Adjustable-Rate Mortgage (ARM)

A type of mortgage that's commonly called an ARM. The interest rate is initially fixed for a specified number of years, after which it can adjust up or down periodically based on a disclosed index. With an ARM, you will usually get a lower interest rate during the initial term than you would with a fixed-rate mortgage, which could allow you to qualify for a larger loan. However, keep in mind that the interest rate may increase in future years, making future monthly payments higher. Most adjustable-rate mortgage programs offer the protection of a rate cap, which limits the amount the rate can be increased each year, as well as over the life of the loan.

Adjustment Date

The date the interest rate may adjust for an adjustable-rate mortgage. This date will be referenced in your disclosures and on your Note. To change to another type of loan, such as a fixed-rate loan, contact your lender at least three months before this adjustment date, but keep in mind that not all ARMs have a conversion option.

Adjustment Period

The amount of time between the adjustment dates for an adjustable-rate mortgage. For example, the interest rate on a six-month ARM could go up, go down, or stay the same every six months. Annual Percentage Rate (APR)

The annual percentage rate reflects the annualized total cost of your mortgage and is calculated using the interest rate on your mortgage loan, the term of the loan, and certain other loan costs, such as closing costs and points.

Application

The process of providing a lender with your personal information-such as income, assets, and debts-so the lender can determine whether you qualify for a loan.

Appraisal

A professional, impartial opinion of a property's estimated market value. The value is estimated based on the property's style and appearance, construction quality, and usefulness, as well as the value of similar properties in the same or nearby community that recently have been sold. An appraisal, which is documented either in writing or electronically, is NOT a warranty of value and does not indicate that a property is habitable, sound, etc.

Borrower

The person applying for the mortgage who will be responsible for repaying the loan. There may be more than one borrower on a loan.

Cash-Out Refinance

A type of mortgage refinance in which the new mortgage amount is greater than the existing mortgage amount, allowing you to access cash from the equity in your home. Many homeowners use this option as an alternative to a home equity loan in order to finance home improvements, consolidate debt, or take needed cash from the equity built up in the property.

Closing

The conclusion of a real estate transaction, also called "settlement." At the time of closing, documents that transfer legal ownership of the property are signed and closing costs are paid.

Closing Costs

Costs paid by the buyer and/or seller to transfer ownership of a property and close the mortgage loan. These may include an origination fee, attorney's fee, taxes, and charges for obtaining title insurance and a survey. Closing costs will vary according to geographic location.

Closing Statement

A disclosure prepared by the closing agent that itemizes all charges related to a real estate closing, including escrow deposits for taxes, homeowner's insurance, and mortgage insurance. The closing statement is also sometimes referred to as the "HUD-1."

Co-Borrower

An additional person who will be responsible for repaying the loan along with the borrower.

Commitment Fee

A fee charged by a lender to cover certain expenses related to a real estate loan. The commitment fee is usually a percentage of the loan amount.

Commitment Letter

A statement by a lender detailing the terms and conditions under which it agrees to lend money to a consumer. This is also known as a loan commitment.

Community Property

In some states, property acquired during a marriage is considered jointly owned or community property, unless it is acquired as separate property of either spouse prior to the marriage. Each spouse owns an undivided 50% share in all assets that arise out of the marriage. Inherited property, on the other hand, remains the separate property of the inheriting spouse, unless such property is commingled with community property. The tax and estate planning implications of community property vary significantly from those of joint tenancy.

Comparables

Recently sold properties used to help the appraiser determine the approximate fair market value of the subject property. Comparable properties will have reasonably similar size, location, and amenities to the property being appraised.

Conforming Loan

A mortgage that meets all the requirements to be eligible for purchase by federal agencies such as Fannie Mae and Freddie Mac. As of January 1, 2012, the conforming loan amount is $417,000 for a one-unit property. Construction Loan

A short-term interim loan for financing the cost of construction of a property. The lender makes payments directly to the builder or contractors at periodic intervals as the home is built.

Consumer Credit Reporting Agency (or Bureau)

An organization that gathers, records, updates, and stores financial and public record information about the payment records of individuals. A potential borrower must give a lender permission to access their credit history during the qualification process so that the lender can evaluate whether to extend credit.

