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Glossary of Terms

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Mortgage Rates*

30-Year Fixed        6.375%

Jumbo Fixed          6.875%

ARM                       6.125%

*Rates subject to change without notice

Last Updated

Monday, December 03, 2007

Making sense of mortgage loans, terminology, rules, and regulations can be mind-boggling at times.  Blue Mountain Mortgage* hopes you will find this Glossary of Terms page both helpful and easy to understand as you embark upon the mortgage loan world.

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Please check back often to see new information.

This page last revised Monday, December 03, 2007

 

 

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Dupont State Forest

 

 

 

 

 

*Blue Mountain Mortgage is registered with the North Carolina Commissioner of Banks and is licensed to conduct mortgage brokering business.

 

 

 

 

 

 

Hickory Nut Gorge Trail

Chimney Rock State Park

High Falls

Dupont State Forest

The Biltmore Estate Gardens

Sunset on the

Blue Ridge Parkway

Lake Imaging

Dupont State Forest

The Biltmore Estate Gardens

Looking Glass Rock

Jeter Mountain

Penrose, NC

Lake Jocassee

Chimney Rock

Lake Lure, NC

Pink Beds

Cradle of Forestry

Hickory Nut Gorge

Twin Falls

Pisgah National Forest

Acceleration Clause - a clause typically included in a mortgage loan that gives the lender (holder of the note) the right to demand the entire balance be paid in the event of a default.  Typical reasons for accelerating a loan is when the borrower defaults on the loan or transfers the title to someone else without notifying the lender.  (Top of Page)

Adjustable Rate Mortgage (ARM) - a mortgage loan where the interest rate changes periodically (not fixed), during the life of the loan, in relation to an index rate.  Payments made by the borrower can increase or decrease over time, depending on the current interest rates. 

Each month, you make a payment that goes towards both the interest and the principal.  Each monthly mortgage payment is the same for the duration of the loan, but the amount of money that goes towards the interest and principal each month varies.  As you make more payments, you pay less towards interest and more towards the principal.  The process of recalculating the interest and principal payments each month is known as amortization. (Top of Page)  

Amortization - A repayment method where the amount you borrow (debt) is repaid systematically through regular monthly payments of principal plus interest.  During the first few years, most of each payment is applied toward the interest owed.  During the final years of the loan, payment amounts are applied almost exclusively to the remaining principal. (Top of Page)

Annual Percentage Rate (APR) -  this is the expression of the effective interest rate that the borrower will pay on a loan, taking into account any one-time fees and standardizing the way the rate is expressed.  The APR includes up-front costs paid to obtain the loan, and is typically a higher amount than the interest rate stipulated in the mortgage note itself.  Fees for title insurance, appraisal, and credit report are typically not included in the APR.  The APR is intended to calculate the true cost of a loan.   (Top of Page)

Application - the initial statement of personal and financial information which is required to approve your loan.  (Top of Page)

Application Fee - this is a fee the borrower pays that covers the lender's cost to process the loan application.  Sometimes, brokers will collect this fee at closing as a way of competing with banks, who charge this fee up front.  Generally, this fee is not refunded in the event you decide not to take the loan, or you are not approved for the loan.  (Top of Page)

Appraisal - a written report, performed by a certified or licensed appraiser, that estimates the value of a property as of a specific date.  This appraisal, or opinion of value, establishes the expected sales price of a home, including the size, quality, condition, and functionality.  An appraisal protects both the lender, so they don't provide more than a property is worth, and the borrower, so they don't pay too much.  An appraisal is required by most lenders to obtain a loan.  The appraisal is a significant factor in determining the amount of loan a bank or mortgage company will approve.  (Top of Page)

Appraisal Fee - the amount charged, usually between $150 - $400 depending on the price of the home, by a qualified appraiser for a written report that determines the estimated value of a home or property.  (Top of Page)

Assumption of Mortgage - this takes place when a buyer purchases a home and takes over a pre-existing mortgage loan.  The buyer's responsibilities are similar had an original mortgage been obtained.  When assuming a mortgage, the buyer is legally responsible for paying the principal and interest.  Both buyer and original mortgagor are liable for the assumption of mortgage, unless the seller is released from accountability, usually in the form of a written agreement.  When you assume an existing mortgage, you will have to pay cash to the seller as compensation for the amount of equity in the home.  (Top of Page)

