ADJUSTABLE RATE MORTGAGE (ARM): A mortgage with an interest rate fixed for only a short period. At the end of the period the rate will be adjusted up or down based on current interest rate indexes.
AMORTIZED LOAN: A loan which is paid off in equal installments during its term.
ASSUMABLE MORTGAGE: A mortgage that can be transferred to a new owner. The new owner then assumes responsibility as the guarantor for the unpaid balance of the mortgage.
BALLOON PAYMENT: The final payment of a mortgage loan when it is larger than the regular payment. It usually extinguishes the debt.
CAPITAL GAINS TAX: The tax on profit derived from the sale of a capital asset. The capital gain is the difference between the sale price and the basis of the property, after making appropriate adjustments for closing costs, fixing up expenses, capital improvements, allowable depreciation, etc.
CLOSING COSTS: Expenses incurred in the closing of a real estate or mortgage transaction. Purchasers expenses normally include: cost of title examination, premiums for the title policies, credit report, appraisal fees, attorney fee, lender’s service fees and recording charges.
CONVENTIONAL MORTGAGE: A loan neither FHA insured nor guaranteed by the VA. A loan approved under Fannie Mae or Freddiemac guidelines.
EQUITY: The difference between market value of the property and the owner’s indebtedness.
ESCROW PAYMENT: A portion of a mortgagor’s monthly payment held in trust by the lender to pay for taxes, insurance, mortgage insurance, and other items that become due.
FHA: The Federal Housing Administration. Sets guidelines for special lower interest loans on qualifi ed priced homes.
FANNIE MAE: Nickname for Federal National Mortgage Association (FNMA), a tax-paying corporation created by Congress. Sets guidelines under which most conventional mortgages are acceptable. FNMA is the largest purchaser of VA, FHA, and Conventional loans. Since FNMA buys so many loans from lenders, most loans must conform to their guidelines.
FREDDIEMAC: Nickname of Federal Home Loan Mortgage Corporation (FHLMC), a federally controlled and operated corporation to support the secondary mortgage market. It purchases and sells residential conventional home mortgages.
LOAN COMMITMENT: A written promise by a lender to make a loan under certain terms and conditions. These include interest rate, length of the loan, lender fees, annual percentage rate, mortgage and hazard insurance, and other special requirements.
LOAN TO VALUE RATIO: The ratio of the mortgage loan principal (amount borrowed) to the property’s appraised value (selling price). On a $100,000 home, with a mortgage loan principal of $80,000, the loan to value ratio is 80%.
ORIGINATION FEE: A fee or charge for work involved in the evaluation, preparation, and submission of a proposed mortgage loan.
POINT: One percent of loan amount. Loan fees are sometimes expressed in points.
PREPAYMENT PENALTY: A fee paid to the mortgagee for paying the mortgage before it becomes due. Also known as prepayment fee or reinvestment fee.
PREPAYMENT PRIVILEGE: The right given a purchaser to pay all or part of a debt prior to its maturity without penalty.
PRIVATE MORTGAGE INSURANCE (PMI): Insurance written by a private company protecting the mortgage lender against loss occasioned by a mortgage default. Generally required by lender when LTV is less than 80%.
SECOND MORTGAGE: An additional loan on a property that becomes second in position behind the first mortgage. Generally at a higher interest rate and shorter terms than a first mortgage.
TITLE: Often used interchangeably with the word ownership. It indicates the accumulation of all rights in a property.
TITLE INSURANCE: An insurance policy which protects the insured (purchaser or lender) against loss arising from defects in title.
VA: Veterans Administration loans are available to all qualififi ed veterans. In general, the veterans must have served more than l80 days continuous active duty and received an honorable discharge. The VA requires no downpayment and offers higher loan limits than FHA.