Financing Terms & Definitions

Adjustment Interval
The period of time between changes in the interest rate for an adjustable-rate mortgage. Typical adjustment intervals are one year, three and five years.

Adjustable Rate Mortgage (ARM)
A mortgage with an interest rate that changes periodically, according to an index that is selected when the mortgage is issued. The initial interest rate is lower than that for fixed-rate mortgages, but monthly payments can go up or down when the rate is adjusted.

Repayment of a mortgage debt with periodic payments of both principal and interest, calculated to retire the obligation at the end of a fixed period of time.

Amortization Schedule
A table showing the amounts of principal and interest due at regular intervals and the unpaid mortgage balance after each payment is made.

Annual Percentage Rate (APR)
A method for calculating an interest rate to the interest collected, discount points charged to either purchaser or seller or both, and certain costs related to closing, and mortgage insurance premiums. It is not the note rate for which your mortgage payment is calculated. A term defined in section 106 of the federal Truth in Lending Act (15 USC 1606), which expresses on an annualized basis the charges imposed on the borrower to obtain a loan (defined in the Act as “finance charges”), including interest, discount and other costs. Examples of fees that can be included in the APR are
Discount Points, Buy down Fee, Pre-Paid Interest, Private Mortgage Insurance (PMI), FHA Mortgage Insurance Premium (MIP), VA Funding Fee, Flood Certification, Fee Tax Service Fee, Processing Fee, and a Warehouse Fee.

An opinion or estimate of value. Also refers to the process by which a value estimate is obtained.

One qualified by education, training, experience and licensed to estimate the value of real and personal property.

An increase in value for any reason, except inflation.

An individual, firm, or corporation who, through a court proceeding, is relieved from the payment of all debts. Bankruptcy may be declared under one of several chapters of the federal bankruptcy code: Chapter 7, which covers liquidation of individual or business assets; Chapter 11, which covers reorganization of bankrupt businesses; Chapter 12, which covers certain farm bankruptcies; and Chapter 13, which covers workouts of debts by individuals. Chapter 13 – “Wage earner plan” where an individual debtor files a budget with the court and agrees to make partial payment to creditors over a three-to-five year period. Chapter 7 – Bankruptcy filing which gives a trustee the power to distribute a debtor’s assets to creditors.

One who receives funds in the form of a loan with the obligation of repaying the loan in full with interest.

An individual employed on a fee or commission basis as agent to bring buyers and sellers together and assist in negotiating contracts between them.

Closing Costs
Fees paid to effect the closing of a mortgage, such as an origination fee, discount points, title insurance fees, survey fees, and attorney’s fees.

Second or additional person equally responsible for payments on a mortgage. A co-borrower does not have to take title to the property, but usually has to sign the mortgage note.

One who agrees to assume a debt obligation if the principal borrower defaults on mortgage payments. A co-signer assumes only personal liability and has no ownership interest in the property; his or her income and obligations are used in the underwriting process to reinforce the credit of the principal borrower.

Credit Report
A report to a prospective lender on the credit standing of a prospective borrower, used to aid in the determination of creditworthiness.

Credit Score
A number that is used to rate your credit. Many Lenders use this as a method of determining the rate that is charged.

Equal Credit Opportunity Act (ECOA)
A federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs. Also called “Reg B.”

Flood Insurance
Insurance coverage which provides compensation to the insured in case of flood water damage.

A legal procedure in which a mortgaged property is sold to pay the outstanding debt in case of default.

Good Faith Estimate (GFE)
A document which tells borrowers the approximate costs they will pay at or before closing, based on common practice in the locality. Under requirements of the Real Estate Settlement Procedures Act (RESPA), the mortgage banker or mortgage broker, if any, must deliver or mail the GFE to the applicant within three business days after the application is received.

Hazard Insurance
Insurance coverage which provides compensation to the insured in case of property loss or damage.

Home or Condominium Owners Association (HOA)
A nonprofit corporation or association that manages the common areas and services of a planned unit development or condominium project. In a condominium project, it has no ownership interest in the common areas; in a planned unit development, it holds title to common areas.

Land Sales Contract
An agreement to transfer title to a property once conditions of the contract has been fulfilled.

Person or entity that invests in or originates mortgage loans, such as a life insurance company, mortgage banker, credit union, commercial bank, or savings and loan. In single-family property usage, the lender is generally whoever’s name the loan is closed in. (In a table funding transaction, the wholesaler mortgage company is usually considered to be the “lender.”) In commercial property usage, the lender is the life insurance company, bank or pension fund that provides the funds and in whose name the loan is closed. questions

Pledge of property, especially real property, as security for a debt. By extension, the document evidencing the pledge. In many states, this document is a deed of trust. The document may contain the terms of repayment of the debt. By further extension, “mortgage” is used to describe both the mortgage proper and the separate promissory note evidencing the debt and providing the terms of the debt’s repayment.

Mortgage Insurance (MI)
Insurance which protects mortgage lenders against loss in the event of default by the borrower. This allows lenders to make loans with lower down payments. The federal government offers MI through HUD/FHA; private entities offer MI for conventional loans.

Mortgage Note
A written promise to pay a sum of money at a stated interest rate during a specified term. A mortgage note is secured by a mortgage.

A general term for any kind of paper or document signed by a borrower that is an acknowledgment of the debt, and is, by inference, a promise to pay. When the note is secured by a mortgage, it is called a mortgage note and the mortgagor is named as the payee.

Loan Origination Fee
The fee charged by a lender to submit the documents to underwriting and other activity associated with your mortgage.

Planned Unit Development (PUD)
A comprehensive development plan for a large land area. A PUD usually includes residences, roads, schools, recreational facilities, commercial, office and industrial areas. Also, a subdivision having lots or areas owned in common and reserved for the use of some or all of the owners of the separately owned lots.

These are often thought to be closing costs but they are not. They are the cost of interim interest, the first year insurance premiums for hazard and mortgage insurance, and real estate taxes.

Real Estate Settlement Procedures Act (RESPA)
A federal statute and regulation promulgated by HUD governing real estate lending practices and disclosures. Its main features pertain to the provision of a good faith estimate of loan settlement costs and the provision of the HUD settlement booklet within three days of making a loan application.

The repayment of a debt from the proceeds of a new loan using the same property as security.

Second Mortgage
A mortgage that has rights subordinate to a first mortgage.

Settlement Costs (also known as Closing Costs)
Money paid by borrowers and sellers to effect the closing of a mortgage loan, including payments for title insurance, origination fees, discount points, processing, underwriting, appraisal, survey, title search, title insurance, recording, transfer charges, and attorney fees.