Mortgage Terms and Definitions
Mortgages and home loans are extremely complex and have many terms that aren’t used outside of the financial sector. Due to this, we’ve compiled a list of the most commonly used terms in our industry and provided a description to you below. Please contact us if you have any questions at all about these terms or the terms related to your loan.
15 Year Mortgage
A loan amortized over 180 months with an interest rate that will remain the same for the life of the loan.
20 Year Mortgage
A loan amortized over 240 months with an interest rate that will remain the same for the life of the loan.
30 Year Mortgage
A loan amortized over 360 months with an interest rate that will remain the same for the life of the loan.
3/1 Arm
ARM stands for Adjustable Rate Mortgage. The interest rate is fixed for the first 36 months. Then will adjust once every 12 months after that. Amortized over 360 months.
5/1 Arm
ARM stands for Adjustable Rate Mortgage. The interest rate is fixed for the first 60 months. Then will adjust once every 12 months after that. Amortized over 360 months.
Adjustment Period
A fixed interval of time during which the interest rate is fixed on an ARM (adjustable rate mortgage). The interest rate will adjust at the end of each interval.
Adjustable Rate Mortgage (ARM)
Mortgage loan which includes an interest rate that periodically adjusts in accordance with a specified index.
Affordability
To have the financial means for something.
Amortization
The gradual payoff of debt via principal and interest payments, usually in monthly installments.
Amortization Schedule
A projection of how much will be paid towards principal and interest with each scheduled loan payment.
Annual Percentage Rate (APR)
The annual rate charged for borrowing that represents the actual yearly cost of the funds over the term of the loan. This includes any fees or additional costs associated with the transaction.
Application
See ‘Uniform Residential Loan Application.’
Appraisal
An opinion of property value at a certain point in time.
Appraisal Fee
Fee paid to an appraiser for preparing an appraisal report.
Appraisal Management Company (AMC)
Intermediary used by a lender to order an appraisal in order to be compliant with HVCC (Home Valuation Code of Conduct) laws.
Approval
Officially agreeing or accepting something as satisfactory.
Borrower
The first individual listed on a loan application.
Co-Borrower
The second individual listed on a loan application.
Buy Down
A buy down is when the borrower attempts to get a lower interest rate for a period of time in the mortgage – typically the first few years of the mortgage.
Buy Up
When the borrower accepts a higher interest rate to receive rebates to help offset the closing costs of the loan. This can be helpful to the borrower to require less cash to close their loan. These can also be called ‘negative points’ in reference to mortgage or discount points on the loan. Box Home Loans’ rate quoting engine shows you what rebates are available to you based on many different loan scenarios to ensure you choose the right loan for you.
Cash Out Refinance
Refinance mortgage which allows borrowers to withdraw cash from home equity. Cash-out proceeds can be used for a variety of purposes such as paying off other debt.
Caps
The maximum amount an interest rate can rise in a given time period.
Ceiling
A ceiling is the maximum amount the interest rate can reach during the term of the note. The maximum ceiling for the 5/1 ARM is 5% over the initial note rate and for a 3/1 ARM it is 6% over the initial note rate.
Collateral
Property secured to the repayment of the mortgage loan.
Conforming Mortgage
A mortgage product that follows Fannie Mae or Freddie Mac guidelines and is not insured by the federal government.
Closing
The time and place at which the mortgage deed and loan documents are executed.
Closing Costs
Costs associated with the purchase of a property that are above and beyond the sales prices.
Closing Date
The date at which the property is formally transferred from the seller to buyer.
Conventional Conforming Fixed Rate
Home loan that adheres to Fannie Mae or Freddie Mac guidelines, although is not government insured, and includes an interest rate that remains constant for the life of the loan.
Conventional Mortgage
Mortgage product that is not guaranteed by the US government. Conventional mortgages adhere to Fannie Mae, Freddie Mac, and other investors’ guidelines.
Credit Score
A numeric value or score issued by a credit bureau that is an expression of a person’s creditworthiness. The score is used by lenders to determine the risk and likelihood a borrower will repay the loan based on past performance.
Discount Points
See ‘Mortgage Points’
Down Payment
The amount of the home’s purchase price that is paid in cash and is not part of the mortgage loan.
Disclosures
Documents between the lender and borrower explaining the loan’s terms and arrangements as well as any documents required by law.
Escrow Account
An impound account in which a portion of the borrower’s monthly mortgage payment is deposited to cover annual charges for homeowners’s insurance and property taxes.
Equity
See ‘Home Equity.’
Fannie Mae
Government sponsored organization that buys mortgages from lenders and pools and sells them as mortgage-backed securities. This allows lenders to reinvest their assets into further lending. Fannie Mae estabishes guidelines for conventional loans.
Fees
Cost or charges in addition to the purchase price of a property.
