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Mortgage Terms

Understanding the vocabulary used with mortgages will help you get the most out of your mortgage. The terms are sorted in alphabetical order.

To use a search box feature, visit our mortgage terms page at F.C. Tucker.

 

 

Acceleration Clause
An acceleration clause is a mortgage provision that permits the lender to require payment in full after an adverse event. In most cases, acceleration clauses are only invoked after a borrower fails to make a series of monthly payments. The borrower will be required to immediately pay the entire balance of the loan.

Additional Principal Payment
Occurs when lenders pay more on their loan than the scheduled amount that is due for the month. For example, a borrower might “double up” by paying twice the amount of their mortgage for one month. This can help reduce the length of the loan.

Adjustable-Rate Mortgage (ARM)
A loan payment schedule that bases interest rates on market fluctuations. Certain types of ARM can include an introductory fixed-rate term or interest-only term, followed by a period of fluctuating interest rates that are adjusted annually based on economic indices. Payments are generally lower during this initial stage, but they can increase with interest rate fluctuations after the introductory period. Those special ARMs can be structured with introductory periods between one year and 10 years.

Adjustment Date
The date on which the interest rate is recalculated and a new rate is applied for an adjustable-rate mortgage (ARM).

Adjustment Period
The time period between interest rate adjustment dates for an adjustable-rate mortgage.

Affordability Analysis
A financial review of a buyer’s ability to accommodate the purchase of a home. Loan Officers and other professionals will evaluate income, available assets, liabilities and other personal financial data. Closing costs and the address of the house also play a role in the affordability analysis. This process determines the type of mortgage that will be made available.

Amortization
The process by which a mortgage loan principal and interest are repaid through an installment plan.

Amortization Term
The length of time before the loan principal and interest are paid in full. Generally expressed in terms of months. For example, a 20-year mortgage would have a 240-month amortization term.

Annual Percentage Rate (APR)
The yearly cost of maintaining a mortgage loan. This includes interest, loan origination fees, mortgage insurance and other costs. Useful in helping buyers identify the appropriate type of mortgage for their needs. This is not the same as the note rate.

Appraisal
A process by which the value of a property is formally determined by a professional appraiser.

Appraised Value
The final fair market value that is identified through the appraiser’s ruling.

Asset
Any item or holding that has monetary value. This can include real estate, personal holdings, bank accounts and even enforceable claims against others such as mutual funds and stocks.

Assumability
Assumable mortgages can be handed over from the seller of the home to the new buyer. In other words, the loan does not change; rather, only the borrower differs. Credit reviews are generally required for the new borrower, and a fee may be charged to transfer the loan to the new party. Mortgages that include due-on-sale clauses are not eligible for this process.

Balloon Mortgage
A mortgage structure that involves steady monthly payments over a stated term, followed by a lump-sum payment at the end of that specified term.

Balloon Payment
The payment remitted to the lender when the balloon mortgage reaches maturity.

Biweekly Payment Mortgage
A mortgage payment structure that requires payments every two weeks instead of the standard one time per month. This allows for 26 biweekly payments, each of which amounts to half of the total monthly payment. This can help reduce overall interest payments.

Bridge Loan
A loan for people who already own a home. The bridge loan uses the old house as collateral against the new mortgage. The proceeds are used to purchase a new house before the first house is sold. This is also called a “swing loan.”

Broker
An individual worker or financial firm that connects borrowers and lenders to originate mortgage loans.

Cap
The high end of an interest rate range that applies to payment adjustments for an adjustable-rate mortgage. In other words, the cap limits the total increase of the monthly payment during any adjustment period. These caps do not limit the amount of interest, so they can cause negative amortization. Caps are designed to protect borrowers from extreme swings in their monthly payments during the adjustment phase of an ARM.

Certificate of Eligibility
A document required to obtain a federal loan through the Department of Veterans Affairs (VA) mortgage loan. This document confirms the type and duration of military service, along with eligibility for the VA mortgage program.

Change Frequency
The frequency with which payment or interest rate changes occur for an adjustable-rate mortgage (ARM). Many ARMs are adjusted on an annual basis.

Closing
A financial meeting that signals the end of the property sale process. The buyer formally approves all mortgage documents by signing them. Closing costs are also paid at this time. Closing is also sometimes called “settlement.”

