Liability - Better known as revolving debt -which is 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.

Security - The property (for mortgages) that will be pledged as collateral for a loan.

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.

Total Debt Ratio - Sometimes called Total Expense Ratio, the total of all your obligations (mortgage, Car payment, Credit Cards, etc) as a percentage of gross monthly income.

Treasury Index - An index used to determine interest rate changes for certain adjustable-rate mortgage (ARM) plans. Based on the results of auctions that the U.S. Treasury holds for its Treasury bills and securities or derived from the U.S. Treasury's daily yield curve, which is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market.

Truth-in-Lending - A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the contractual as well as the annual percentage rate (APR) and other charges.

Two-step Mortgage - An adjustable-rate mortgage (ARM) with one interest rate for the first contracted number of years of its mortgage term and a different (adjustable) interest rate for the remainder of the amortization term.

Underwriting - The process of evaluating a loan application to determine the risk involved for the lender. Underwriting involves an analysis of the borrower's creditworthiness and the quality of the property itself.

VA Mortgage - A mortgage that is guaranteed by the Department of Veterans Affairs (VA).

Variable Rate Mortgage - See ARM.

"Wrap Around" Mortgage - A mortgage that includes the remaining balance on an existing first mortgage PLUS an additional amount requested by the mortgagor or seller. Full payments on both mortgages are made to the "Wrap Around" mortgagee (or seller), who then forwards the payments on the first mortgage to the first mortgagee. These mortgages may not be allowed by the first mortgage holder, and if discovered, could be subject to a demand for full payment.