Federal Housing Administration (FHA)
Division of the Department of Housing and Urban Development that insures FHA loans made by banks and mortgage companies. It was created during the Great Depression to help more people the ability to obtain a mortgage to purchase property. The Federal Housing Administration sets the guidelines for FHA loans. FHA loans assists first-time homebuyers and those who may not qualify for conventional loans.
Federal Home Loan Mortgage Corporation (FHLMC)
Government sponsored organization that buys mortgages from lenders and pools and sells them as mortgage-backed securities. This allows lenders to reinvest their assets into further lending. Freddie Mac establishes guidelines for conventional loans.
FICO Score
A numeric value or score issued by a credit bureau that is an expression of a person’s creditworthiness. Lenders determine the risk and likelihood a borrower will repay the loan based on past performance. Calculated with algorithms from the Fair Isaac Corporation.
Fixed Rate Mortgage
Mortgage loan in which the interest rate remains the same for the life of the loan.
Fixed Rate Period
The period of time in an Adjustable Rate Mortgage where the interest rate is fixed. On a 5/1 ARM, the fixed period is 5 years and on a 3/1 ARM, the fixed period is 3 years.
First Mortgage
Mortgage that has priority over any other mortgages attached to a property. Usually, this is the main mortgage on a property. For example, a Home Equity Line of Credit is a second lien in comparison to the first original mortgage.
First Time Home Buyer
Buyer purchasing property for the first time.
Federal National Mortgage Association (FNMA)
Government sponsored organization that buys mortgages from lenders and pools and sells them as mortgage-backed securities, this allows lenders to reinvest their assets into further lending. Fannie Mae establishes guidelines for conventional loans.
Freddie Mac
Government sponsored organization that buys mortgages from lenders and pools and sells them as mortgage-backed securities, this allows lenders to reinvest their assets into further lending. Freddie Mac establishes guidelines for conventional loans.
Fully Indexed Interest Rate
The interest rate recalculates every 12 months for both the 5/1 ARM and 3/1 ARM after the fixed period . The new interest rate uses a formula. That formula is Fully Indexed Interest Rate = Mortgage Margin + Index Rate
Good Faith Estimate (GFE)
Document produced by lender to give an estimate of the settlement charges likely to occur as well as other loan information.
High Balance Conforming Fixed Rate Mortgages
Mortgage loan subject to a high-cost area with loan limits set annually by the Federal Housing Finance Agency, with this in mind, the home must be located in a recognized high-balance mortgage county.
High Balance Mortgages
Mortgage loan subject to a high-cost area with loan limits set annually by the Federal Housing Finance Agency, with this in mind, the home must be located in a recognized high-balance mortgage county.
Home Equity
The difference between a home’s value and the outstanding balance of loans. Unencumbered interest in real property.
Homeowners Insurance
Insurance policy that protects the property and possessions inside from serious loss such as fire.
Homeowners Insurance Premium
The annual cost of maintaining homeowners insurance.
Home Valuation Code of Conduct (HVCC)
Set of federal guidelines designed to enhance the integrity of the home appraisal process. Hence, lenders no longer work directly with appraisers. Instead, a third-party appraisal management company acts as a buffer between the lender and the appraiser.
Index Rate
The index is a variable that changes throughout time which impacts the interest rate of an ARM after the fixed rate period ends. Box Home Loans ARMs are tied to the LIBOR index.
Interest Rate Index
The index is a variable that changes throughout time which impacts the interest rate of an ARM after the fixed rate period ends. Box Home Loans ARMs are tied to the LIBOR index.
Initial Note Rate
The note rate upon the origination of an adjustable rate mortgage.
Interest
Fee charged by a lender for the use of borrowing its money.
Interest Rate
The charge by the lender for borrowing money expressed as a percentage.
Interest Rate Caps
Interest Rate Caps are the limit on the amount the interest rate can increase or decrease each adjustment period of an Adjustable Rate Mortgage. An interest rate can increase or decrease every 12 months period by 2.0% from the last calculated rate period. Because of this, this is the cap in how much variability there can be in an interest rate each year.
Interest Rate Ceiling
An interest rate ceiling is the maximum amount the interest rate can reach during the term of the note. Further, the maximum ceiling for the 5/1 ARM is 5% over the initial note rate and for a 3/1 ARM it is 6% over the initial note rate.
Lender
Organization that lends money. Mortgage companies, banks, and credit unions may act as mortgage lenders. Box Home Loans is a Lender.
LIBOR Index
LIBOR stands for “London Inter-Bank Offered Rate.” It is based on rates that contributor banks in London offer each other for inter-bank deposits. Essentially, a LIBOR is a rate at which a fellow London bank can borrow money from other banks. In addition, Borrowers can easily research the history of this index by searching online for “History of LIBOR Index.” The index is a variable that changes throughout time which impacts the interest rate of an ARM after the fixed rate period ends.
Loan Amount
The dollar amount borrowed on a mortgage.
Loan Officer
Representatives of the mortgage company that assist borrowers in finding the best rate and loan product. In addition, they assist in completing the application and answering questions related to the underwriting and closing of the loan.