Closing Costs
Expenses due at the end of the home purchase process. These costs are independent of the cost of the property, and they are incurred when the property is transferred to another party. These costs may include property taxes, origination fees, title and escrow fees, along with appraisal costs and other expenses. Closing costs may be shared by a buyer and seller, or they may be apportioned to only one of the parties. These closing costs vary depending on the location of the home and the lenders used.

Compound Interest
Interest that is paid on both the original balance of the principal, along with the unpaid interest that has accrued during the term of the loan.

Consumer Reporting Agency (or Bureau)
One of three national organizations that manages the preparation of credit history reports. These agencies generate credit scores that help lenders determine whether a borrower is creditworthy enough to support a mortgage. Information from these reports is obtained through a credit repository and other sources.

Conversion Clause
Statement in an ARM that allows the loan to be switched to a fixed-rate payment model at some point during the term of the loan. Conversion is most often made available at the end of the first adjustment period. A conversion clause may cause extra expense to be incurred when the mortgage is drafted.

Credit Report
Document generated by a consumer reporting agency that details credit history and past payments. The credit report shows defaults, bankruptcies, write-offs and other unsavory financial information. The credit history is used by lenders to determine whether the applicant should be approved for a loan.

Credit Risk Score
The credit score is a simplification of the consumer’s credit risk as compared to the rest of the U.S. population. Credit usage and payment history is considered. The most popular credit score is that generated by FICO© and is a three-digit number. Credit scores range from 300 to 850, and they are based on a mathematical algorithm that combines information from your credit report and other sources. A high score indicates that the borrower has a lower credit risk, and that person is far more likely to get favorable terms.

Deed of Trust
This document is used in lieu of a mortgage in some states. The title may be conveyed to a trustee during the mortgage process.

Default
Failure of a borrower to make payments on a mortgage when they are due. Borrowers can also default if they fail to abide by the other requirements contained in a mortgage agreement.

Delinquency
Failure of the borrower to pay the mortgage note when it is due.

Deposit
Sum of money that is produced to bind the sale of real property to a buyer. That sum of money is given to a financial institution or individual to guarantee payment or serve as an advance of funds during loan processing.

Discount
The amount by which a rate is lowered during the initial phase of an adjustable-rate mortgage. The interest rate is generally lowered by multiple percentage points during this introductory phase; after the discount period, the index rate is used to determine payment.

Down Payment
Amount of money that is provided up front to purchase a property. This amount is not included in the mortgage loan. For example, a $100,000 home with a $20,000 down payment would only require an $80,000 loan.

Equity
The amount of financial value that is held in a property. Equity can be calculated by subtracting the home’s fair market value from the outstanding amount owed on the mortgage.

Escrow
An item or amount of money that has been held by a third party to be disbursed upon the fulfillment of a mortgage condition. In many cases, buyers are required to put some funds or documents in escrow to be delivered after the closing is complete.

Escrow Disbursements
The use of items of value that have been placed in escrow to pay for home-buying costs such as hazard insurance, property taxes, and mortgage insurance as those amounts become due.

Escrow Payment
Percentage of the borrower’s monthly payments that will be held by a servicer to pay for home-buying costs including property taxes, mortgage insurance, hazard insurance and others.

Fannie Mae
Federally chartered, shareholder-owned company that provides the majority of home mortgage funds throughout the nation.

FHA Mortgage
Mortgages that are insured by the Federal Housing Administration (FHA) instead of through a private investor. FHA mortgages are, by definition, insured; an uninsured FHA loan is not available.

First Mortgage
The first loan taken to pay for the real estate property, also known as the “primary lien.”

Fixed Installment
The amount due every month for mortgage payments. The fixed installment includes payment for both interest and the principal of the mortgage.

Fixed-Rate Mortgage (FRM)
Mortgage with interest rates that remain fixed throughout the entire term.

Fully Amortized ARM
A form of adjustable-rate mortgage (ARM) that features a monthly payment that will amortize the outstanding balance over the term of the loan. That payment is based upon the interest accrual rate.

GNMA 
Government-owned federal corporation that has taken over responsibility for special assistance loan efforts that had been overseen by Fannie Mae. GNMA is commonly called Ginnie Mae.

Guarantee Mortgage      
A mortgage that has been guaranteed by another party aside from the primary borrower.

Housing Expense Ratio
The percentage of monthly income that has been allotted to pay for the borrower’s housing costs.

HUD-1 statement
Document that itemizes costs that must be paid at closing. These can include loan fees, real estate commissions, escrow amounts, points and a variety of other charges. The document includes the total net proceeds from the seller and the net payment from the buyer during the closing process. Each itemized cost is traceable through a standardized numbering system.

