Mortgage Glossary

Adjustable-rate mortgage (ARM):

A mortgage with an interest rate and payment that change periodically over the life of the loan based on changes in a specified index.

Cash-out:

The cash back to the borrow if they refinance their current mortgage for a higher loan amount than currently owed based on the equity built up in the house. The cash-out amount is calculated by subtracting the sum of the remaining old loan and fees from the new mortgage loan. EXAMPLE: New loan amount $140,000 - Owned on old loan $120,000 - Loan fees $2,000 = Cash-out of $18,000.

Closing (or Settlement):

The final step in the mortgage process. It includes the signing of the legal documents, distribution of funds and, in the case of a home purchase, transfer of ownership. See also "Closing Costs" below. Closing Costs:

Costs paid at closing for services completed to finalize a loan. Examples include title fees and recording fees.

Conventional Loan

A mortgage not insured or guaranteed by FHA and VA which conforms to the guidelines set by Fannie Mae or Freddie Mac.

Deed of Trust:

A instrument used in place of a mortgage. Property is transferred to a trustee by the borrower (trustor), in favor of the lender (beneficiary), and returned to the borrower upon payment in full.

Down Payment

The amount of your home's price that your pay up-front. The loan amount is the difference between the home price and the down payment and is usually expressed as a percentage (i.e. a $100,000 home with 20% down would be an $80,000 loan amount).

Discount Points (or Points):

Fee paid to the lender in exchange for a lower interest rate. A point is equal to one percent of the loan amount.

FHA (Federal Housing Administration)

A federal agency with the Department of Housing and Urban Development (HUD), which insures residential mortgage loans made by private lenders and sets standards for underwriting mortgage loans.

Fixed-rate mortgage:

A mortgage loan in which the interest rate does not change during the entire term of the loan.

Good Faith Estimate:

A written estimate of the settlement costs the borrower will likely have to pay at closing. Under the Real Estate Settlement Procedures Act (RESPA), the borrower must receive the estimate from the lender within three days of the loan application.

Loan-to-value (LTV) ratio:

The relationship between the dollar amount of a borrower's mortgage loan and the value of the property.

Mortgage Note:

Legal document obligating a borrower to repay a loan at a stated interest during a specified period of time. The note is secured by a mortgage or or deed of trust or other security instrument. Also called the Note.

Private Mortgage Insurance (PMI)

"Private" means that it is insurance on a conventional (non-government) mortgage loan. Ratios:

Measurement (expressed as a percentage) that compares your monthly liabilities to your gross income. The Housing Ratio is your proposed mortgage payment devided by your gross monthly income. The Debt Ratio is all your monthly liabilities (including your mortgage) devided by your gross monthly income. Underwriters are usually more flexible on loans with higher down payments and less flexible on low down payment loans.

Reserves:

The amount of money you have after closing to cover your mortgage payments. Reserves are often expressed as "months of payments." For example, if you had $10,000 after closing and your mortgage payment was $1,000 a month then you would have 10 months of reserves. Some loan programs require a minimum number of months' reserves.

Title Company:

A company that insures title to property.

Title Insurance:

Insurance which protects the lender (lender's policy) or the buyer (owner's policy) against loss due to disputes over ownership of a property. Title Search:

Examination of municiple records to ensure that the seller is the legal owner of a property and that there are no liens or other claims against the property. The goal of this search is to have "clear title." Truth-in-Lending Act:

Federal Law requiring written disclosure of the terms of the mortgage (including the APR and other charges) by a lender to a borrower after application. Also requires the right to rescission period.<

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