Loan to Value Ratio (LTV)
A ratio calculated by dividing the amount to be borrowed by the price or appraised value of the home.
Lock
An agreement between the mortgage lender and borrower that sets the interest rate at a determined amount for a specific period of time.
Lock Period
The number of days the lock is effective. Funding of the loan must take place before the lock date to meet the lock agreement.
Minimum Down Payment
The minimum amount of cash required towards the purchase price of a property. Generally, this amount is 5% of the purchase price for conventional loans and 3.5% for FHA loans.
Mortgage
Loan for the purchase or refinance of residential property. In particular, the mortgage is the transfer of an interest in the property to the lender as a security for a debt.
Mortgage Margin
Every mortgage has a margin. This determines the fully indexed interest rate of an adjustable rate mortgage (ARM). The margin is fixed, so it remains constant throughout the life of the mortgage.
Mortgage Term
The period of time and the interest rate agreed upon by the lender and the borrower to repay a loan. As an illustration, Box Home Loans offers loans for 15, 20, and 30 year terms on Fixed Rate Mortgages and 5 and 3 year terms on Adjustable Rate Mortgages.
Mortgage Insurance
An insurance policy intended to protect the lender against the losses that may occur if a borrower defaults on their payments. In order to avoid paying mortgage insurance on a conventional loan, the loan-to-value (LTV) ratio must be 80% or below. For example, if the borrower’s home is worth $100,000, in order to avoid paying mortgage insurance, the maximum loan amount would be $80,000. If the borrower’s loan-to-value ratio is above 80%, mortgage insurance will be required in either an upfront or monthly fee.
Mortgage Insurance Premium
A monthly payment required as part of your housing payment to pay for the mortgage insurance on a loan.
Mortgage Payment
The monthly payment made to the lender for repayment on the mortgage loan. Mortgage payments must always include the principal and interest. Most homeowners also have a third part of a payment included in an escrow account that the lender maintains to pay for things like: hazard insurance, property taxes, homeowners association fees and mortgage insurance (where applicable).
Mortgage Points
A form of pre-paid interest. 1 point equals 1% of the loan amount. Lenders will charge points, lenders can increase the yield on the loan above the stated interest rate. Borrowers can also offer to pay a lender points as a method to reduce the interest rate of the loan – effectively lowering the monthly payment. Box Home Loans’ rate quoting engine shows you the rate, points, and APR of every quote we do to ensure you select the right loan for your needs.
Note
The legal document which requires the borrower to repay a mortgage or home loan at the interest rate stated over a period of time.
PITI
PITI is an acronym for:Principal, Interest, Taxes, and Insurance. The four elements included in an escrowed mortgage payment. Principal and interest go directly towards the repayment of the loan while taxes and insurance go to an escrow account to cover the fees when they are due.
Points
See ‘Mortgage Points’
Premium
The annual cost or fee associated with a service.
Pre-Approval
A lender commits to lend to a potential borrower based the review and analysis by an underwriter of a completed loan application, credit report, debt to income, and savings. This does not guaranty a loan until the property itself has been inspected and met underwriting guidelines. This approval is also only valid so long as the borrower meets the requirements at the time of purchase or closing on the loan.
Principal
The amount of money borrowed for the purpose of buying a home.
Primary Residence
The homeowner lives in this property the majority of the year.
Private Mortgage Insurance
Insurance that protects the lender in the instance of borrower default. Private mortgage insurance is required on any down payment less than 20%. Further, mortgage insurance can be paid monthly with the mortgage payment or upfront in a lump sum.
Processing
Stage in the loan application where the borrower and any third-party vendors obtain required documents in preparation for underwriting.
Property Tax
The annual amount assessed and taxed on a property by county or other local governments.
Purchase
To buy real property.
Qualification
In order for a borrower to purchase a home or refinance a mortgage they must meet these requirements.
Rate
The charge by the lender for borrowing money expressed as a percentage.
Refinance
Paying off one loan by obtaining another; refinancing secures better loan terms (like a lower interest rate).
Second Mortgage
An additional mortgage on property listed in 2nd position on title. In case of a default the first mortgage must be paid before the second mortgage. Because second loans are more risky for the lender, they usually carry a higher interest rate.
Term
The period of time and the interest rate agreed upon by the lender and the borrower to repay a loan. As an illustration, Box Home Loans offers loans for 15, 20, and 30 year terms on Fixed Rate Mortgages and 5 and 3 year terms on Adjustable Rate Mortgages.
Title Insurance
Insurance to protect against any future title dispute on the property. Further, title insurers verify who is the actual property owners and discovers and liens attached to the property.
Underwriting
The process of analyzing a loan application with supporting documentation to determine the amount of risk involved in making the loan; it includes a review of the potential borrower’s credit history, a judgment of the property value, as well as other supporting documentation
Uniform Residential Loan Application 1003
The standard application required to process a Fannie Mae or Freddie Mac application.