Adjustable-rate mortgage (ARM) -- Home loan
in which the interest rate is changed periodically based on
a standard financial index. Most ARMs have caps on how much
an interest rate may increase.
Annual percentage rate (APR) -- A yearly rate
of interest that includes fees and costs paid to acquire the
loan. Lenders are required by law to disclose the APR. The rate
is calculated in a standard way, taking the average compound
interest rate over the term of the loan, so borrowers can compare
loans. In mortgages, it is the interest rate of a mortgage when
taking into account the interest, mortgage insurance, and certain
closing costs including points paid at closing. There is no
APR in an automobile lease; instead, the cost of money is expressed
as the money factor.
Appraisal -- An estimate of market value placed
on all real property and mobile homes. There are two kinds of
appraisals: mass appraisal, in which a community is valued for
tax purposes; and fee appraisal, in which one property is appraised,
often in comparison with other properties. Each is accomplished
under a different set of rules and guidelines.
Balloon Payments - A balloon payment is a
loan payment that can equal all of the remaining loan balance
or a large fraction of the remaining balance.
Bankruptcy - A tactic that individuals use
to relieve themselves of debts and/or liabilities when they
are no longer able to repay. The most common form of individual
bankruptcy is a Chapter 7, when an individual frees himself
from most of his/her debts. Borrowers who have undergone bankruptcy
usually cannot qualify for "A" paper loans until after
two years after declaration and a re-establishment of credit.
Broker - One who finds lenders for prospective
borrowers who meet the lenders’ criteria. A mortgage broker
does not make the loan, but receives payment for services.
Community Reinvestment Act - A federal law
that requires financial institutions to lend in areas where
they take deposits, including in poor and minority neighborhoods.
Conventional loan or conventional financing - A mortgage that
is not insured or guaranteed by a government agency such as
the Federal Home Administration (FHA) or Veterans Administration
Credit bureau - A company that collects and
sells information about how people handle credit. It issues
credit reports that list how individuals manage their debts
and make payments, how much untapped credit they have available
and whether they have applied for any loans. The reports are
made available to individuals and to creditors who profess to
have a legitimate need for the information. The three major
national credit bureaus are Equifax, Experian (formerly TRW)
and Trans Union.
Credit Insurance - If a borrower dies or becomes
unemployed, credit insurance pays the outstanding loan balance.
Credit insurance is much more expensive when it is added to
the loan amount than when a consumer pays for it on a monthly
basis outside of the loan, because interest is charged on the
Default - Failure to meet legal obligations
in a contract, specifically, failure to make the monthly payments
on a mortgage.
Equity - The value of a homeowner's unencumbered
interest in real estate. Equity is the difference between the
home's fair market value and the unpaid principal balance of
the mortgage and any liens. Equity increases as the mortgage
is paid down and as the property appreciates in value.
Escrow account - An account in which money
for property taxes and insurance is held until paid; money is
added to the account every time a mortgage payment is made.
Fee Packing - The practice of increasing the
cost of a loan with unnecessary fees. Also known as "padding."
FHA loan - A residential mortgage from an
approved lender and insured by the Federal Housing Administration.
The down payment on an FHA loan usually is less than that for
a conventional mortgage. The FHA does not lend money, but nominates
Flipping - The practice of repeated loan refinancings
with little or no benefit to the borrower. NCRC defines “flipping”
as the making of a home loan to a borrower which refinances
an existing consumer home loan when the new loan does not have
a tangible benefit to the borrower considering all of the circumstances,
including the terms of both the new and refinanced loans, the
cost of the new loan, and the borrower’s circumstances. Home
loan refinancings are presumed to be flippings if the primary
tangible benefit to the borrower is an interest rate lower than
the interest rate on debts satisfied or refinanced in connection
with the home loan, and it will take more than four (4) years
for the borrower to recoup the costs of the points and fees
and other closing costs through savings resulting from the lower
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.
Forbearance -- Delaying foreclosure, usually
because the borrower has arranged to pay the amount in arrears.
Loan-to-value ratio (LTV) - The percentage
of the home's price that is paid for by a mortgage. On a $100,000
house, if the buyer makes a $20,000 down payment and borrows
$80,000, the mortgage is 80 percent of the price of the house.
Therefore, the loan-to-value ratio is 80. When refinancing a
mortgage, the loan-to-value ratio is computed using the appraised
value of the home, not the sale price.
Mortgage - A legal agreement that uses property
as collateral to secure payment of a debt. The legal agreement
means that when a mortgage is on a house, the lender can take
possession of the house if the borrower stops making payments.
Mortgagee - One who lends for the purchase
of property, using the property as collateral to assure payment.
Mortgagor - One who borrows for the purchase
of property, using the property as collateral to secure payment.
Note - A legal acknowledgment of a debt and
an implicit promise to repay.
Points - Points are broken out on the site
for Discount and Origination. The definitions for each are as
Prepayment Penalty - Lenders who impose prepayment
penalties will charge borrowers a fee if they repay part or
their entire loan in advance of the regular schedule or refinances
with another bank. According to the HUD and Department of Treasury
Task Force report on sub-prime lending, about 70 percent of
sub-prime loans contain prepayment penalties. Only one to two
percent of prime loans includes prepayment penalties.
Prime rate - The interest rate a bank charges
its best or "prime" customers. Each bank will quote
a prime-lending rate. The rate given to consumers on their loans
is often based as the prime rate plus a certain percentage,
which represents the lender's assessment of the risk in lending,
plus its profit margin.
Servicer - An organization that collects monthly
mortgage principal and interest payments from homeowners and
manages escrow accounts for paying taxes and homeowners' insurance
premiums. The servicer often services mortgages that have been
purchased by an investor in the secondary mortgage market.
Subprime borrower - A borrower with a less-than-perfect
credit report due to late payments or default on debt payments.
Lenders often grade them based on the severity of past credit
problems, with categories ranging from "A-" on down
to "D" or lower.
Subprime mortgage - A mortgage granted to
a borrower considered subprime, that is, a person with a less-than-perfect
credit report. Subprime borrowers have either missed payments
on a debt or have been late with payments. Lenders charge a
higher interest rate to compensate for potential losses from
customers who may run into trouble or default.
Title company -A company that checks a property's
title for liens and other obstacles to sale, fixes any clouds
to title, supervises the closing transaction, and makes sure
that money transfers in a purchase are processed correctly.
Yield Spread Premium - a kickback fee paid
by a lender to a broker for selling higher interest rates.