Woodard Mortgage Group

We’ve listed some basic mortgage terminology to help you better understand your loan and the process. If you see a term you’d like to know more about – please call us today. We are here to help you every step of the way…

Accrued Interest

Interest that is earned but not paid, adding to the amount owed. Same as Negative amortization.

Adjustable Rate Mortgage (ARM)

A mortgage on which the interest rate, after an initial period, can be changed by the lender. While ARMs in many countries abroad allow rate changes at the lender’s discretion (“discretionary ARMs”), in the US most ARMs base rate changes on a pre-selected interest rate index over which the lender has no control. These are “indexed ARMs”. There is no discretion associated with rate changes on indexed ARMs.

Alternative Documentation

Expedited and simpler documentation requirements designed to speed up the loan approval process. Instead of verifying employment with the applicant’s employer and bank deposits with the applicant’s bank, the lender will accept paycheck stubs, W-2s, and the borrower’s original bank statements. Alternative documentation remains “full documentation”, as opposed to the other documentation options.

Amortization

The repayment of principal from scheduled mortgage payments that exceed the interest due. The scheduled payment less the interest equals amortization. The loan balance declines by the amount of the scheduled payment, plus the amount of any extra payment. If the payment is less than the interest due, the balance rises, which is negative amortization.

Amortization schedule

A table showing the mortgage payment, broken down by interest and amortization, the loan balance, tax and insurance payments if made by the lender, and the balance of the tax/insurance escrow account.

Amount financed

On the Truth in Lending form, the loan amount less “prepaid finance charges”, which are lender fees paid at closing. For example, if the loan is for $100,000 and the borrower pays the lender $4,000 in fees, the amount financed is $96,000.

APR

The Annual Percentage Rate, which must be reported by lenders under Truth in Lending regulations. It is a measure of credit cost to the borrower that takes account of the interest rate, points, and flat dollar charges by the lender. The charges covered by the APR also include mortgage insurance premiums, but not other payments to third parties, such as payments to title insurers or appraisers. The APR is adjusted for the time value of money, so that dollars paid by the borrower up-front carry a heavier weight than dollars paid in the future. However, the APR is calculated on the assumption that the loan runs to term, and is therefore potentially deceptive for borrowers with short time horizons.

Balloon mortgage

A mortgage which is payable in full after a period that is shorter than the term. In most cases, the balance is refinanced with the current or another lender. On a 7-year balloon loan, for example, the payment is usually calculated over a 30-year period, and the balance at the end of the 7th year must be repaid or refinanced at that time. Balloon mortgages are similar to ARMs in that the borrower trades off a lower rate in the early years against the risk of a higher rate later. They are riskier than ARMs because there is no limit on the extent of a rate increase at the end of the balloon period.

Biweekly mortgage

A mortgage on which the borrower pays half the monthly payment every two weeks. Because this results in 26 (rather than 24) payments per year, the biweekly mortgage amortizes before term.

Buy-down

A permanent buy-down is the payment of points in exchange for a lower interest rate. A temporary buy-down concentrates the rate reduction in the early years.

Conforming mortgage

A loan eligible for purchase by the two major Federal agencies that buy mortgages, Fannie Mae and Freddie Mac.

Conventional mortgage

A home mortgage that is neither FHA-insured nor VA-guaranteed.

Conversion option

The option to convert an ARM to an FRM at some point during its life. These loans are likely to carry a higher rate or points than ARMs that do not have the option.

Cumulative interest

The sum of all interest payments to date or over the life of the loan. This is an incomplete measure of the cost of credit to the borrower because it does not include up-front cash payments, and it is not adjusted for the time value of money.

Deed in lieu of foreclosure

Deeding the property over to the lender as an alternative to having the lender foreclose on the property.

Default

Failure of the borrower to honor the terms of the loan agreement. Lenders (and the law) usually view borrowers delinquent 90 days or more as in default.

Documentation requirements

The set of lender requirements that specify how information about a loan applicant’s income and assets must be provided, and how it will be used by the lender.

Effective rate

A term used in two ways. In one context it refers to a measure of interest cost to the borrower that is identical to the APR except that it is calculated over the time horizon specified by the borrower. The APR is calculated on the assumption that the loan runs to term, which most loans do not. (See Does the Annual Percentage Rate (APR) Help?). In most texts on the mathematics of finance, however, the “effective rate” is the quoted rate adjusted for intra-year compounding. For example, a quoted 6% mortgage rate is actually a rate of .5% per month, and if interest received in the early months is invested for the balance of the year at .5%, it results in a return of 6.17% over the year. The 6.17% is called the “effective rate” and 6% is the “nominal” rate.

Equity

In connection with a home, the difference between the value of the home and the balance of outstanding mortgage loans on the home.

Escrow

An agreement that money or other objects of value be placed with a third party for safe keeping, pending the performance of some promised act by one of the parties to the agreement. It is common for home mortgage transactions to include an escrow agreement where the borrower adds a specified amount for taxes and hazard insurance to the regular monthly mortgage payment. The money goes into an escrow account out of which the lender pays the taxes and insurance when they come due.