Balloon Payment - a mortgage loan that contains monthly amortized payments for a set period of time, with a lump sum due at the maturity date.  The final payment can be, and is often times, significantly larger than the monthly payments.  Balloon loans make sense to a person who is expecting a financial windfall in the future.  (Top of Page)

Cap - a limit on how much the interest rate or monthly payment can change on an adjustable rate mortgage.  A lifetime cap is the maximum allowable increase, for either the payment or interest rate, for the lifetime of the ARM.  (Top of Page)

Cash Out - any funds paid out directly to the borrower, when refinancing a present mortgage.  (Top of Page)

Ceiling - the maximum allowable interest rate over the life of an adjustable rate loan.  (Top of Page)

Closing Costs - fees paid by the borrower or seller during the closing of a mortgage loan.  Included in these closing costs, that are not part of the purchase price, are:  origination fee, discount points, attorney's fees, title insurance, survey, and any other pre-paid items like taxes and insurance escrow payments.  (Top of Page)

Conforming Loan - any loan that conforms to GSE (Government Sponsored Enterprise) standards, set by Fannie Mae & Freddie Mac.  View the 2007 conforming loan limits set by Fannie Mae.  Loans that meet these standards usually have lower interest rates, typically between a quarter and a half percentage rate.

Contract of Sale - the agreement between the buyer and seller on the purchase price, terms, and conditions necessary to both parties to convey (pass on) the title to the buyer.  (Top of Page)

Credit Limit - the maximum amount of credit a bank or lender will offer a borrower under a home equity plan.  (Top of Page)

Credit Report - a report showing the history of a person's current and unpaid debt.  Your financial history and habits, how you pay back bills, will determine you ability to acquire a loan.  Lenders take this information to determine your ability to repay a loan, once the contract is signed.  There are three major national credit reporting agencies; Equifax, TransUnion, and Experian, who retain a database of credit information on more than 170 million Americans.  (Top of Page)

Debt Service - the total amount of credit card, auto, mortgage or other outstanding debt for which you are responsible.  (Top of Page)

Deed of Trust - an agreement used to promise your home or other real estate as security for a loan.  This is a public records document stating that there is a lien on your property.  In some states, the deed of trust can be used in place of a mortgage.  If the borrower defaults on the loan, the foreclosure is typically much faster than the court process involved with a mortgage loan.  (Top of Page)

Deferred Payment Loan (DPL) - a reverse mortgage that gives you a lump sum of money to repair or improve a home.  These loans are typically offered by state or local governments.  (Top of Page)

Discount Points (or Points) - The amount of money paid to the lender at closing, either to maintain or lower the interest rate charged.  Each point is equal to 1% of the loan amount.  For example, two points on a $100,000 mortgage would equal $2,000.  Each discount point paid on a 30-year mortgage usually lowers the interest rate by .0125 percent.  A 7.5% interest rate would thus be lowered to 7.375% if one point is purchased.  Purchasing points lowers your interest rate because the lender gets the lump sum of money at closing, instead of collecting that interest you make on monthly payments.  (Top of Page)

Down Payment - the difference between the purchase price and that portion of the purchase price being financed.  Most lenders require the down payment be paid from the buyer's own funds.  Gifts from related parties are sometimes acceptable, but need to be disclosed to the lender.  (Top of Page)

Due on Sale - this is a clause in a mortgage agreement that states; if the mortgagor (borrower) sells or transfers the property to someone else, the mortgagee (lender) has the right to demand the outstanding balance in full.  (Top of Page)

Equifax - one of top three consumer credit reporting agencies in the United States.  Equifax is the oldest of those three agencies, gathering and retaining more than 400 million credit card holders worldwide.  The other two agencies are TransUnion and Experian.  These three companies compile all credit information and provide that personal credit report history, including FICO score, to anyone who requests the information.  (Top of Page)

Equity - the difference between the fair market value (appraised value) of your home and your outstanding mortgage balance (amount owed).  The resulting amount is known as the homeowner's financial interest in the property.  (Top of Page)

Experian - a global credit information company, Experian is one of the top three consumer credit reporting agencies in the United States.  The other two agencies are Equifax and TransUnion.  These three companies compile all credit information and provide that personal credit report history, including FICO score, to anyone who requests the information.  Call all three companies in the event your credit cards are lost or stolen.  (Top of Page)