Conventional Mortgage

A loan that is not part of a government-housing program and is not insured or guaranteed by the federal government.

Conversion Clause

A provision in some adjustable-rate mortgages that allows you to change the ARM to a fixed-rate mortgage.

Convertible ARM

An adjustable-rate mortgage that can be converted to a fixed-rate mortgage under specified conditions, either by refinancing or a conversion option.

Co-op or Cooperative

A type of housing where a corporation or business trust entity holds title to the property (usually an apartment complex) and grants occupancy rights to shareholder tenants through proprietary leases.

Corporate Relocation

An arrangement where an employer agrees to move an employee to another area of the country. As part of the relocation agreement, the employer may pay a portion of the mortgage-related expenses.

Credit

An agreement in which a borrower receives something of value in exchange for a promise to repay the lender at a later date.

Credit History

The recorded information concerning an individual's debt and repayment history.

Credit Report

A record of your credit activities. It lists accounts you have along with balances, payment history and any credit related legal actions taken by or against you.

Debt

An amount owed to another. Debt is one area of financial information that lenders review carefully during the mortgage lending process. It is also referred to as "liability."

Debt-to-Income Ratio

A borrower's total monthly debt divided by gross monthly income and shown as a percentage. (Example: If debt = $1,200 and gross monthly income = $5,000, then the debt-to-income ratio would equal $1,200 divided by $5,000, or 24%.) Total monthly debt includes monthly mortgage payments, as well as student loans, car loans, and credit card payments. Also called the "back-end ratio" or "total debt ratio."

Default

The failure to make loan payments on time, in the amount specified, or as required in the terms of the obligation or note.

Depreciation

A decrease in the value of a property due to market conditions or other causes.

Disability

A physical or mental impairment that substantially limits one or more of a person's major life activities.

Discount Points

Points are a percentage of the loan amount paid at closing that may affect the interest rate. For instance, on a $90,000 loan amount, one point = 1%, or $900. Points are typically paid in order to obtain a lower interest rate. (This is also referred to as "buying down the rate.") Alternatively, the lender may pay points to the borrower to offset the borrower's closing costs in exchange for a higher rate. These are considered negative points.

Down Payment

The portion of the purchase price a buyer pays in cash up front and does not finance with a mortgage loan.

Equal Credit Opportunity Act (ECOA)

A federal law that promotes the availability of credit to all creditworthy applicants without regard to race, color, religion, national origin, sex, marital status, or age (provided the applicant has the capacity to contract); to the fact that all or part of the applicant's income derives from a public assistance program; or to the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act. The regulation prohibits creditor practices that discriminate on the basis of any of these factors. The regulation also requires creditors to notify applicants of action taken on their applications; to report credit history in the names of both spouses on an account; to retain records of credit applications; to collect information about the applicant's race and other personal characteristics in applications for certain dwelling-related loans; and to provide applicants with copies of appraisal reports used in connection with credit transactions.

Equity

A homeowner's financial interest in a property. Equity is the difference between the fair market value of the property and how much is owed on the property. On a new mortgage purchase loan, the down payment represents the initial equity in the property.

Equity Line of Credit

An open-ended loan, usually recorded as a second mortgage, that permits borrowers to obtain cash advances based on an approved line of credit.

Escrow

A transaction in which a third party holds money for the seller or buyer, or for the borrower and lender, in order to handle legal documents and disbursement of funds.

Escrow Account

An account created by a third party to hold money in trust. With a mortgage escrow account, the lender collects 1/12 of the annual property tax and insurance payments each month along with the mortgage payment, puts the money in an escrow account until the payment is due, and then pays the bill out of the account for the borrower.

Escrow Analysis

The periodic examination of escrow accounts to determine if current monthly deposits are enough to pay taxes, insurance, and other bills when due. Lenders are required to review escrow accounts annually and provide the borrower with the analysis.

Escrow Payment

The portion of the monthly mortgage payment that is held in an escrow account to pay for taxes and homeowner's insurance. This is known as "impounds" or "reserves" in some states.

Estate

The total of real property and personal property owned by an individual at the time of death.

