GLOSSARY OF MORTGAGE & CLOSING STATEMENT TERMS
Vocabulary is Knowledge. Knowledge is Power.

3/1, 5/1, 7/1 and 10/1 ARMs - Adjustable-Rate Mortgages in which the rate is fixed for 3-, 5-, 7- or 10-year intervals, respectively, and then can vary yearly or once-a-year.

5/25 and 7/23 Mortgages - Mortgages with a one-time adjustment in payment after 5- or 7 years, respectively.

Acceleration - the contractual right of the lender (mortgagee) to demand the immediate payment of the entire and full mortgage loan balance upon the default of the borrower (mortgagor), or in the alternative, by using the contractual right as specified in the Due-on-Sale Clause when the mortgaged property is sold.

Adjustable Rate Mortgage (ARM) - a mortgage in which the interest rate is adjusted periodically (typically yearly), based upon a pre-selected and contractually agreed upon rate of increase, usually based upon an identified index. It is sometimes known as a “renegotiable rate mortgage” or a “variable rate mortgage.”

Adjustment Interval - with an ARM, the contractually agreed time interval (1-, 3-, 5-, 7-, 10-years) between changes in the interest rate and monthly payment.

Amortization - a periodic payment (usually monthly, may be bi-weekly, etc.) of a mortgage sufficient to pay off the debts (principal) after a specified time (usually 5-, 10-, 15-, 20-, 30- years) and all incurred and accrued interest on the outstanding balance of the loan. Payments remain constant (the same) if the mortgage is a fixed-rate mortgage.

Annual Percentage Rate (APR) - a measurement of the full cost of a loan. It includes interest on the principal plus loan fees expressed as a yearly percentage rate. All lenders must apply the same rules in calculating the APR, so looking at this number is a quick, easy and fair method to compare lenders (mortgagees) and the costs of their loan(s).

Appraisal - an estimate, based on various and sufficient data, made by a qualified (and licensed) professional appraiser who determines the “fair market value” of the property; see also “Appraised Value.” City and county governments use the appraised value to determine the amount of taxes owed by property owners. In Montgomery County, TN, the present county tax rate is $ 3.30 peer $100 of assessed value; if the property is locate within the city limits, there is an additional $1.81 per $100 of assessed value.

Appraisal Fee - the fee charged by the appraiser to give his/her professional opinion as to the “fair market value” of the property.

Appraised Value - the “fair market value” of the property as determined by a professional appraiser; see also “Appraisal.”

Appraiser–a qualified, licensed individual (company) that evaluates and then determines the “fair market value” of the property.

APR--see annual percentage rate.

ARM–see Adjustable Rate Mortgage.

Assessed value–a percentage of the appraised value that is used to calculate the tax amount on that property. The percentage is determined by the property’s use–in Montgomery County, TN., residential and agricultural property = 25% of the appraised value; personal property = 30%; commercial and industrial property = 40%; public utilities = 55%. If the value of your home is $100,000, the assessed value would then be $25,000; see also appraised value; see also Appraisal.

Assessment–a local tax levied against a property for a specific purpose such as curbs, street lighting, sewers, etc.

Assumption–an agreement between the seller and buyer whereby the buyer “steps into the shoes” of the seller and assumes or takes over an existing mortgage on the property. If the lender is willing, this frequently saves the buyer money since this is an existing mortgage and there should be reduced closing costs. Note that the lender determines if it will allow an assumption of the debt.

Assumption Fee–the fee charged by a lender for the privilege of allowing a buyer to assume an existing mortgage, frequently at a lower interest rate than a new mortgage would demand.

Attorney’s Fees–fees paid to an attorney for his or her professional work.

Balloon Mortgage–a mortgage with a large payment at the end of the loan term. An example would be a 30 year amortization and a 5 year term. At the end of the term the entire unpaid amount of principal (the balloon payment) is due. Many borrowers repay the balloon payment by refinancing the mortgage.

Blanket Mortgage–a single mortgage secured by at least two pieces or particles of property.

Borrower (Mortgagor)–an individual who receives a loan in the form of a mortgage and has the intention of repaying the loan in full.

