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Adjustable Rate Mortgage (ARM) |
A mortgage which begins with a low interest rate, fixed for a
specified initial period of the loan term, then "adjusts" at
specified intervals during the remainder of the loan term.
Adjustments are based on an "index" (the value of which can
change over time) plus a "margin." The index plus the margin
determine the fully adjusted rate, which is typically subject
to certain limits (ceilings and floors). These limits are
referred to as "caps." |
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Amortization |
Repayment of a mortgage through monthly installments of
principal and interest. The monthly payment amount is based on
a schedule that will allow complete repayment of the loan
principal by the end of a specific time period (for example,
15 or 30 years). |
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Annual Percentage Rate (APR) |
Calculated by using a standard formula, shows the cost of a
loan expressed as a yearly interest rate and includes the
interest, points, mortgage insurance, and other fees
associated with the loan. |
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Balloon Mortgage |
A mortgage which typically offers low, fixed rate payments as
though the mortgage was scheduled on a 30 year term. But
instead, the loan has a shorter term (for example, 5, 7 or 10
years) which ends with a single large payment (a "balloon
payment") for all the remaining principle. |
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Cap |
A limit, such as that placed on an adjustable rate
mortgage, on how much a monthly payment or interest rate can
increase or decrease. |
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Cash Reserves |
A cash amount sometimes required to be held in reserve in
addition to the down payment and closing costs. The amount
required is determined by the lender. |
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Certificate of Title |
A document provided by a qualified source (such as a title
company) that shows the property legally belongs to the
current owner. Before the title is transferred at closing, it
should be free and clear of all liens or other claims. |
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Closing |
Also known as settlement, this is the time at which the
property is formally sold and transferred from the seller to
the buyer. It is at this time that the borrower takes on the
loan obligation, pays all closing costs, and receives title
from the seller. |
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Closing Costs |
Customary costs above and beyond the sale price of the
property that must be paid to cover the transfer of ownership
at closing. An estimate of these costs are provided to the
borrower on a form known as a Good Faith Estimate of
Settlement Charges, after submission of a loan application. |
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Credit Report |
A record of an individual that lists all past and present
debts and the timeliness of their repayment. A credit score is
calculated and reported on the credit report. |
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Credit Score |
A number representing the possibility a borrower may default.
It is based upon credit history and is used to determine
ability to qualify for a mortgage loan. |
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Deed |
The document that transfers ownership of a property. |
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Down Payment |
The portion of a home's purchase price that is paid in cash
and is not part of the mortgage loan. |
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Earnest Money |
The money put down by a potential buyer to show that he or she
is serious about purchasing the home. It becomes part of the
down payment if the offer is accepted, is returned if the
offer is rejected, or is forfeited if the buyer pulls out of
the transaction. |
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Escrow Account |
A separate account into which the lender puts a portion (other
than principal and interest) of each monthly mortgage payment.
Typically an escrow account provides the funds needed to pay
expenses such as property taxes, homeowners insurance,
mortgage insurance, etc. |
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Federal Home Loan Mortgage Corporation (FHLM) |
Or Freddie Mac is a federally-chartered corporation that
purchases residential mortgages, securitizes them, and sells
them to investors. This provides lenders with funds for new
homebuyers. |
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Federal Housing Administration (FHA) |
Established in 1934 to advance homeownership opportunities for
all Americans, it assists homebuyers by providing mortgage
insurance to lenders to cover most losses that may occur when
a borrower defaults. This encourages lenders to make loans to
borrowers who might not otherwise qualify for conventional
mortgages. |
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Federal National Mortgage Association (FNMA) |
Or Fannie Mae, is a federally-chartered enterprise owned by
private stockholders that purchases residential mortgages and
converts them into securities for sale to investors. By
purchasing mortgages, Fannie Mae supplies funds that lenders
may loan to potential homebuyers. |
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Fixed Rate Mortgage |
A mortgage with monthly payments that remain the same
throughout the life of the loan because the interest rate is
fixed. |
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Flood Insurance |
Insurance that protects homeowners against losses from a
flood. If a home is located in a flood plain/zone, the lender
will require flood insurance before approving a loan. |
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Foreclosure |
A legal process in which mortgaged property is sold to pay the
loan of the defaulting borrower. |
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Government National Mortgage Association (GNMA) |
Or Ginnie Mae is a government-owned corporation overseen by
the U.S. Department of Housing and Urban Development, Ginnie
Mae pools FHA-insured and VA-guaranteed loans to back
securities for private investment. As with Fannie Mae and
