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Glossary of Home-Buying Terms and Loan Products

Following is a glossary of commonly used terms which are used in the mortgage financing process.

Adjustable Rate Mortgage (ARM)
A mortgage whose interest rate changes over time based on an index, plus a margin.
Amortization
The gradual repayment of a mortgage by installments.
Amortization Schedule
A timetable for repayment of a mortgage showing the amount of each payment applied to interest and principal and the remaining balance.
Annual Percentage Rate (APR)
The total yearly cost of a mortgage stated as a percentage of the loan amount; includes the base interest rate, primary mortgage insurance and loan origination fee (points).
Appraisal
A professional opinion of the market value of a property.
Appreciation
An increase in the value of a house due to changes in market conditions or other causes.
Assessed Value
The valuation placed upon property by a public tax assessor for purposes of taxation.
Assumable Mortgage
A mortgage that can be taken over ("assumed") by the buyer when a home is sold.
Cash Reserve
A requirement of some lenders that buyers have sufficient cash remaining after closing to make the first two mortgage payments.
Clear Title
A title that is free of liens and legal questions as to ownership of the property.
Closing
The occasion where a sale is finalized; the buyer signs the mortgage, and closing costs are paid. Also called "settlement".
Closing Costs
Expenses (over and above the price of the property) incurred by buyers and sellers in transferring ownership of a property. Also called "settlement costs".
Community Home Buyer's Program
An alternative financing option that allows households of modest means to qualify for mortgages using nontraditional credit histories, 33% housing-to-income and 38% debt-to-income ratios, and the waiver of the usual two-payment cash reserve at closing.
Condominium
A form of property ownership in which the homeowner holds title to an individual dwelling unit plus an interest in common areas of a multi-unit project.
Contingency
A condition that must be met before a contract is legally binding.
Conventional Mortgage
Any mortgage that is not insured or guaranteed by the Federal Government.
Convertible ARM
An adjustable-rate mortgage that can be converted to a fixed-rate mortgage under specified conditions.
Credit Report
A report of an individual's credit history prepared by a credit bureau and used by a lender in determining a loan applicant's creditworthiness.
Deed
The legal document conveying title to the property.
Depreciation
A decline in the value of a property, the opposite of appreciation.
Discount Points
--see Points--
Down Payment
The part of the purchase price which the buyer pays in cash and does not finance with a mortgage.
Earnest Money
A deposit given to the seller to show that a prospective buyer is serious about buying the house.
Equity
The difference between the market value of a property and the homeowner's outstanding mortgage balance.
Equity Loan
A loan based on the borrower's equity in his or her home.
Escrow
The holding of documents and money by a neutral third party prior to closing; also, an account held by the lender into which a homeowner pays money for taxes and insurance.
FHA Loan
A mortgage that is insured by the Federal Housing Administration.
First Mortgage
The mortgage that has first claim in the event if a default.
Fixed-Rate Mortgage
A mortgage in which the interest rate does not change during the entire term of the loan.
Foreclosure
The process by which a mortgaged property may be sold when a mortgage is in default.
Graduated Payment Mortgage
A mortgage that starts with low monthly payments that increase at a predetermined rate.
Hazard Insurance
Insurance to protect the homeowner and the lender against physical damage to a property from fire, wind, vandalism or other hazards.
Homeowner's Insurance
An insurance policy that combines liability coverage and hazard insurance.
Interest
The fee charged for borrowing money.
Interest Rate Cap
A provision of an ARM limiting how much interest rates may increase per adjustment period. See also Lifetime Cap.
Lifetime Cap
A provision of an ARM that limits the total increase in interest rates over the life of the loan.
Loan-to-Value Ratio (LTV)
The relationship between the amount of a mortgage and the total value of the property.
Lock-In
A written agreement guaranteeing the home buyer a specified interest rate provided the loan is closed within a set period of time. The lock-in also usually specifies the number if points to be paid at closing.
Margin
The set percentage the lender adds to the index rate to determine the interest rate of an ARM.
Mortgage
A legal document that pledges a property to the lender as security for payment of a debt.
Mortgage Banker
A company that originates mortgages exclusively for resale in the secondary market.
Mortgage Broker
A company that for a fee matches borrowers with lenders.
Mortgage Insurance Premium (MIP)
The fee paid by a borrower to FHA or a private insurer for mortgage insurance.
Mortgage Note
A legal document obligating a borrower to repay a loan at a stated interest rate during a specified period of time; the agreement is secured by a mortgage.
Negative Amortization
Payment terms under which the borrower's monthly payments do not cover the interest due; as a result, the loan balance increases.
Notice of Default
A formal written notice to a borrower that a default has occurred and that legal action may be taken.
Origination Fee
A fee paid to the lender for processing a loan application; it is stated as a percentage of the mortgage amount, or points.
Owner Financing
A purchase in which the seller provides all or part of the financing.
Payment Cap
A provision of some ARMs limiting how much a borrower's payment may increase regardless of how much the interest rate increases; may result in a negative amortization.
PITI
Stands for principal, interest, taxes and insurance - the components of a monthly mortgage payment.
Points
A one-time charge by the lender to increase the yield of the loan; a point is one percent (1%) of the amount of the mortgage.
Prepayment Penalty
A fee charged to a borrower who pays off a loan before it is due.
Prequalification
The process of determining how much money a prospective home buyer will be eligible to borrow before a loan is applied for.
Principal
The amount borrowed or remaining unpaid; also, that part of the monthly payment that reduces the outstanding balance of the mortgage.
Private Mortgage Insurance (PMI)
Insurance provided by nongovernmental insurers that protects lenders against loss if a borrower defaults.
Qualifying Ratios
Guidelines applied by lenders to determine how large a loan to grant a homebuyer.
Real Estate Settlement Procedures Act
A consumer protection law that requires lenders to give borrowers advance notice of closing costs.
Refinancing
The process of paying off one loan with the proceeds from a new loan secured by the same property.
Second Mortgage
A mortgage that has rights that are subordinate to the rights of the first mortgage holder.
State VA
A loan that is guaranteed by the State Veterans Administration. It is typically well below market interest rates. Veterans fall into two categories, disenfranchised or qualified. Each category has its own qualifying guidelines.
Survey
A drawing showing the legal boundaries of a property.
Three/Two (3/2) Option
An alternative financing plan that enables households whose earnings are no more than 115% of the median income in their regional area to make a three percent down payment with their own funds, coupled with a two percent gift from a relative or a two percent grant or unsecured loan from a nonprofit or state or local government program.
Title
A legal document establishing the right of ownership.
Title Company
A company that specializes in insuring title to property.
Title Insurance
Insurance to protect the lender (lender's policy) or the buyer (owner's policy) against loss arising from disputes over ownership of a property.
Title Search
A check of the title records to ensure that the seller is the legal owner of the property and that there are no liens or other claims outstanding.
Truth-in-Lending
A Federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the APR and other charges.
Underwriting
The process of evaluating a loan application to determine the risk involved for the lender.
VA Loan
A loan that is guaranteed by the Veterans Administration.
WHEDA
Wisconsin Housing and Economic Development Authority grants below-market interest rates to qualified borrowers who make below county median incomes.


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