A mortgage loan with payments usually lower than a fixed rate initially, but is subject to changes in interest rates. There are a variety of ARMs that can have an initial interest rate that lasts three to ten years, adjusting annually thereafter. They are described as 3/1, 5/1, 7/1 and 10/1. A 3/1 ARM starts out with a low rate that lasts three years, then is adjusted annually. A 5/1 ARM has an introductory rate that lasts five years, and 7/1 and 10/1 ARMs have intro rates that last seven and ten years. The monthly payment amount is usually subject to a cap.
Affordability or home affordability refers to the amount of money you can comfortably afford to spend on a home. Affordability takes into account your income, down payment, and monthly debts. Use our affordability calculator to see how much house you can afford.
Repayment of a mortgage loan through regular monthly installments of principal and interest. At the end of the scheduled payments (e.g., monthly payments for 15 years or 30 years), you will own your home.
An amortization schedule shows how much money will be paid over the life of a home loan. It is a detailed table that shows the amount of principal and interest that comprise each payment for the entire loan term.
In a real estate transaction, an appraisal is the estimate of a home's market value, conducted by a licensed or authorized appraiser, that is based on details of the home and comparable sales in the area. The appraisal is used in the mortgage process to protect the lender and to ensure that the loan amount is equal to or greater than home's market value. The appraisal fee is one of the closing costs paid at closing, typically by the buyer.
Assets are anything of financial value that can be converted into cash (i.e., stocks and bonds, automobiles, real estate, retirement funds, and savings).
A limit, such as that placed on an adjustable rate mortgage, on how much a monthly payment or interest rate can increase or decrease.
A cash-in refinance is when a borrower pays additional money towards their loan during a refinance transaction.
A cash-out refinance is the refinancing of an existing home loan for an amount larger than the existing loan balance. The homeowner then receives the difference in cash. Cash-out refinancing is often used to pay for large, one-time purchases such as college tuition, medical bills, or home repairs and remodeling.
Closing (or mortgage closing or settlement) is the final step in a real estate transaction where all legal documents, including those related to a mortgage, are signed, and the ownership of the property is legally transferred to the buyer.
Closing costs are the fees associated with the sale of a home that are paid at closing, which may include title insurance, lender fees, appraisal fees, and more. Closing costs are typically 2 to 5 percent of the property's purchase price.
In real estate, property offered to secure (or offered as security for) repayment of a loan, though not with the intention of transferring property ownership.
A conforming loan or conforming mortgages is a mortgage loan that follows the guidelines of Fannie Mae and Freddie Mac. For most counties, the conforming loan limit for a single-family home is $424,100. In some counties with a higher cost of living, the limit is higher. Loans that exceed this amount are called jumbo loans.
A conventional mortgage is a home loan that is not guaranteed or insured by a government agency such as the Department of Veterans Affairs (VA), Federal Housing Administration (FHA), or the Farmers Home Administration (FmHA). The interest rate on a conventional mortgage can be fixed or adjustable. Most conventional mortgages require a minimum 3% down payment or a 20% downpayment to avoid Private Mortgage Insurance.
A detailed history of an individual's credit. This is used by lenders to gauge a potential borrower's ability to repay a loan.
Credit score is a statistically derived number that lenders use to determine your creditworthiness. The number can range anywhere from 300-850. Your credit score is calculated based on a number of factors, including but not limited to total debt, length of credit history, and payment history. There are a number of steps you can take to improve your credit score. Your credit score will influence the mortgage rate you receive, and many loan types have minimum credit score requirements.
The debt-to-income ratio (DTI) is expressed as a percentage and is your total monthly debt divided by your gross monthly income. A DTI less than 43 percent is considered workable by most mortgage professionals. If the DTI is higher than 43 percent, it can be difficult to qualify for a mortgage. The lower your DTI, the more options you'll have.
A deed is the legal document that transfers the ownership of a property.
Discount points are paid to a lender at closing to reduce the interest rate on a loan. Each point is equal to 1% of the total loan amount. (Also see Points.)
A down payment is the initial payment made towards a real estate purchase, and is the difference between the home's purchase price and the amount of the mortgage. Different loan types have different minimum down payment requirements, which are given as a percentage of the home's purchase price. A higher the down payment will lower the monthly mortgage payment.
Calculated by subtracting the amount still owed on the mortgage loan and any liens from the fair market value of the property. Equity grows as the mortgage is paid down and the property appreciates in value.
Escrow is a neutral third party that handles the exchange of money and documents between a buyer and a seller in a real estate transaction. An escrow account is often set up for a borrower by the lender to pay for homeowners insurance and property taxes when these costs come due during the course of a given year.
A private, shareholder-owned company that purchases residential mortgages and converts them into securities for sale to investors. Fannie Mae supplies funds that lenders may loan to potential homebuyers. Its original name was Federal National Mortgage Association (FNMA), started by the federal government in 1938.