Freddie Mac, the investment income provides funding that may
then be lent to eligible borrowers by lenders. |
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Good Faith Estimate |
An estimate of all closing fees including pre-paid and escrow
items as well as lender charges. |
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Homebuyer Education Learning Program (HELP) |
An educational program from the FHA that counsels people about
the home buying process. HELP covers topics like budgeting,
finding a home, getting a loan, and home maintenance. |
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Home Inspection |
An examination of the structure and mechanical systems to
determine a home's safety. It makes the potential homebuyer
aware of any repairs that may be needed. |
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Home Warranty |
Offers protection for mechanical systems and attached
appliances against unexpected repairs not covered by
homeowner's insurance. Coverage extends over a specific time
period and does not cover the home's structure. |
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Homeowner's/ Hazard Insurance |
An insurance policy that combines protection against damage to
a dwelling and its contents with protection against claims of
negligence or inappropriate action that result in someone's
injury or property damage. |
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HUD 1 Statement |
It itemizes all closing costs and must be given to the
borrower at closing. |
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HUD - U.S. Department of Housing and Urban Development |
Established in 1965, HUD works to create a decent home and
suitable living environment for all Americans. It does this by
addressing housing needs, improving and developing American
communities, and enforcing fair housing laws. |
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Index |
A measurement used by lenders to determine changes to the
Interest rate charged on an adjustable rate mortgage. |
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Interest |
A fee charged for the use of money. |
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Interest Rate |
The amount of interest charged on a monthly loan payment.
Usually expressed as a percentage. |
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Lien |
A legal claim against property that must be satisfied When the
property is sold. |
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Loan Origination Fee |
The charge for originating a loan. It calculated as a
percentage of the loan amount and is paid at closing. |
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Loan-to-value (LTV) |
The percentage of financing calculated by dividing the amount
borrowed by the lesser of the purchase price or appraised
value of the home to be purchased. The higher the LTV, the
less cash a borrower is required to pay as down payment.
Example: 95% LTV represents 95% financing which requires a
down payment of 5%. Together the LTV and down payment equate
to 100% of the purchase price (or appraised value). |
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Lock-In |
Since interest rates can change frequently, many lenders offer
an interest rate lock-in that guarantees a specific interest
rate if the loan is closed within a specific time. |
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Margin |
An amount the lender adds to an index to determine the
interest rate on an adjustable rate mortgage. |
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Mortgage |
A lien on the property that secures the promise to repay a
loan. |
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Mortgage Broker |
A company that originates and processes loans for a number of
lenders. |
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Mortgage Insurance |
A policy that protects lenders against some or most of the
losses that can occur when a borrower defaults on a mortgage
loan. Mortgage insurance is required primarily for borrowers
with a down payment of less than 20% of the home's purchase
price. |
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Mortgage Insurance Premium (MIP) |
A monthly premium, usually collected by the lender with the
mortgage payment (of principal, interest, taxes hazard and
flood insurance). It is paid by the borrower. |
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Principal, Interest, Taxes, and Insurance (PITI) |
The four elements of a monthly mortgage payment. Payments of
principal and interest go directly towards repaying the loan
while the portion that covers taxes and insurance (hazard,
flood and mortgage, if applicable) goes into an escrow account
to cover the fees when they are due. |
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Pre-Approval |
A lender's commitment to lend to a potential borrower. The
commitment remains as long as the borrower still meets the
qualification requirements at the time of purchase. |
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Pre-Qualification |
A lender's informal determination of the maximum amount an
individual is eligible to borrow. |
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Prepayment |
Payment of the mortgage loan before the scheduled due date.
Some loans may be subject to a prepayment penalty. |
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Title Search |
A check of public records to be sure that the seller is the
recognized owner of the real estate and that there are no
unsettled liens or other claims against the property. |
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Truth-in-Lending |
A federal law obligating a lender to give full written
disclosure of all fees, terms, and conditions associated
during the term of the loan. |
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Underwriting |
The process of analyzing a loan application to determine the
amount of risk involved in making the loan. It includes a
review of the potential borrower's credit history and a
judgment of the property value. |
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VA - Department of Veterans Affairs |
A federal agency which guarantees loans made to veterans.
Similar to mortgage insurance, a loan guarantee protects
lenders against loss that may result from a borrower default.
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