Broker–an individual that assists another in arranging funding but does not loan the money himself; also, an individual assisting another in negotiating contracts, such as for interest rates and terms of a mortgage, for a client. Brokers usually receive a commission or fee for their services.

Buy-down–when somebody, such as the builder, subsidizes the mortgage by lowering the interest rate for the first few years of the loan. Payments will increase when the subsidy expires.

Caps (interest)–limits on the amount of change, yearly and/or during the life of the loan, in the interest rate of an ARM.

Caps (payment)–limits on the amount of change, yearly and/or during the life of the loan, in the amount of monthly payments of an ARM.

Certificate of Eligibility–a document given to qualified veterans which entitles them to VA guaranteed loans.

Certificate of Title–a document signed by an attorney or title examiner stating that the owner (seller) has a good title to the property and that the title can be insured by a title insurance company.

Certificate of Veteran Status–a document given to veterans or reservists who have served at least 90 continuous days of active duty, including training time.

Closing–a meeting between seller, buyer and lender, or their agents, during which the funds and property change hands.

Closing Costs–various costs and expenses associated with and assessed at closing. Closing costs usually amount to 3%-6% of the mortgage amount. Items such as discount points, origination fee, appraisal fee, title search and title insurance, survey, city and county taxes, deed recording fee, credit report fee, mortgage insurance premium, fees for power of attorney, and other costs assessed at settlement are included in the closing costs. These costs are itemized on a HUD Settlement statement.

COFI (Cost-of-funds index)–an index, often the 11th District Cost of Funds, used with an ARM to establish the interest rate based on the cost-of-funds index.

Conventional Loan–a loan that is not insured, guaranteed or made by the federal government

Cost-of-funds index– see COFI.

Credit Report–a report by a credit bureau reporting on the credit history and current status of a borrower’s credit rating or standing. This report is used by lenders to determine whether a loan is to be granted or not, and to help determine the interest rate changed on a loan.

Credit Report Fee–the fee charged by a credit reporting firm for a report on a client’s credit history. Lenders use the credit report information to help decide whether or not to approve and make a loan and how much money to loan.

Debt-to-Income Ratio (DTI)–the ratio of monthly debt payments to gross monthly income. The DTI is used by lenders to help determine whether a borrower can qualify for a mortgage.

Deed (Warranty)–a formal written instrument with which title to property is transferred from one owner to another, with the former owner warranting or guaranteeing that he or she has good title free and clear of all liens and encumbrances and will defend the title against all lawful claims.

Deed (Quit-claim)–a formal written instrument which transfers the right, title or interest of one owner to another without providing a warranty or guarantee of title. If the former owner owns clear title to the property, all the interest is transferred; if the former owner owns no interest in the property, no interest is transferred.

Deed of Trust–a document used in some states in place of a mortgage to secure payment of a loan or note.

Default–failure to make the regularly-scheduled payments on a mortgage which can lead to a foreclosure; also, a failure to meet the legal obligations of a contract; see also delinquency.

Deferred Interest–when a mortgage is written so that the monthly payments are less than those required to satisfy the loan rate, the unpaid interest is deferred and added to the loan balance, resulting in a negative amortization.

Delinquency–a failure to make payments on time which can lead to a foreclosure; see also default.

Discount Points–Each point is equal to 1% of the loan amount. This increases or equalizes the lender’s yield (includes the interest rate charged, discount points paid and other charges collected) or rate of return. Even the FHA charges 1 point up front in their closing costs.

Document Preparation–fees charged to prepare various documents.

Down Payment–the amount of money, in cash, the buyer pays towards the purchase price of the property, to make up the difference between the sale price and the mortgage amount.

DTI–see Debt-to-Income Ratio.

Due-on-Sale Clause–a clause in a mortgage or deed of trust that allows the lender to demand immediate and full payment of the balance of the mortgage if the mortgage holder sells the property.

Earnest Money–a monetary consideration given by the buyer to assure they will complete the transaction. If the buyer chooses to not complete the transaction, the seller keeps the earnest money as liquidated damages.

ECOA–see Equal Credit Opportunity Act.

End loan–see permanent loan.

Entitlement (Eligibility)–entitlement for a home loan guaranteed by the VA; also, the VA home loan benefit.