Estimated Gross Costs of Buying

Total principal and interest payments over the number of years that you plan to own your home.

Estimated Increase in Equity

An estimate of how much equity you will have, calculated by taking the property value and increasing it by a selected rate of appreciation for a specific number of years.

Estimated Net Costs of Buying

An estimate of how much buying a house will actually cost, calculated by taking the estimated gross costs of buying and subtracting estimated tax savings and the estimated increase in equity.

Estimated Tax Savings

An estimate of how much you could save in taxes if you bought a house instead of renting, based on property taxes and interest paid.

Estimated Total Costs of Renting

An estimate that compares the cost of renting to owning by adding up your total current rental payments, increased by a yearly adjustment, for the same number of years you would plan to own a home.

Fair Credit Reporting Act

The Fair Credit Reporting Act promotes the accuracy and privacy of information in consumer credit reports. It also controls the use of credit reports and requires consumer reporting agencies to maintain correct and complete files.

Fannie Mae

See Federal National Mortgage Association.

Federal Home Loan Mortgage Corporation (Freddie Mac)

Created by Congress, this stockholder-owned corporation, a portion of whose board of directors is appointed by the President of the United States, supports the secondary market in mortgages on residential and multifamily properties with mortgage purchase and securitization programs.

Federal Housing Administration (FHA)

An agency within the U.S. Department of Housing and Urban Development (HUD), the FHA insures residential mortgage loans made by private lenders. The FHA sets standards for construction and underwriting but does not lend money, plan housing, or construct housing.

Federal National Mortgage Association (Fannie Mae)

The Federal National Mortgage Association-FNMA, or Fannie Mae for short-is an agency chartered by the U.S. Congress. Fannie Mae is the nation's largest supplier of home mortgage funds. In other words, it buys mortgages from lenders. This is known as the "secondary market."

FHA Mortgage

An FHA mortgage is insured and guaranteed by the Federal Housing Administration (FHA) and requires little or no down payment. These loans are designed to make a home purchase more affordable than with a conventional loan, especially for the first-time homebuyer. FHA loans are subject to limitations on the amount of money that can be borrowed. These limits vary throughout the country.

First Mortgage

A first mortgage is a mortgage that is the primary lien against a property, and takes priority over all other liens.

Fixed-Rate Mortgage (FRM)

A mortgage in which the interest rate does not change during the entire term of the loan. This means that the monthly payments for principal and interest are also fixed for the life of the loan.

Float Rate

See Rate Float.

Flood Insurance

Special hazard coverage from a reputable flood insurance provider that is recommended for all properties and is required if a property is located in a special flood hazard area.

Freddie Mac

See Federal Home Loan Mortgage Corporation.

Funding

The funding of a loan occurs when funds are disbursed to the seller of a property or a borrower on a refinance. In some cases, this happens simultaneously with closing.

Good Faith Estimate

Required by federal law, a good faith estimate (GFE) is a written list of the estimated closing costs associated with buying or refinancing a house. The good faith estimate includes the lender's charges, along with the local closing agent's charges and fees. It also includes estimated amounts for real estate property tax and homeowner's insurance.

Gross Monthly Rental Income

The amount of money received each month for rent on property that is owned and used for investment purposes. This income will need to be verified through a lease or through tax returns.

High Balance Loan

A mortgage that provides higher conforming loan limits for high-cost housing areas-above $417,000 and up to $625,500. Created by the Housing and Economic Recovery Act of 2008, High Balance loans occupy a middle tier between conforming and jumbo loans. Also known as "conforming jumbo," "super conforming," or "conforming plus" loans.

Home Equity Line of Credit (HELOC)

A secure line of credit using the available equity in an applicant's residence as collateral.

Homeowner's Insurance or Hazard Insurance

Insurance protecting a property against loss due to fire, other natural causes, vandalism, etc., depending upon the terms of the policy. You must have this type of insurance to close on a loan. This may not cover flood or wind damage.

Housing Ratio

A borrower's total monthly housing payment (PITI, or principal, interest, taxes, and insurance) divided by gross monthly income and shown as a percentage. For example, if PITI = $1,500 and gross monthly income = $6,000, then the housing ratio would equal $1,500 divided by $6,000, or 25%. This is sometimes referred to as the "front ratio."