Fannie Mae

One of two Federal agencies that purchase home loans from lenders. (The other is Freddie Mac). Both agencies finance their purchases primarily by packaging mortgages into pools, then issuing securities against the pools. The securities are guaranteed by the agencies. They also raise funds by selling notes and other liabilities.

Fees

The sum of all upfront cash payments required by the lender as part of the charge for the loan.

FHA mortgage

A mortgage on which the lender is insured against loss by the Federal Housing Administration, with the borrower paying the mortgage insurance premium. The major advantage of an FHA mortgage is that the required down payment is very low, but the maximum loan amount is also low.

First mortgage

A mortgage that has a first-priority claim against the property in the event the borrower defaults on the loan. For example, a borrower defaults on a loan secured by a property worth $100,000 net of sale costs. The property has a first mortgage with a balance of $90,000 and a second mortgage with a balance of $15,000. The first mortgage lender can collect $90,000 plus any unpaid interest and foreclosure costs. The second mortgage lender can collect only what is left of the $100,000.

Fixed rate mortgage (FRM)

A mortgage on which the interest rate and monthly mortgage payment remain unchanged throughout the term of the mortgage.

Float

Allowing the rate and points to vary with changes in market conditions. The borrower may elect to lock the rate and points at any time but must do so a few days before the closing. Allowing the rate to float exposes the borrower to market risk, and also to the risk of being taken advantage of by the loan provider.

Float-down

A rate lock, plus an option to reduce the rate if market interest rates decline during the lock period. Also called a cap. A float-down costs the borrower more than a lock because it is more costly to the lender. Float-downs vary widely in terms of how often the borrower can exercise (usually only once), and exactly when the borrower can exercise.

Freddie Mac

One of two Federal agencies that purchase home loans from lenders.

Good faith estimate

The form that lists the settlement charges the borrower must pay at closing, which the lender is obliged to provide the borrower within three business days of receiving the loan application.

HARP Program

The Home Affordability Refinance Program (HARP) was started by Fannie Mae and Freddie Mac in 2010 to provide refinancing to borrowers with loan-to-value ratios too high to be eligible for their standard programs.

Homeowners insurance

Insurance purchased by the borrower, and required by the lender, to protect the property against loss from fire and other hazards.

Housing expense

The sum of mortgage payment, hazard insurance, property taxes, and homeowner association fees. Same as PITI and “monthly housing expense.”

Housing expense ratio

The ratio of housing expense to borrower income, which is used (along with the total expense ratio and other factors) in qualifying borrowers.

HUD1 form

The form a borrower receives at closing that details all the payments and receipts among the parties in a real estate transaction, including borrower, lender, home seller, mortgage broker and various other service providers.

Hybrid ARM

An ARM on which the initial rate holds for some period, during which it is “fixed-rate”, after which it becomes adjustable rate. Generally, the term is applied to ARMs with initial rate periods of 3 years or longer.

Interest cost

A time-adjusted measure of cost to a mortgage borrower. It is calculated in the same way as the APR except that the APR assumes that the loan runs to term, and is always measured before taxes. Interest cost is measured over the individual borrower’s time horizon, and it may be measured after taxes at the individual borrower’s tax rate. In addition, the cost items included in interest cost may be more or less inclusive than those included in the APR.

Jumbo mortgage

A mortgage larger than the maximum eligible for purchase by the two Federal agencies, Fannie Mae and Freddie Mac, $417,000 in 2008.

Lien

The lender’s right to claim the borrower’s property in the event the borrower defaults. If there is more than one lien, the claim of the lender holding the first lien will be satisfied before the claim of the lender holding the second lien, which in turn will be satisfied before the claim of a lender holding a third lien, etc.

Lock

An option exercised by the borrower, at the time of the loan application or later, to “lock in” the rates and points prevailing in the market at that time. The lender and borrower are committed to those terms, regardless of what happens between that point and the closing date.

Lock commitment letter

A written statement from a lender verifying that the price and other terms of a loan have been locked. Borrowers who lock through a mortgage broker should always ask to see the lock commitment letter.

Maximum loan amount

The largest loan size permitted on a particular loan program. For programs where the loan is targeted for sale to Fannie Mae or Freddy Mac, the maximum will be the largest loan eligible for purchase by these agencies. On FHA loans, the maximums are set by the Federal Housing Administration, and vary somewhat by geographical area. On other loans, maximums are set by lenders.

Minimum down payment

The minimum allowable ratio of down payment to sale price on any program. If the minimum is 10%, for example, it means that you must make a down payment of at least $10,000 on a $100,000 house, or $20,000 on a $200,000 house.

Monthly debt service

Monthly payments required on credit cards, installment loans, home equity loans, and other debts but not including payments on the loan applied for.

