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Amortization (schedule)
Amortization refers to a set schedule of payments over a period of time made up of principal and interest. An amortization schedule is a table showing the amount of the payment, principal paid, interest paid, and the outstanding loan balance after the payment is applied.
Annual Percentage Rate (APR)
The Annual Percentage Rate is the effective cost to the borrower factoring in the total costs including the interest rate and up front closing costs.
Appraisal
A formal, written estimate completed by a licensed individual of the property’s value, encompassing many factors which include size, location, condition as compared to properties that have sold within the last 0-9 months within the immediate area. For an investment property, the report also contains a market rent analysis that outlines comparable rental properties in the area and their rents.
Adjustable Rate Mortgage (ARM)
A note which is fixed for a period of time at a predetermined rate, typically 3-10 years, and adjusts after the set period according to the Margin, Index, Floor, Frequency, Period Adjustment Cap and Life Adjustment Cap.
Index: A benchmark rate to which the ARM is tied. Typical indexes are the LIBOR, T-Bill or the MTA.
Margin: % above the Index that is FIXED throughout the life of the loan. The underlying Index is variable while the Margin is fixed.
Floor: Lowest possible rate, regardless of the Index, that a borrower will pay.
Frequency: The time between adjustments after the initial fixed period.
Period Adjustment Cap: Maximum amount an ARM can adjust during any adjustment period.
Life Adjustment Cap: Maximum amount an ARM can adjust in total from the initial Interest Rate – also known as the fully indexed rate.
Automated Underwriting
A computer program designed to provide quick approval of a consumer based on information provided at the time of application, including income, assets and credit. The approval is subject to subsequent verification and is not to be considered a final underwriting decision.
Biweekly Mortgage
A tool used to pay down the principal of a mortgage in less than the outlined period. Instead of making 12 payments each year (one a month) a borrower pays 26 payments half payments (1 every other week) totaling 13 payments a year.
Buy-Down
A consumer may buy-down a note in exchange for paying points up front in exchange for a lower rate.
Cash-Out Refinance
A refinance transaction where a borrower’s new loan is in excess of the payoff and settlement costs, resulting in net cash back to the borrower at closing.
Closing
Closing is the time at which the transaction is consummated and funds are disbursed. If a purchase transaction, ownership of the property transfers from seller to buyer at this time.
Conforming Loan
A conventional mortgage eligible for sale to either Fannie Mae of Freddie Mac. The conforming loan limit is set annually and may vary by geographic region.
Credit Grade
When analyzing a consumer’s credit, the middle of the three major credit agencies scores is considered the consumers score even though liabilities reported to each agency are considered when underwriting the loan. Credit is made up of several credit grades which include:
“A” credit: This refers to a consumer in the highest credit category. For most scenarios, a score of 720 or greater is considered “A” paper.
“Alt-A”: Typically refers to credit scores below 720 and above sub-prime.
Sub-Prime: A borrower who primarily has poor credit and typically pays higher rates and fees
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Debt to Income Ratio
A factor of a borrower’s total debt, including housing and other liabilities, versus their total gross income.
Default
A borrower is in default when there is a failure to honor the terms of the loan, typically 90 days or greater past the due date.
Delinquency
An account that is greater than 30 days past due..
Down Payment
The amount of money put toward the purchase price to reduce the mortgage liability. Typically expressed in the form a %, down payment amounts range from 0% in some instances on up to 20% or greater.
Equity
The equity is the difference between the value of a home and the outstanding mortgage liability.
Escrow Account / Waive Escrows
An account created by the lender to collect and pay the taxes and insurance on the subject property. An escrow analysis is performed each year and the borrower is required to make up any shortfall or receives a refund of any overage in the account. On certain loans, a consumer has the option to waive the creation of an escrow account and pay the bills on their own when they come due. This waiver is often accompanied by a fee of .25% as the lender maintains a higher level of risk when an escrow account is waived.
FHA Mortgage
A mortgage where the lender is insured against any loss by the Federal Housing Administration (FHA). There are geographic limitations on loan size for FHA mortgages.
First Mortgage
A mortgage in senior position in first priority position in the event of default.
Fixed Rate Mortgage
A loan with a fixed rate and payment throughout the term.
Float
To allow the rate to fluctuate, or float, with the market conditions.
Foreclosure
The process where the lender uses the legal system to acquire its collateral (the property) in the event of default by the borrower.
Fully Amortized Payment
John A. Hay III was born in San Angelo, Texas, and has been an Austin resident since 1992. He is a founding and managing member of Level Funding, LLC. John’s fine attention to detail and focus allows him to cater to high net worth individuals for both their personal and investment needs.
Gift of Equity
A gift, usually between family members, in the form of equity in the subject property used for the purposes of down payment. Consult your tax advisor on the potential tax consequences of such a gift.
Good Faith Estimate (GFE)
A federally required disclosure (within 3 days of receiving a full loan application) outlining an estimated itemization of the necessary settlement/closing costs required to close the loan.