HUD

Stands for the U.S. Department of Housing and Urban Development. This government agency is responsible for implementing and overseeing federal housing and community development programs. It also oversees the Federal Housing Administration.

HUD-1 Uniform Settlement Statement

See Closing Statement.

Incapacitated

See Mentally Incapacitated or Incompetent.

Income

Sources of revenue, including salary, bonuses, interest, investment income, and public assistance. Income is one area of financial information that lenders review during the mortgage lending process.

Index

A published rate used by lenders that serves as the basis for determining interest rate changes on ARM loans. Some commonly used indexes include the One-Year Treasury Bill, the 6-Month LIBOR, and the 11th District Cost of Funds (COFI).

Interest Rate

The fee paid to a lender to borrow money, expressed as a percentage.

Jumbo Loan

A mortgage loan that exceeds the conforming loan amount set by the federal government. Jumbo loans usually command higher interest rates.

LIBOR (London Interbank Offered Rate)

The rate at which banks in the foreign market lend money to one another. One of the more dependable barometers for the international cost of money, the LIBOR is one of many indexes used for setting interest rates for ARM loans.

Lien

A legal claim against a property.

Lifetime Cap

A provision of an ARM that limits the highest interest rate that can occur over the life of the loan. These caps vary with each ARM and can be used as a point of comparison when shopping for a loan.

Loan Amount

The amount a consumer borrows from a lender to purchase a home.

Loan Programs

Different types of loans, as defined by term and repayment features. Examples include a 30-year fixed-rate mortgage or a 10/1 ARM.

Loan-to-Value (LTV) Ratio

The amount you owe on a property, expressed as a percentage of its value. For example, a 90% loan-to-value ratio means you are financing 90% of the sales price (or appraised value). Different loans have different LTV ratio requirements.

Lock Rate

See Rate Lock.

Manufactured Housing

Factory-built or prefabricated housing, including mobile homes.

Mentally Incapacitated or Incompetent

Lacking sufficient understanding and memory to comprehend in a general way the situation in which a person finds himself or herself and the nature, purpose, and consequence of any act or transaction into which he or she proposes to enter.

Mortgage

A legal document that pledges a property as security for repayment of a loan.

Mortgage Insurance (MI)

Insurance paid by the borrower that protects the lender in case the borrower defaults on a loan. With conventional loans, mortgage insurance is not required if the down payment is at least 20%. Also known as private mortgage insurance.

Mortgage Insurance Premium (MIP)

The up-front insurance premium that must be paid if an FHA loan funds the purchase of a home. The insurance helps cover the cost of reselling a home if the loan goes into default.

Mortgagee

The company or person in a mortgage loan transaction that holds the mortgage note as a pledge for repayment of the loan.

Mortgage Note

A written, legal document that binds the borrower to repay a loan at a stated interest rate during a specified period of time.

Mortgagor

The borrower in a mortgage loan transaction.

Multifamily

A building with more than four residential units.

Negative Amortization

An increase in the balance of a loan, caused by monthly mortgage payments that do not cover the principal and interest due.

Nonconforming Mortgage Loan

See Jumbo Loan.

Origination Fee

A fee imposed by a lender to cover certain expenses in connection with making a real estate loan. Usually a percentage of the loan amount.

P&I

See Principal and Interest.

Payment Cap

See Rate Cap.

PITI

An abbreviation for principal, interest, taxes, and insurance.

Points

Points are a percentage of the loan amount paid at closing that may affect the interest rate. For instance, on a $90,000 loan amount, one point = 1%, or $900. Points are typically paid in order to obtain a lower interest rate. (This is also referred to as "buying down the rate.") Alternatively, the lender may pay points to the borrower to offset the borrower's closing costs in exchange for a higher rate. These are considered negative points.

Prepayment

Paying off an entire mortgage before it's due. Many loans offer prepayment without penalty. This may be important to keep in mind when comparing loan programs.

Prepayment Penalty

A penalty charged by the lender for paying off a mortgage loan in advance of the agreed payment schedule. Not all loan programs have a prepayment penalty.

