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Loan Definitions

Conventional and Jumbo Loans
Conventional loans are secured by government sponsored entities or GSE's such as Fannie Mae and Freddie Mac.

Subprime Loans
Programs for those that have less than perfect credit.

FHA Loans
Programs that help low and moderate income families become homeowners by lowering some of the costs of their
mortgage loan.

VA Loans
Loan programs available to those who qualify by military service.

Second Mortgages and Home Equity Lines of Credit
Loan programs to take advantage of the equity in your home.

Fixed Rate Mortgages
A loan program where your monthly principal and interest payments never change.

Adjustable Rate Mortgages (ARMs)
These loans generally begin with an interest rate that is 2-3 percent below a comparable fixed rate mortgage, and
could allow you to buy a more expensive home.

Introductory Rate ARMs
Most adjustable rate loans (ARMs) have a low introductory rate or start rate, some times as much as 5% below the
current market rate of a fixed loan.

Standard ARMs and the Differences
Various types of adjustable rate mortgages.

COFI Index
This index is used to determine the interest rate for some types of ARMs.

LIBOR Index
This index is used to determine the interest rate for some types of ARMs.

Balloon Mortgages
Balloon loans are short term mortgages that have some features of a fixed rate mortgage.

Interest Only Loans
“Interest only" products are an easy way to save money and a very popular alternative to traditional fixed rates but
they are not without risk. An "Interest Only" loan can offer consumers greater purchasing power, increased cash
flow and a number of other benefits which are listed later in this article.

Graduated Payment Mortgages (GPMs)
The GPM is an alternative to the conventional adjustable rate mortgage, and has a fixed note rate and payment
schedule.

Interest Rate Buydowns
The most common buy down is the 2-1 buy down. In the past, for a buyer to secure a 2-1 buy down they would
pay 3 points above current market points in order to pay a below market interest rate during the first two years of
the loan. At the end of the two years they would then pay the old market rate for the remaining term.

Reverse Mortgages
A reverse mortgage is a special type of loan made to older homeowners to enable them to convert the equity in their
home into cash.

Commercial Loans
Loan programs for commercial and investment properties.

Refinance Considerations

When you're making your decision, there are several things to keep in mind.

If your current interest rate is significantly higher than today's lowest rates, you
may be able to roll your loan costs into the loan and still get a lower rate than you
have today, thereby reducing your interest payments and saving money
immediately.

Second, if you are planning to stay in your home for at least three to five years, it
may make sense to pay "points" (a point equals 1% of the loan amount) and
closing costs to get the lowest available rate.

And third, you can avoid laying out cash and still get a low rate by adding the
points and closing costs to your new mortgage. Does that mean shouldering a lot
of extra debt? Not necessarily. If you've had your current mortgage for at least
three years, you've probably reduced your balance by several thousand dollars. So
you may be able to tack your closing costs onto your new loan and still end up
with a mortgage that's smaller than your original one -- plus, of course, a lower
rate and lower monthly payment.

Annual Percentage Rate (APR)
The measurement of the full cost of a loan including
interest and loan fees expressed as a yearly percentage rate.
Because all lenders apply the same rules in calculating the
annual percentage rate, it provides consumers with a good
basis for comparing the cost of different loans.

Appraisal
An estimate of the value of property made by a qualified
professional called an "appraiser.”

Appraised Value
An opinion of a property's fair market value, based on an
appraiser's knowledge, experience, and analysis of the
property.

Balloon Mortgage
A loan which is amortized for a longer period than the
term of the loan. Usually this refers to a thirty year
amortization and a five or seven year term. At the end of
the term of the loan, the remaining outstanding principal
on the loan is due. This final payment is known as a
balloon payment.

Bridge Loan
A second trust that is collateralized by the borrower's
present home allowing the proceeds to be used to close on a
new house before the present home is sold. Also known as
"swing loan."

Cash Flow
The amount of cash derived over a certain period of time
from an income producing property. The cash flow should
be large enough to pay the expenses of the income
producing property (mortgage payment, maintenance,
utilities, etc...).

Caps (interest)
Consumer safeguards which limit the amount of change to
the interest rate for an adjustable rate mortgage

Caps (payment)
Consumer safeguards which limit the amount of change to
the monthly payments for an adjustable rate mortgage

Closing
The meeting between the buyer, seller and lender or their
agents where the property and funds legally change hands,
also called settlement. Closing costs usually include an
origination fee, discount points, appraisal fee, title search
and insurance, survey, taxes, deed recording fee, credit
report charge and other costs assessed at settlement. The
cost of closing usually are about 3 percent to 6 percent of
the mortgage amount

Closing Costs
Expenses over and above the price of the property that are
incurred by buyers and sellers when transferring
ownership of a property. Closing costs normally include an
origination fee, property taxes, charges for title insurance
and escrow costs, appraisal fees, etc. Closing costs will vary
according to the area country and the lenders used.

Contract Sale or Deed:
A contract between purchaser and a seller of real estate to
convey title after certain conditions have been met. It is a
form of installment sale.

Conventional Loan
A mortgage not insured by FHA or guaranteed by VA

Credit Risk Score
A credit risk score is a statistical summary of the
information contained in a consumer's credit report. The
most well known type of credit risk score is the Fair Isaac
or FICO score. This form of credit scoring is a mathematical
summary calculation that assigns numerical values to
various pieces of information in the credit report. The
overall credit risk score is highly relative in the credit
underwriting process for a mortgage loan.