Hybrid ARM (3/1 ARM, 5/1 ARM, 7/1 ARM, 10/1 ARM)
Hybrid adjustable-rate mortgages combine fixed-rate mortgages with the traditional ARM structure. The borrower enjoys lower payment rates during an initial period that generally spans three to 10 years. During the initial period, interest rates are lower than those offered for most ARMs, and the rate stays stable. Then, adjustment occurs at the end of the initial period and throughout the remainder of the loan term. Most hybrid ARMs are based on a 30-year term. Thus, a 5/1 loan would involve five years at the introductory rate, and an adjustable rate would apply for the remaining 25 years. This loan is best for people who want to move or refinance shortly after the first adjustment occurs.

Index
Industry indicator that measures interest rate changes. The index is used to determine the interest rate for an adjustable-rate mortgage during the adjustment period. The index may be tied to the yield on Treasury bills, for example. The choice of index is critical during ARM negotiations, as some of the indices are far more volatile than others.

Initial Interest Rate
Interest rate at the time that closing occurs. The interest rate may change as the adjustable-rate mortgage (ARM) progresses. This rate may also be called a “teaser” or a “start rate.”

Installment
Agreed-upon payments that the borrower makes to the lender.

Insured Mortgage
Mortgages that are insured through the Federal Housing Administration (FHA) or by private insurers (MI). The insurance is paid by the borrower and is designed to protect the lender in the event of default.

Interest
Fee assessed for the privilege of borrowing money from a lender.

Interest Rate Ceiling
The maximum interest rate that can be reached by an adjustable-rate mortgage (ARM). This amount is included in the mortgage documents.

Interest Rate Floor
The minimum interest rate that can be reached by an adjustable-rate mortgage (ARM). This amount is included in the mortgage documents.

Late Charge
Cost incurred by a borrower who makes a late mortgage payment. Payments that are late by 15 days or more may be assessed a late fee.

Liabilities
Borrower’s financial obligations, including credit-card debt, car notes, business loans and other types of both long-term and short-term debt.

Lifetime Payment Cap
Clause that limits the amount by which payments may rise or drop during the term of the adjustable-rate mortgage (ARM).

Lifetime Rate Cap
Limit on the amount by which interest rates may rise or drop during the term of an adjustable-rate mortgage (ARM).

Line of Credit
Amount of credit extended to an individual by a bank or lending institution for a specified amount of time.

Loan
Amount of money that is borrowed from a financial institution that is usually repaid with interest.

Loan-to-Value (LTV) Percentage
Relationship between the appraised value of a piece of property (or its sale price, if it is lower) and the amount due in principal on the mortgage loan. A $100,000 home that has an $80,000 mortgage would have an LTV measuring at 80 percent.

Margin
Number of percentage points that is added to the index rate to calculate a rate change during a loan adjustment for an adjustable-rate mortgage.

Maturity
A loan reaches maturity when the final payment on the loan’s principal is remitted.

Mortgage
Document that offers the real estate as a collateral for the repayment of debt.

Mortgage Banker
Financial firm that originates mortgages for sale in the secondary mortgage market.

Mortgage Broker
Person or firm that connects borrowers and lenders to originate home loans.

Mortgage Insurance
Contract that protects the bank or other lender from the borrower’s default on either a government or privately funded mortgage. The insurance can be issued by the federal government or a private company, depending on the nature of the loan.

Mortgage Insurance Premium (MIP)
Cost of mortgage insurance. Paid by the borrower.

Mortgage Life Insurance
A special type of life insurance that is designed to pay off a mortgage if the borrower dies during the span of that policy.

Mortgagor
A borrower involved in a mortgage agreement.

Note
Legal document that requires the borrower to repay the mortgage loan by a certain date and in compliance with other terms of the mortgage agreement.

Origination Fee
Fee remitted to a lender in exchange for processing a loan application.

Owner Financing
Type of property purchase in which the owner of the property provides a part or all of the financing. Owner financing may not involve a bank.

Payment Change Date
Date on which a new monthly payment amount is enforced after an adjustment for an adjustable-rate mortgage (ARM) or a graduated-payment mortgage (GRM). Payments generally change the month after the adjustment has occurred.

Periodic Payment Cap
Limit on the amount by which payments can rise or drop during an adjustment period for an adjustable-rate mortgage (ARM).