Prequalification

A preliminary evaluation of a buyer's financial status to estimate the amount and type of loans available to the buyer. This evaluation is performed by the lender. It does not include a third-party credit report, and the lender does not formally commit to offering a loan.

Principal

The outstanding balance of a loan, excluding interest.

Principal and Interest (P&I)

The two components of your monthly mortgage payment: the principal goes toward reducing the outstanding balance of the loan, while the interest is the finance charge.

Private Mortgage Insurance (PMI)

Insurance paid by the borrower that protects the lender in case of default on a loan. With conventional loans, mortgage insurance is generally not required with a down payment of at least 20%. Also known as "mortgage insurance."

Property Type

See Condominium, Co-op, Manufactured Housing, Multifamily, Single-Family Attached Home, or Single-Family Detached Home.

Purchase Price

The price a buyer pays to purchase a home.

Qualify

To meet a loan program's predetermined guidelines, such as income, assets, credit history, and debt.

Qualifying Ratios

The percentages that a lender will compare to see whether a buyer qualifies for a loan. This consists of the debt-to-income ratio and the housing ratio.

Rate

See Interest Rate.

Rate Cap

A limit on how much the interest rate on an ARM loan can change in an adjustment period or over the life of the loan. For example, if your rate cap is 1% and your current interest rate is 6%, then your newly adjusted rate will be between 5% and 7%. A lender will provide this information for each of its ARM products.

Rate Float

The period before the rate has been secured. During this time, the rate will fluctuate with the current market until protected by either a rate lock or rate protection.

Rate Lock

A lender's commitment to lend money at a particular interest rate as long as the loan closes and funds within a specified time period. The lock protects against rate increases during that time.

Refinancing

The process of paying off one loan with the proceeds from a new loan, using the same property as security. Homeowners may refinance to lower their interest rate, shorten the term of their loan, or get cash out of the property's equity.

Second Mortgage

A second mortgage is a mortgage with rights that are subordinate to a first mortgage. Also called a "second trust."

Settlement Statement

See Closing Statement.

Single-Family Attached Home

A home where the customer owns the dwelling and lot but shares at least one common wall with another structure.

Single-Family Detached Home

A freestanding home without any homeowner's association dues. If you pay homeowner's association dues, your property would be considered a detached home in a planned unit development.

Subject Property

The property to be secured by the mortgage loan.

Survey

A measurement of land, prepared by a licensed surveyor, that shows a property's boundaries, elevations, improvements, and relationship to surrounding tracts. The buyer typically pays for the survey of the property.

Term of Loan

The amount of time you have to repay the mortgage loan. Terms are usually expressed as a number of months. For example, the term of a 30-year fixed-rate mortgage is 360 months (30 years x 12 months).

Title

A document that gives evidence of ownership of a property.

Title Insurance

Insurance that protects the lender or buyer against losses resulting from disputes over the title of a property. Lender title insurance is required to close a loan and is typically paid for by the buyer. Buyers must also purchase a separate title insurance policy to protect their own interests.

Title Search

Examination of public records, laws, and court decisions to ensure that no one except the seller has a valid claim to the property. A title search is required by the lender and is a standard part of closing costs paid for by the buyer.

Total Monthly Payment

The sum of the loan principal, interest, taxes, and insurance (PITI) that is paid to the lender each month.

Transfer Tax

A tax that may be levied by a state or local government when property passes from one owner to another. Not all state or local governments require a transfer tax.

Truth-in-Lending Act

A federal law that requires credit terms to be disclosed in a standard format known as the truth-in-lending statement. With these statements, you can better compare the lending terms of different financial institutions.

Underwriting

The analysis of a lender's risk in making a mortgage loan. Underwriting involves the evaluation of the property as outlined in the appraisal report, and of the borrower's ability and willingness to repay the loan.

VA Mortgage

A mortgage guaranteed by the Department of Veterans Affairs (VA) and only available for military personnel, veterans, or spouses of veterans who died from service-related injuries. Because the loan is guaranteed, it requires little or no down payment.

VA

The Department of Veterans Affairs, formerly the Veterans Administration. A government agency that administers benefit programs to help veterans return to civilian life, including guaranteed mortgage loans with little or no down payment