First Mortgage - a mortgage which is in first lien position, taking priority over all other liens.  In the event of a default, or failure to make payments, this mortgage has the first claim.  (Top of Page)

Fixed Rate - an interest rate which is fixed for the duration of the loan, resulting in fixed payments of one amount.  (Top of Page)

FHA Loan - FHA Insured Loan.  This is a federally-assisted mortgage loan where the Federal Housing Administration (FHA) insures the lender against losses they might occur in the event of a default.  The FHA does not provide the loan to the borrower, but lowers the risk for the lender.  (Top of Page)

Good Faith Estimate (GFE) - a written estimate of ALL costs that could be incurred when obtaining a mortgage.  This Good Faith Estimate is the most commonly used method to deceive borrowers, making the total closing costs appear less than they will actually be.  Blue Mountain Mortgage guarantees their Good Faith Estimate, ensuring rates and closing costs will not mysteriously increase at the end of the loan process.  (Top of Page)

Grace Period - a period of time during which a loan payment may be paid after its due date, without incurring a late fee or penalty.  NOTE:  Such late payments may be reported on your credit report.  (Top of Page)

Gross Income - the amount of income earned by a company or individual before taxes or expenses have been deducted.  (Top of Page)

Government Loan

Hazard Insurance - insurance that covers property/physical damage or loss of property due to hazards for a set amount (premium) of money.  These hazards include fire, wind damage, hail damage, storms, and other types of threats.  This is also called homeowner's or property insurance.  Most people buy comprehensive coverage, but might also purchase additional coverage for a specific danger depending on where they live.  (Top of Page)

Home Equity Line of Credit (HELOC) - a loan that provides the borrower with the ability to borrow money, up to a maximum qualified credit limit.  The lender agrees to lend up to this maximum amount, within a specified period of time, where the collateral is the borrower's equity in a house or property.  HELOC loans are based on variable interest rates, such as the prime rate.  Repayment is secured by the equity in your home or property.  The simple interest (interest-only payments on the outstanding balance) is tax deductible.  Once a home equity line of credit loan is paid, the borrower may once again make use of that line of credit.  (Top of Page)

Home Equity Loan (HEL) - a fixed or adjustable loan where the borrower uses their home's equity as collateral.  Many times these loans are used to finance home repairs/improvements, major purchases, college education, medical bills, or debt consolidation.  Typically these loans are second position liens, but can be held in first position liens as well.  Can be referred to as a second mortgage, since the loan is secured against the value of the house/property.  Home Equity Loans are recommended by many to replace or substitute for consumer loans, whose interest is not tax-deductible, such as auto/boat loans, credit card debt, medical debt, and education loans.  (Top of Page)

HUD I Settlement Statement - a form used at loan closing to itemize the costs associated with purchasing the home, giving a detailed list of all incoming and outgoing funds.  Typically this document includes the lender's charges, recording fees, and title company's fees.  This form is used collectively by mandate of the Department of Housing and Urban Development (HUD).  This document needs to be evaluated carefully, item by item, and should be kept for as long as you own the property.  (Top of Page)

Hybrid Loan - also known as a "two-step" loan, where the interest rates begin with a low fixed rate, allowing for minimal interest on your loan.  After about 5-7 years, the loan changes to an adjustable rate mortgage, adjusting your rates to the current market interest rates.  (Top of Page)

Index - a number, typically a percentage, upon which future interest rates for adjustable rate mortgages are based.  This is the variable component of an ARM loan, changing on a monthly basis.  Lenders use this number as a guide to measure the changes in interest rates.  Common indexes include the Cost of Funds for the Eleventh Federal District of banks or the average rate of a one year Government Treasury Security.  (Top of Page)

Interest-Only Loan - a loan, for a given amount of time, where the borrow only pays interest on the borrowed amount.  Typical interest-only loan time frames are five or ten years, at which point the remaining amount is amortized for the remaining time frame.  For instance, a person who obtained an 30-year loan, the first ten years of which were interest-only, then the remaining principal balance would be amortized for the final twenty years on the loan.  (Top of Page)

Interest Rate - the periodic change for use of credit/money, typically expressed as a percentage.  Interest rates are calculated by dividing the amount of interest by the amount of principal.  (Top of Page)

Jumbo Loan - a mortgage loan above a set amount of money, which is the industry standard set for conforming loans.  This standard is set by Fannie Mae (FNMA) and Freddie Mac (FHLMC) and represents the average loan size nationwide. These two agencies set the loan limits and buy the bulk of residential mortgages in the United States.  The interest rate on jumbo loans is usually higher than rates for conforming loans and are typically more of a risk for lenders. 