The FHA was established in 1934 to advance homeownership opportunities for all Americans. It provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories.
An acronym for the Fair Isaac Corporation, the company that developed the most commonly used credit scoring system. Credit reporting agencies issue FICO scores to lenders who in turn use them to calculate the risk on a loan.
A mortgage with payments that remain the same throughout the life of the loan because the interest rate and other terms do not change.
Created in 1970 by the federal government as the Federal Home Loan Mortgage Corporation, it is a stockholder-owned corporation chartered by Congress to increase the supply of funds that mortgage lenders, such as commercial banks, mortgage bankers, savings institutions and credit unions, can make available to homebuyers and multifamily investors.
If the payment schedule on a loan is met, the loan principal will be entirely paid off at the end of the term.
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. Like Fannie Mae and Freddie Mac, the investment income provides funding that may then be lent to eligible borrowers by lenders. Ginnie Mae stands for Government National Mortgage Association (GNMA).
A home equity line of credit (HELOC) is a revolving line of credit where, similar to a home equity loan, the borrower's equity is used as collateral. But instead of receiving one lump sum, the borrower receives a line of credit that can be used at his or her discretion.
A home equity loan (also known as a second mortgage, term loan or equity loan) is a type of loan where a mortgage lender lets a homeowner borrow money against the equity in his or her home. A home equity loan is paid every month on top of the first mortgage.
Typically, owners of condos or townhomes are required to pay homeowners association dues (also known as HOA fees), to cover common amenities or services within the property such as garbage collection, landscaping, snow removal, pool maintenance, and hazard insurance.
Commonly known as hazard insurance, most lenders require insurance to provide damage protection for your home and personal property from a variety of events, including fire, lightning, burglary, vandalism, storms, explosions, and more. Homeowner's insurance policies also contain personal liability coverage, which protects against lawsuits involving injuries that occur on and off your property.
A rate or fee charged for the use of borrowed money.
Also known just as rate, it is usually expressed as a percentage and it is the amount of interest charged that determines a monthly loan payment.
A jumbo loan is a mortgage with a loan amount that exceeds the conforming loan limits for the area. In most areas in the United States, the conforming loan limit is $424,100, but the limits can exceed that amount in higher-cost areas.
A lien is any legal claim upon a property for a debt or a non-monetary interest in the property. A lien gives a person or creditor the right to keep possession of property belonging to another person until the debt owed is settled.
The first step in the official loan approval process; this form is used to record important information about the potential borrower necessary to the underwriting process.
Loan term is the length of time your loan agreement is in place. Your loan balance should be repaid by the end of the term. The most common mortgage loan terms are 30 years or 15 years, but there are a wide variety of options available.
Loan-to-value (LTV) is the ratio between the value of your loan and the value of your home. To determine your LTV, divide your loan amount by the lesser of the home's appraised value or purchase price. For example, if your loan balance is $80,000 and your home is valued at $100,000, then your LTV ratio is 80%.
A guarantee of an interest rate if a loan is closed within a specific time.
A lien against real estate given by a buyer or property owner to the lender as security for money borrowed. Essentially, it is a legal agreement that means if the borrower stops making payments, the lender can take possession of the house.
One who originates, sells, and services mortgage loans and resells them to secondary mortgage lenders such as Fannie Mae or Freddie Mac.
A firm that originates and processes loans for a number of lenders providing the borrower with access to a variety of rates and programs.
A policy protecting 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. Also known as PMI (Private Mortgage Insurance).
Mortgage Insurance Premium is a term used for mortgage insurance on a FHA loan. This insurance protects the lender in case of default and is paid upfront and monthly. This allows borrowers to purchase or refinance their homes with a downpayment as low as 3.5%.
A non-conforming mortgage is a mortgage that does not meet the guidelines for conforming loans set by by Fannie Mae and Freddie Mac. Conforming loan amount limits are typically $424,100 for a single-family home, though they can be higher in some high-cost areas. Loans that exceed this amount are also called jumbo loans.
The process of preparing, submitting, and evaluating a loan application generally includes a credit check, verification of employment, and a property appraisal.
The fee a lender charges for processing a loan. This includes the cost to prepare loan documents, check a borrower's credit history, and inspect the property.
A rate of interest on a loan for which the lender does not charge (nor pay) points. An interest rate lower than the par rate would cost the broker money; an interest rate higher than the par rate would pay the broker a commission. (The par rate can vary, depending on the qualifications of a particular borrower.)