Debt-to-Income Ratio
The ratio, expressed as a percentage, which results when a
borrower's monthly payment obligation on long term
debts is divided by his or her gross monthly income. See
housing expenses-to-income ratio

Down Payment
Money paid to make up the difference between the purchase
price and the mortgage amount.

Equity
The difference between the fair market value and current
indebtedness, also referred to as the owner's interest. The
value an owner has in real estate over and above the
obligation against the property

Escrow
An account held by the lender into which the home buyer
pays money for tax or insurance payments. Also earnest
deposits held pending loan closing.

Fixed Rate Mortgage
The mortgage interest rate will remain the same on these
mortgages throughout the term of the mortgage for the
original borrower.

Fully Amortized ARM
An adjustable rate mortgage (ARM) with a monthly
payment that is sufficient to amortize the remaining
balance, at the interest accrual rate, over the amortization
term.

Foreclosure
A legal process by which the lender or the seller forces a
sale of a mortgaged property because the borrower has not
met the terms of the mortgage. Also known as a
repossession of property.

Index
A published interest rate against which lenders measure the
difference between the current interest rate on an adjustable
rate mortgage and that earned by other investments (such
as one, three, and five year U.S. Treasury security yields,
the monthly average interest rate on loans closed by
savings and loan institutions, and the monthly average
costs-of-funds incurred by savings and loans), which is
then used to adjust the interest rate on an adjustable
mortgage up or down.

Initial Interest Rate
This refers to the original interest rate of the mortgage at
the time of closing. This rate changes for an adjustable rate
mortgage (ARM). It's also known as "start rate" or "teaser."

Interest
The fee charged for borrowing money.

Jumbo Loan
A loan which is larger than the limits set by the Federal
National Mortgage Association and the Federal Home Loan
Mortgage Corporation. Because jumbo loans cannot be
funded by these two agencies, they usually carry a higher
interest rate.

Late Charge
The penalty a borrower must pay when a payment is made
a stated number of days after the due date.

Lien
A claim upon a piece of property for the payment or
satisfaction of a debt or obligation

Loan to Value Ratio
The relationship between the amount of the mortgage loan
and the appraised value of the property expressed as a
percentage.

Market Value
The highest price that a buyer would pay and the lowest
price a seller would accept on a property. Market value may
be different from the price a property could actually be sold
for at a given time.

Monthly Fixed Installment
The portion of the total monthly payment that is applied
toward principal and interest. When a mortgage negatively
amortizes, the monthly fixed installment does not include
any amount for principal reduction and doesn't cover all of
the interest. The loan balance therefore increases instead of
decreasing.

Mortgage Insurance
Money paid to insure the mortgage when the down
payment is less than 20 percent. See private mortgage
insurance, FHA mortgage insurance

Negative Amortization
When your monthly payments are not large enough to pay
all the interest due on the loan. This unpaid interest is
added to the unpaid balance of the loan. The home buyer
ends up owing more than the original amount of the loan.

One Year Adjustable Rate Mortgage
Mortgage where the annual rate changes yearly. The rate is
usually based on movements of a published index plus a
specified margin, chosen by the lender.

Origination Fee
The fee charged by a lender to prepare loan documents,
make credit checks, inspect and sometimes appraise a
property; usually computed as a percentage of the face value
of the loan.

Periodic Rate Cap
A limit on the amount that the interest rate can increase or
decrease during any one adjustment period, regardless of
how high or low the index might be.

Points (Loan Discount Points)
Prepaid interest assessed at closing by the lender. Each
point is equal to 1 percent of the loan amount (e.g., two
points on a $100,000 mortgage would cost $2,000).

Prepayment
A privilege in a mortgage permitting the borrower to make
payments in advance of their due date

Primary Mortgage Market
Lenders, such as savings and loan associations, commercial
banks, and mortgage companies, who make mortgage loans
directly to borrowers. These lenders sometimes sell their
mortgages to the secondary mortgage markets such as
FNMA or GNMA, etc…

Principal
The amount borrowed or remaining unpaid. The part of
the monthly payment that reduces the remaining balance of
a mortgage

Principal Balance
The outstanding balance of principal on a mortgage not
including interest or any other charges

Qualifying Ratios
Calculations used to determine if a borrower can qualify for
a mortgage. They consist of two separate calculations: a
housing expense as a percent of income ratio and total debt
obligations as a percent of income ratio.

Rate Lock
A commitment issued by a lender to a borrower or another
mortgage originator guaranteeing a specified interest rate
and lender costs for a specified period of time

Refinance
Obtaining a new mortgage loan on a property already
owned often to replace existing loans on the property.

Second Mortgage
A mortgage made subsequent to another mortgage and
subordinate to the first one.

Standard Payment Calculation
The method used to determine the monthly payment
required to repay the remaining balance of a mortgage in
substantially equal installments over the remaining term of
the mortgage at the current interest rate.

Title
A document that gives evidence of an individual's
ownership of property.

Title Search
An examination of municipal records to determine the legal
ownership of property. Usually is performed by a title
company.

Truth in Lending
A federal law requiring disclosure of the Annual Percentage
Rate to home buyers shortly after they apply for the loan.
Also known as Regulation Z.

Wraparound Mortgage
Results when an existing assumable loan is combined with
a new loan, resulting in an interest rate somewhere
between the old rate and the current market rate. The
payments are made to a second lender or the previous
homeowner, who then forwards the payments to the first
lender after taking the additional amount off the top.