Periodic Rate Cap
Limit on the amount by which an interest rate can rise or drop during a single adjustment period, no matter the value of the index for an adjustable-rate mortgage (ARM).

PITI Reserves
Amount of cash that a borrower must have readily available in bank accounts after making the down payment and meeting all closing cost obligations. PITI stands for principal, interest, taxes and insurance. These reserves generally need to amount to three months’ worth of payments, though that amount can vary.

Points
A single point is equivalent to one percent of the principal of the mortgage amount. A mortgage valued at $100,000 with one point means that $1,000 would be given to the lender. Points are due at closing. They may be paid by the seller, buyer or both.

Prepayment Penalty
Fees assessed for borrowers who choose to pay off loans before they come due.

Pre-Approval
Process by which lenders determine the amount of money a homebuyer could be eligible to borrow. Occurs during the first stage of the mortgage process.

Principal
Amount borrowed from the lender, not considering interest. The amount of the monthly payment that is allocated to actual amount of the loan, rather than interest alone.

Principal Balance
Remaining amount due on a mortgage loan, excluding interest and auxiliary charges.

Principal, Interest, Taxes, and Insurance (PITI)
Four parts of a monthly mortgage payment. Borrowers pay for the principal, which is the amount that goes toward reducing the mortgage’s balance. Interest is the fee assessed for the privilege of borrowing the money. The taxes and insurance generally refer to property taxes and homeowners insurance. In some cases, taxes and insurance may be sent to an escrow account.

Private Mortgage Insurance (PMI)
Insurance that is provided by a private insurer to protect financial institutions in the event of a borrower default. Lenders generally require insurance for a loan that covers 80 percent or more of the property’s assessed value. For example, a $100,000 house requiring an $80,000 loan would have to be insured. If a borrower only needed $60,000 to pay for the property, however, insurance would not necessarily be required.

Qualifying Ratios
Calculations that determine whether borrowers can qualify for mortgages. This consists of two components. Lenders calculate the housing expense as a percentage of gross income. Other debt obligations, such as credit-card debt and other types of outstanding loans, are also compared to total gross income.

Rate Lock
Commitment by the lender to guarantee an agreed-upon interest rate for a certain period of time. The interest rate cannot be changed during that period.

Real Estate Agent
Professional who negotiates and facilitates the sale of real property on behalf of the seller.

Real Estate Settlement Procedures Act (RESPA)
Consumer protection regulations that require lenders to provide borrowers with adequate advance notice about closing costs.

Recording
Filing of a legal document in the registrar’s office that adds the document to the public record. Such documents include deeds, mortgage notes, extensions of mortgages and satisfaction of mortgages.

Refinance 
Paying off a property’s loan with money that has been borrowed from a new loan. Refinancing is generally done to secure a better interest rate or other favorable terms.

Secondary Mortgage Market
Financial marketplace in which existing mortgages are purchased and sold.

Security
Property that is listed as loan collateral.

Servicer
Organization that collects payments for principal and interests from borrowers. Servicers also manage borrowers’ escrow accounts. A servicer may provide these services for mortgages that have been bought by an investor in the secondary mortgage marketplace.

Total Expense Ratio
Mortgage obligations as a percentage of the borrower’s gross monthly income. This includes housing expenses and other monthly payments.

Treasury Index
Financial index used to set interest rate adjustments for some adjustable-rate mortgages (ARMs). This index is based on the results of U.S. Treasury auctions for Treasury bills and other securities. The index may also be derived from the daily yield curve published by the U.S. treasury, which is dependent upon bid yields for actively traded Treasury securities. In other words, this is one index that can be used to set the interest rate for an adjustable-rate mortgage when an adjustment is scheduled.

Truth-in-Lending
Federal law that requires financial institutions to fully disclose the complete terms and conditions of a mortgage. Charges such as the annual percentage rate (APR) and others must be included in this document.

Underwriting
Process of reviewing a loan application to determine whether the borrower is an acceptable risk for a lender. This requires an analysis of the borrower’s credit history and general creditworthiness, along with an evaluation of the property itself. Underwriting is the process by which the bank determines the amount of lending risk it will undertake through the loan.

VA Mortgage
Mortgage that has been guaranteed by the Department of Veterans Affairs (VA). This type of mortgage is only available to military members, veterans and reserve or National Guard personnel. Eligibility criteria apply for this type of loan, which is also known as a government mortgage.

 

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