Equal Credit Opportunity Act (ECOA)–The federal law that requires creditors and lenders to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status, sexual preference or receipt of income from public assistance programs.

Equity (Owner’s Interest)–the difference between the current indebtedness on the property and the fair market value of the property.

Escrow–earnest money deposits held before closing and usually applied to the sale price of the property.

Escrow Account Deposits–deposit of money by a buyer into an account held by a lender for the payment of taxes and insurance. It is usually part of the monthly mortgage payment.

Fair Market Value–the price at which a willing seller will sell and a willing buyer buy.

FHA–Federal Housing Administration–a division of the Department of Housing and urban Development. It sets standards for underwriting mortgages and insures residential mortgage loans made by private lenders.

FHA Loan–a loan insured by the FHA. Loans are large enough to handle moderately-priced homes nearly anywhere in the U.S.A. There are limits to the size of these loans.

FHA Mortgage Insurance–a fee, presently 2.25% of the loan amount, paid at closing to insure a FHA loan. It also requires a annual fee, of up to 0.5% of the current loan amount, to be paid in monthly installments for a variable length of time. The lower the down payment, the longer the fee must be paid.

Finance Charge–the dollar amount the credit will cost

Firm Commitment–a written promise by a lender to make a loan of a certain amount to a specific individual, for a specified length of time, to purchase a specific property; also, a written promise by the FHA to insure a mortgage loan for a specific property and a specific buyer.

Fixed Rate Loan–the loan interest rate is fixed and the interest rate and payment amount do not change during the life of the loan to the original borrower.

Fixed Rate Mortgage–the mortgage interest rate will remain fixed or constant on the mortgage during the life of the mortgage to the original borrower.

Flood Insurance–insurance required by lenders if the property is located in a flood-plain or is subject to damage by flooding.

Foreclosure–a legal process whereby the lender forces the sale of a mortgaged property because the borrower has not met the terms of the mortgage.

Good Faith Estimate of Settlement Costs (GFE)----the Real Estate Settlement Procedures Act (RESPA) requires a lender or mortgage broker to give you a GFE of the settlement charges you probably will encounter and have to pay for. Note that it is an estimate, and actual charges may be more or less.

Government Mortgage–a mortgage insured by Housing and Urban Development (HUD) through the FHA (see FHA) or guaranteed by the VA (see VA) or the Rural Housing Service (see RHS).

Government Recording Fees (State/County/City)–fees charged by various governmental agencies for recordation of documents.

Graduated Payment Mortgage (GPM)–a type of variable- or flexible-rate mortgage in which the monthly payments increase for a specified period of time (e.g., 12 months, 36 months, 60 months) and then level off and remain constant. A GPM mortgage has negative amortization built into it. Caution is urged if you are considering a GPM.

Guaranty–a written promise by one party to perform an obligation, such as pay a debt, if another party fails to perform or pay the debt according to the contract. Parents are frequently asked to be guaranty for loans made to their children, esp. if there is a doubt the child has the financial ability or will repay the debt.

Hazard Insurance–insurance in which an insurance company insures and financially protects the insured from specified losses, such as fire, storm, hail, etc.; see also hazard insurance premium.

Hazard Insurance Premium–the cost of hazard insurance; see also hazard insurance.

HUD Settlement Statement–a summary of all the costs of both buyer and seller in a mortgage transaction and provided to both parties. Itemized costs should approximate those on the GFE.

Impound–the portion of a borrower’s monthly payment held by the lender to pay for items such as taxes, insurance (hazard, mortgage), etc. as they arise and become due.

Index–the base interest rate used to calculate the interest rate on a variable rate loan. Lenders typically set their loan rate at a set percentage (say 3%) above the index or base rate.

Interest–the charge or cost of borrowing money.

Lender’s Inspection Fee–a charge that covers the cost of inspections, often of newly constructed housing.

Lender’s Title Insurance–an insurance policy, usually issued by a title insurance company, that protects the lender against errors or disputes in the title to the property. The cost is usually based on the value of the property. see also Owner’s Title Insurance and Title Insurance.

Lien–a legal claim on the property that secures the promise to repay the loan.

Loan Discount–see Discount Points.