Lien - a legal claim against real property used as security for repayment of debt.  (Top of Page)

Loan Acceleration - this is a small additional payment made towards the loan each month, which will reduce the amount of interest paid over the course of a loan.  Do not confuse this with the Acceleration Clause in your mortgage agreement.  (Top of Page)

Loan to Value (LTV) Ratio - this ratio is computed by dividing the sales price or appraised value into the loan amount and expressed as a resulting percentage.  As an example, a sales price of $100,000 and a mortgage loan of $80,000, the loan to value ratio would be 80%.  Loans with an LTV of 80% or higher may require Private Mortgage Insurance (PMI).  (Top of Page)

Lock or Lock in - a commitment obtained from a lender assuring a particular interest rate or feature for a defined period of time, usually 30 days.  This lock provides protection to the borrower in the event interest rates rise between the time you apply for a loan, acquire loan approval, and subsequently close the loan and receive the funds borrowed.  Traditionally, banks will charge a fee upfront that brokers do not charge. (Top of Page)

Margin - an amount, typically percentage points, that are added to the index to determine the interest rate for adjustable rate mortgages (ARM).  Interest rate of ARM = Index rate + margin.  The margin is typically the fixed portion of the ARM loan, remaining constant throughout the life of the loan. (Top of Page)

Minimum Payment - the lowest amount the borrower must pay, usually monthly, on a home equity loan or line of credit.  Some plans allow the minimum payment to be "interest-only" (simple interest), while with other plans the minimum payment might include principal and interest (amortized).  (Top of Page)

Mortgage Banker - a person who originates mortgage loans, loaning the borrower money under their name.  Bankers may or may not sell the loan.  Most Mortgage Bankers can be found nationwide and have wholesale divisions which utilize Mortgage Brokers to expand their customer base.  (Top of Page)

Mortgage Broker - Licensed Entity - a person who takes loan applications and processes the necessary paperwork.  Mortgage Brokers are approved by any number of National Lenders to Originate mortgages on their behalf.  A Mortgage Broker works on the wholesale side of National Lenders, Investors, Savings & Loans, and banks that are not accessible to the public.  (Top of Page)

Mortgage Insurance (MIP or PMI) - insurance purchased by the borrower in insure the lender or government against loss should the loan end in default.  Mortgage Insurance Premium (MIP) is paid on government-insured loans (FHA or VA Loans) regardless of the Loan-to-Value (LTV).  In the event you pay off the mortgage loan early, you may allowed a small refund of MIP.  Private Mortgage Insurance (PMI), is paid on loans which are not government-insured and whose LTV is greater than 80%.  When you have accumulated 20% of your home's value as equity, your lender may waive PMI at your request.  Basically, when a mortgage loan value exceeds 80%, Private Mortgage Insurance covers the lender in case the borrower defaults on the loan.  NOTE:  This does not constitute a form of life insurance which pays off the loan in case of death.  (Top of Page)

Mortgage Loan - a loan that uses real estate as security or collateral to provide for repayment, should you default on the terms of your loan.  The mortgage is your agreement to pledge your home or other real estate as security.  If a borrower defaults on a mortgage loan, the lender must bring court action in order to foreclose on the property.  (Top of Page)

Mortgagee - the lender in a mortgage loan agreement.  (Top of Page)

Mortgagor - the borrower in a mortgage loan agreement.  (Top of Page)

Negative Amortization - known as the "NegAm" in the finance world.  This type of amortization is where the borrower pays back less than the interest owed each month to the lender.  The outstanding amount is added back to the remaining balance owed the lender.  That means the balance owed may actually increase, rather than decrease, over the life of the loan.  These types of loans are more secure in a falling rate market, but much riskier in a rising rate market.  (Top of Page)

Non-Conforming Loan - a loan that fails to meet the bank's criteria for funding, typically due to a mortgage amount that is higher than the conforming loan limit.  Most real estate loans are deemed non-conforming for a couple reasons; the borrower's financial status or the property type does not meet the bank's standards.