A piggyback mortgage is a type of home loan where a second mortgage is taken out at the same time as the first mortgage, typically to decrease the loan-to-value (LTV) to avoid paying private mortgage insurance (PMI). PMI is often required for home loans with a down payment of less than 20% and a LTV ratio that's more than 80%. With a piggyback loan, the borrower makes a 10% down payment, and the second mortgage covers the second 10%, which decreases the LTV ratio to 80%.
A point equals 1 percent of the mortgage amount. Lenders sometimes charge "origination points" to cover expenses of making a loan. Borrowers sometimes pay "discount points" to reduce the loan's interest rate.
A commitment in writing from a lender that a borrower would qualify for a particular loan amount based on income and credit information.
A pre-payment penalty means that if you pay off your mortgage loan earlier than agreed, you will pay a penalty. However, if you agree to pay a pre-payment penalty, you will usually get a better interest rate.
When a lender evaluates a borrower's finances to determine how much he or she can afford to borrow and on what terms.
A primary residence is the dwelling where you live the majority of the time. Primary residences qualify for the lowest mortgage rates compared to second homes, vacation homes, or investment properties.
Prime rate is the short-term interest rate charged by a lender to customers who are the least likely to default on their loans. The most credit-worthy customers receive the best or lowest rate that the lender would offer any of its customers. Each lending institution sets its own prime rate.
The amount of money borrowed from a lender, not including interest or additional fees.
PITI is an acronym for Principal, Interest, Taxes and Insurance. It is the collective amount a borrower pays when buying a home with a mortgage loan.
Private Mortgage Insurance (PMI) is coverage that insures the mortgage lender against loss if the borrower or borrowers default on the home loan. PMI is normally required when a borrower's down payment or equity is less than 20 percent of the loan value. Not all lenders will require PMI, but those that follow the Fannie Mae or Freddie Mac guidelines for home loan approval will require PMI. The mortgage insurance is usually escrowed into the mortgage payment, and when a borrower reaches 20 percent equity, mortgage insurance is not required.
This is an annual tax on homeowners' property, and the tax amount is typically based on the home's value.
Also known as interest rate, it is usually expressed as a percentage and it is the amount of interest charged that determines a monthly loan payment.
A rate lock or lock-in refers to a written agreement guaranteeing a home buyer a specific interest rate on a home loan provided that the loan is closed within a certain period of time, such as 60 or 90 days. Often the agreement also specifies the number of points to be paid at closing.
The act of paying off one loan by obtaining another. Refinancing is generally done to secure better loan terms, such as a lower interest rate.
The Real Estate Settlement Procedures Act (RESPA) is a 1974 law aimed at protecting consumers by requiring disclosures and forbidding kickbacks for referrals among the service providers involved in the sale of a home.
For example, a real estate agent may not receive a payment for referring the client to a particular title insurance company.
Sometimes called reverse-annuity or home-equity conversion mortgage, it's when a homeowner borrows against the equity in their home and receives regular monthly tax-free payments from the lender.
The three day right of recission is a federal law granted by a provision of the Truth in Lending Act (TILA) that allows homeowners to cancel a home equity loan, second mortgage, or refinance loan on their primary residence within three days after signing their final loan documents.
A second mortgage is a mortgage on your home in addition to the original first mortgage you used to purchase you home. Your home is used to secure your second mortgage, so if you fail to make payments, the bank can take your home.
Also known as seller contributions, seller concessions are the costs that a seller agrees to pay on behalf of the buyer during the sale of a home, at closing. Sellers concessions can cover closing costs including but not limited to:
- Lender origination fees
- Discount points
- Title insurance costs
- Loan processing fees
- Attorney's fees
- Credit report pulling fee
- Appraisal fees
- Inspection fees
- Transfer taxes
Seller concessions can benefit the buyer by helping pay for closing costs associated with the loan. And they can benefit the seller by helping them sell their home faster. The amount of a seller concession typically ranges from 1% to 6% of the purchase price of the home, and is based on a number of factors including loan type and down payment amount.
When the demand for homes in a given marketplace exceeds the supply of properties on the market.
Servicing, or loan servicing, is the administration of a home loan by a mortgage bank, servicer or lender that collects the principal, interest, and escrow payments from the borrower. Your loan servicer may or may not be the same company that issued your mortgage, and it is not uncommon for your loan servicer to change during the life of your loan.
Insurance protecting the lender (or a homeowner) against any claims that could arise from arguments about ownership of the property. Should a problem arise, the title insurer pays any legal damages.
A federal law obligating a lender to give full written disclosure of all fees, terms, and conditions associated with the loan's initial period and any adjustments to the remaining term of the loan.
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.
A VA mortgage (also called a VA home loan or just VA loan) is a mortgage loan that's guaranteed by the Department of Veterans Affairs (VA) for veterans, active military personnel, and military spouses who qualify. The VA does not lend money for VA loans, but it guarantees mortgages made by private lenders. VA mortgages have benefits such as zero down payment.