Loan Origination Fees-fees charged by the lender for processing and/or evaluating the loan application. Fees are frequently assessed as a percentage on the amount of the loan and are usually paid by the borrower.

Mortgage–a transfer or conveyance of property upon any condition that becomes void upon payment according to the stipulated terms.

Mortgage Broker Fee–a fee paid to a mortgage broker; see also broker.

Mortgage Insurance–money paid to insure a mortgage when the down payment is less than 20%.

Mortgage Insurance Application fee–a fee for processing an application for mortgage insurance.

Mortgage Insurance Premium–the cost of mortgage insurance. Lenders frequently require the borrower to pay, at settlement, the first year’s mortgage insurance premium or an advance lump sum premium that covers the entire life of the loan.

Mortgage Note–a written agreement to repay a loan which is secured by a mortgage and serves as proof of indebtedness. The note will state the manner in which the loan is to repaid.

Mortgagee–the lender.

Mortgagor–the borrower.

Negative Amortization–when the monthly payments are not large enough to pay the interest due on the loan. The unpaid interest is added to the unpaid balance of the loan so that the borrower tends to end up owing more than the original amount of the loan.

Net effective income–the borrower’s gross income minus federal income taxes.

Non-Assumption Clause–a contract clause in the mortgage the forbids or prohibits someone else assuming the mortgage without the prior approval of the lender.

Notary Fee–a fee charged by a Notary Public who swears that the person(s) named in the document(s) are the named persons and did, in fact, sign them

One-Year Adjustable Mortgage–a mortgage whose interest rate changes yearly, with the rte usually based on movements of a particular published index plus a specified additional margin

Origination Fee–a fee charged by a lender to prepare loan documents, obtain and evaluate credit history, inspect the property, appraise the property, etc. The fee is usually computed as a percentage of the amount of the loan

Owner Financing–where the owner finances the first or second loan on the property. They may lend their equity back as a first or second mortgage.

Owner’s (Buyer’s) Title Insurance–an insurance policy, usually issued by a title insurance company, that protects buyers against errors or disputes in the title to the property. The cost is usually based on the value of the property. see also Title Insurance; Lender’s Title Insurance Policy

Paid Outside of Closing (“POC”)–fees such as credit reports and appraisals are usually paid by the borrower before closing, are additional costs and are added in line 1400 of the HUD Settlement Statement. Other fees such as fees paid by the lender to a broker may be paid after closing, are usually included in the interest rate or other settlement charges and will not be added to line 1400 of the HUD Settlement Statement.

Permanent Loan–a long term loan, usually 10 years or more; see also end loan

Pest & Other Inspections–inspection and treatment for termites, carpenter ants and other insects that destroy wood. This is performed by a licensed pest control operator who will issue a letter stating that none were found or that they were treated

PITI-- abbreviation for Principal, Interest, Taxes, Insurance, the usual components of a monthly mortgage payment

Points–see Discount Points

Power of Attorney (POA)–a legally binding document allowing one individual to act on behalf of another

Prepaid Expenses–funds used to either create an escrow account or to adjust the seller’s existing escrow account. Items frequently include taxes, hazard insurance, private mortgage insurance, assessments, etc.

Prepaid Interest–interest due from the date of the loan closing to the first day of the following month. Most loans require payments to be due on the first day of the month. This is considered a settlement charge and will be disclosed on the HUD Settlement Statement

Prepayment–a contractual clause in a mortgage permitting the borrower to make payments in advance of the due dates; it is a privilege, not a right

Prepayment Penalty–a lender’s charge for an early payment of debt; lenders may allow prepayment with or without penalty. Many states allow a penalty but do not impose a penalty.

Primary Mortgage Market–when lenders make mortgage loans directly to banks, S & Ls and mortgage companies which then loan the funds to borrowers. Lenders sometimes sell their mortgages to the secondary mortgage markets such as the Federal National Mortgage
Association (FNMA), the Government National Mortgage Association (GNMA), etc.