PITI (Principal Interest Taxes Insurance) - the sum of the four components of a monthly mortgage payment,  including principal, interest, taxes and insurance.  PITI is commonly referred to as the "bottom line" of mortgage payments.  (Top of Page)

Points - the amount paid, either to maintain or lower the interest rate charged.  Each point is equal to 1% of the loan amount.  For instance, two points on a $100,000 loan would equal $2000.  If you, as a borrower, need the lowest possible closing costs, then it is not wise to purchase points, although some lenders charge points up front.  (Top of Page)

Portfolio Loan - this type of loan is not sold to secondary lenders right away.  This usually happens when a large bank uses its own money to finance a loan.  This gives the lender more control over determining whether the borrower is worthy of the credit, and ultimately approving the loan.  After a year of making payments on time, the loan is deemed hardened and can be sold to a secondary lender.  Once the portfolio loan is sold to a secondary lender, it frees up the bank to make more loans and it also gives the borrower a more solid credit report.

Prepayment Penalty - an additional fee paid to the lending institution for paying a loan prior to the scheduled maturity date.  Typically these prepayment penalties disappear with time, usually after five years, but essentially this is a fine for paying off your mortgage loan early.  Not every lender charges a prepayment penalty.  (Top of Page)

Qualifying Ratios - comparison's of a borrower's debts and gross monthly income.  This ratio usually determines the maximum amount of loan that can be approved and the borrower's ability to pay off the loan.  A typical debt-to-income ratio is 33/38.  This means a borrower's housing costs take up 33% of their monthly income.  Then add their monthly buying debt to that housing cost and the result should be no more than 38% of their monthly income. These are just guidelines and can be flexible depending on the lending institution.(Top of Page)

Reverse Mortgage - also known as a Home Equity Conversion Mortgage (HECM).  This type of mortgage provides unique benefits to a specific group, namely those 62 years and older who live in their primary residence, have a significant amount of equity in the home, and currently have little to no income.  Basically a reverse mortgage is a loan against that equity in your home, which you don't pay back for as long as you live in the home.  The Federal Housing Authority (FHA) dictate how much HECM lenders are allowed to loan a person based on their age and their home's value.  (Top of Page)

Right to Rescission - this is the legal right to void or cancel your mortgage contract, within 3 business days, and treat the contract as if it never existed, thus qualifying you to a refund of all money paid.  This right does not apply to mortgages made to purchase a home, but could be used for other loans like a home equity loan.  (Top of Page)

Rural Housing Service (RHS) - an agency of the US Department of Agriculture (USDA).  RHS provides services for individual homeowners, farm labor housing, rental assistance for those in multi-family housing complexes, and assist with housing for elderly and disabled to name a few.  (Top of Page)

Servicing a Loan - the ongoing process of collecting monthly mortgage payments, escrow account management, sending principal/interest payments to the lender, and managing delinquencies.  (Top of Page)

Sub-Prime Loan - a loan offered at a rate above prime to those individuals who do not qualify for prime rate loans.  Typically, individuals are turned away or do not qualify for the prime rate because of low credit ratings or other factors that indicate they might default on the loan.  (Top of Page)

Title - the written evidence, legal document, that proves rightful ownership and possession of a specified piece of property.  (Top of Page)

Title Insurance - this insurance protects lenders or homeowners against financial loss as a result of legal defects in the title or from invalid or other types of mortgage liens that cannot be enforced.  (Top of Page)

Transaction Fee - a fee which may be changed each time you draw on a home equity credit line.  (Top of Page)

TransUnion - one of the top three global leaders in credit and information management.  The other two agencies are Equifax and Experian.  These three companies compile all credit information and provide that personal credit report history, including FICO score, to anyone who requests the information.  Call all three companies in the event your credit cards are lost or stolen.  (Top of Page)

Underwriting - the process a financial service provider uses, to verify data and approve a loan.  The term originates from the word underwriter which started with the practice of having each risk-taker write his/her name under the total amount of risk he/she was willing to accept.  (Top of Page)

Variable Rate - an interest rate that changes periodically in relation to an index.  Payments may increase or decrease according to the change in the interest rate.  (Top of Page)

VA Loan - also known as a "VA Insured Loan".  This loan, issued by the Veteran's Administration (VA), insures the lender against losses that might be incurred due to a borrower's default.  This loan is only available to veterans who have a Certificate of Eligibility.  (Top of Page)

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