Mortgage

A written document evidencing the lien on a property taken by a lender as security for the repayment of a loan. The term “mortgage” or “mortgage loan” is used loosely to refer both to the lien and the loan. In most cases, they are defined in two separate documents: a mortgage and a note.

Mortgage insurance premium

The up-front and/or periodic charges that the borrower pays for mortgage insurance. There are different mortgage insurance plans with differing combinations of up-front, monthly and annual premiums. The most widely used premium plan is a monthly charge with no upfront premium.

Negative points

Points paid by a lender for a loan with a rate above the rate on a zero point loan. For example, a wholesaler quotes the following prices to a mortgage broker. 8%/0 points, 7.5%/3 points, 8.75%/-3 points. On mortgage web sites, negative points are usually referred to as “rebates” because they are used to reduce a borrower’s settlement costs. When negative points are retained by a mortgage broker, they are called a “yield spread premium”.

Origination fee

An upfront fee charged by some lenders, usually expressed as a percent of the loan amount. It should be added to points in determining the total fees charged by the lender that are expressed as a percent of the loan amount. Unlike points, however, an origination fee does not vary with the interest rate.

Piggyback mortgage

A combination of a first mortgage for 80% of property value, and a second for 5%, 10%, 15%, or 20% of value. These combinations are designated as 80/5/15, 80/10/10, 80/15/5, and 80/20/0, respectively. Piggybacks are a substitute for mortgage insurance for borrowers who cannot put 20% down.

PITI

Shorthand for principal, interest, taxes and insurance, which are the components of the monthly housing expense.

PMI

Private mortgage insurance, as distinguished from insurance provided by government under FHA and VA.

Points

An upfront cash payment required by the lender as part of the charge for the loan, expressed as a percent of the loan amount; e.g., “3 points” means a charge equal to 3% of the loan balance. It is common today for lenders to offer a wide range of rate/point combinations, especially on fixed rate mortgages (FRMs), including combinations with negative points. On a negative point loan the lender contributes cash toward meeting closing costs. Positive and negative points are sometimes termed “discounts” and “premiums,” respectively.

Pre-approval

A commitment by a lender to make a mortgage loan to a specified borrower, prior to the identification of a specific property. It is designed to make it easier to shop for a house. Unlike a pre-qualification, the lender checks the applicant’s credit.

Prepayment penalty

A charge imposed by the lender if the borrower pays off the loan early. The charge is usually expressed as a percent of the loan balance at the time of prepayment, or a specified number of months interest.

Qualification

The process of determining whether a prospective borrower has the ability, meaning sufficient assets and income, to repay a loan. Qualification is sometimes referred to as “pre-qualification” because it is subject to verification of the information provided by the applicant. Qualification is short of approval because it does not take account of the credit history of the borrower. Qualified borrowers may ultimately be turned down because, while they have demonstrated the capacity to repay, a poor credit history suggests that they may be unwilling to pay.

Qualification ratios

Requirements stipulated by the lender that the ratio of housing expense to borrower income, and housing expense plus other debt service to borrower income, cannot exceed specified maximums, e.g., 28% and 35%. These may reflect the maximums specified by Fannie Mae and Freddie Mac; they may also vary with the loan-value ratio and other factors.

Refinance

Paying off an old loan while simultaneously taking a new one. This may be done to reduce borrowing costs under conditions where the borrower can obtain a new loan at an interest rate below the rate on the existing loan. It may be done to raise cash, as an alternative to a home equity loan. Or it may be done to reduce the monthly payment.

RESPA

The Real Estate Settlement Procedures Act, a Federal consumer protection statute first enacted in 1974. RESPA was designed to protect home purchasers and owners shopping for settlement services by mandating certain disclosures, and prohibiting referral fees and kickbacks.

Reverse mortgage

A loan to an elderly home owner on which the balance rises over time, and which is not repaid until the owner dies, sells the house, or moves out permanently.

Subordinate financing

A second mortgage on the property which is not paid off when a new loan is taken out. The second mortgage lender must allow subordination of the second to the new first mortgage.

Sub-prime market

The network of sub-prime lenders, mortgage brokers, warehouse lenders and investment bankers who make possible the delivery of loans to sub-prime borrowers.

Title insurance

Insurance against loss arising from problems connected to the title to property.

Truth in Lending (TIL)

The Federal law that specifies the information that must be provided to borrowers on different types of loans. Also, the form used to disclose this information.

Underwriting

The process of examining all the data about a borrower’s property and transaction to determine whether the mortgage applied for by the borrower should be issued. The person who does this is called an underwriter.

Underwriting requirements

The standards imposed by lenders in determining whether a borrower qualifies for a loan. These standards are more comprehensive than qualification requirements in that they include an evaluation of the borrower’s creditworthiness.

VA mortgage

A mortgage with no down payment requirement, available only to ex-servicemen and women as well as those on active duty, on which the lender is insured against loss by the Veterans Administration.

40-Year Mortgage

A mortgage with a term of 40 years.