Hazard Insurance
Commonly called homeowners insurance, this is a required item that protests the property, and therefore the lender, from loss such as from a fire. If you live in a Federal Emergency Management Agency designated flood zone, you may be required to carry additional flood insurance.
Home Equity Line of Credit (HELOC)
A line of credit collateralized by a property where the lender agrees in advance to loan a borrower at their time and choosing up to a maximum amount of money.
HUD1 (Settlement Statement)
The uniform form that complies with the Housing and Urban Development requirements, including detailing the total payments and receipts of all the parties to the transaction, including the buyer, seller, realtor, title company and mortgage company.
Interest Only Mortgage (I/O)
A mortgage with a predetermined period where the borrower is only obligated to pay the interest accrued each month, after which the remaining balance is amortized over the remaining term.
Investor
A borrower who purchases real estate as an investment instead of as a residence.
Jumbo Mortgage
A mortgage in excess of the maximum conforming loan amount (currently $417,000 in most geographic regions).
Loan Discount / Point(s)
The cost to a borrower to buy down the interest rate below the par rate. Typical discount ratios are 1 discount point (or 1% of the loan amount) to every .25% in interest rate.
Loan to Value Ratio (LTV) & Combined Loan to Value Ratio (CLTV)
The LTV is calculated as the loan amount versus the purchase price on purchase transactions, and the appraised value on refinance transactions. The CLTV is calculated by adding the 1st and 2nd liens versus the purchase price on purchase transactions, and the appraised value on refinance transactions.
Lock
A decision to lock in a specific rate as well as loan program for a specific term, usually 21 days or greater and typically 30 days.
Mortgage
A physical document that evidences the lien on a property taken by a lender as the security interest for repayment of a mortgage.
Mortgage Insurance, Private Mortgage Insurance (MI or PMI)
Insurance provided to protect a lender in the event of default by the borrower on loans at greater than 80% Loan to Value and commonly referred to as MI or PMI. Mortgage Insurance is usually paid by the borrower, but may also be paid by the seller or lender. It is factored on many things, including the LTV, credit score, and loan type. MI can take many forms, including monthly, upfront, split, and annual.
No Cost Mortgage
A mortgage where all closing costs and settlement charges, excluding homeowners insurance, taxes, escrow account, and per diem interest are paid by the lender and/or interested party.
Origination Fee
The primary source of income for a loan officer, an origination fee is typically paid at closing and expressed as % of the loan amount. Unlike discount points, the origination fee does not change with the interest rate.
PI/TI
Stands for the monthly Principal & Interest / Taxes & Insurance. This is the common reference to the total monthly housing obligation.
Point(s) (Discount)
The charge by a lender which allows the borrower to buy down the rate below the par rate. Typically, 1% discount equates to .25% lower interest rate.
Portfolio Lender
A lender who holds the loans it funds and does not sell them on the secondary market..
Prepayment Penalty
A penalty imposed on a borrower when prepayment is made, such as through a sale or refinance. A prepayment penalty being placed on a loan is typically in exchange for a lower interest rate. Prepayment periods typically range from 1 to 5 years. The prepayment penalty assessed to the borrower in the event of prepayment is usually a predetermined number months of interest.
Purchase Money Mortgage(s)
A mortgage or mortgages taken out in conjunction with the purchase of the subject property.
Real Estate Settlement and Procedures Act (RESPA)
Enacted in 1974, a Federal consumer protection statute designed to protect consumers by making things such as referral fees and kickbacks illegal.
Right of Rescission
Created by the Federal Truth In Lending Act, the right of a refinancing borrower to cancel the transaction with no cost within 3 days (excluding Sunday) of closing.
Second Mortgage
A mortgage with a junior priority behind a first mortgage. In the event of default, a second mortgage lender is only made whole once any senior liens and property taxes are paid in full.
Seller Contributions
When a seller agrees to contribute an amount toward the buyers closing costs and prepaid items such as taxes and insurance.
Settlement Costs
The total costs to a borrower in order to settle, or close a transaction, including closing costs, down payment and prepaid items.
Stated Assets
A loan where a borrower states their assets but their value is not independently verified.
Stated Income
A loan where a borrower states their income and the source but not the actual income is verified.
Term
The length of time in which a mortgage is to be paid in full and the period used to calculate the monthly mortgage payment.
Texas Veterans Land Board
A loan available to certain qualifying veterans in the State of Texas. Many restrictions apply such as a minimum of 5% down payment, however those who qualify receive a below market fixed rate with minimal additional fees.
Title Insurance
Insurance provided to protect the owner and lender by insuring clear title to the property.
Truth In Lending (TIL)
Established by the Federal Truth In Lending Act, the TIL is designed to be a uniform form which outlines specific parts of the transaction, including amount financed, itemization of amounts financed, prepayment penalty information, and much more.
Underwriting
The process in which a loan file is submitted to a set of guidelines set forth by the lender.
Veterans Administration Mortgage (VA)
A loan program offered to qualifying active as well as former service men and women and insured by the Veterans Administration.
*This mortgage glossary is provided for educational and information purposes only with every good faith effort to be true and correct on the published date.
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