Principal–the amount of debt remaining on a loan, not counting interest

Principal, Interest, Taxes, Insurance – see PITI

Private Mortgage Insurance (PMI)–the usual down payment on real estate is 20%. If the down payment is smaller, lenders usually require the borrower to carry PMI to protect their loan. PMI usually requires an initial premium and usually additional monthly fees based on the loan’s structure and balance owed

Pro-rata–to divide proportionally. For example, if the seller owns the house for 4 months, he or she would owe 4/12 of the city and county taxes. The buyer would owe the remaining 8/12.

Prorate–to proportionally allocate between the seller and buyer an obligation, such as taxes, that has been paid or is due to be paid.

Rate Lock–a time period, such as 30 or 60 days, during which a lender agrees to hold the mortgage rate and points paid by the borrower to the rate quoted to the borrower on a particular day. The borrower then has that time frame to close before the rate and points may be changed

Realtor–a licensed real estate broker or associate

Recission–cancellation, as with a contract

Recording fees–fees government agencies charge for recording documents and making them a part of the public record

Refinance–obtaining a new mortgage on a presently owned property. Borrowers frequently refinance when there is a sufficient downward change in the interest rate

RESPA–Real Estate Settlement Procedures Act. A federal law that requires lenders to furnish to the borrower, after application, information on known or estimated settlement costs once after application and once before or at closing

Reverse Annuity Mortgage (RAM)–a form of a mortgage in which the lender makes periodic payments to the borrower using the borrower’s equity as collateral for and repayment of the loan

Satisfaction (of Mortgage)–also called a “release of mortgage,” it is a document issued by the lender stating that the mortgage loan has been paid in full

Second Mortgage–a mortgage issued after the first or primary mortgage and subordinate to the primary mortgage

Secondary Mortgage Market–the mortgage market in which primary mortgage lenders (banks, S & Ls, mortgage companies) sell their mortgages in order to obtain more money so they can originate more new loans

Servicing–all the steps a lender takes to ensure that a loan remains in good standing. Examples of servicing include collection of payments, payment of taxes, insurance, etc.

Settlement Costs–see Closing Costs

Settlement (Closing) Fee–fees associated with the transfer of property to a purchaser and recording the mortgage lien on the property. It includes items such as application fees and fees for title examination, abstract of title, surveys, title insurance, attorney’s fees, document preparation, appraisal, credit report, etc.

Shared Appreciation Mortgage–a type of mortgage in which the borrower and another party (lender, family member Refinance–obtaining a new mortgage on a presently owned property. Borrowers frequently refinance when there is a sufficient downward change in the interest rate

Survey–a measurement of land (and possibly improvements) showing the location and boundaries in relation to known points. It is prepared by a registered land surveyor. It may be called a “meets and bounds” survey.

Title–a legal document evidencing ownership of real estate

Title Abstract–a summary of the public records relating to the title of a particular parcel of real property. An attorney or title company reviews a title abstract to determine whether there are any title defects

Title Examination–examination of municipal records by an attorney or title insurance company to determine ownership of the real estate

Title Insurance–an insurance policy, usually issued by a title insurance company, that protects buyers and/or sellers against errors or disputes in the title to the property. The cost is usually based on the value of the property. Policies may be issued to protect the buyer (Buyers Policy) or the seller (Seller’s Policy) or (usually) both; see also Owner’s (Buyer’s) Insurance Policy and Lender’s Title Insurance

Title Search–an examination of the public municipal records to determine the ownership of real estate; it is usually performed by a licensed attorney or title insurance company. This search should disclose any liens, overdue special assessments, or other claims.

Total Settlement Charges–all charges, for both the seller and buyer, associated with a transfer of real property

Truth-in-Lending–a federal law that requires lenders to disclose, in writing, the true Annual Percentage Rage (APR) to borrowers (home buyers) shortly after they apply for a loan. It may also be called “Regulation Z;” see also Annual Percentage Rate

Two-Step Mortgage–a type of mortgage in which the borrower receives a below market rate of interest for a determined number of years (such as 7 or 10 years), and then receives a new interest rate (within limits), based on market conditions at that time. Lenders frequently contractually reserve the option to “call in” the loan and make the entire amount of principal due at the end of the determined number of years. Some lenders call this type of mortgage a “Premier” or “Super Seven” or ‘Super Ten.”

Underwriting fees–fees charged for evaluating a loan based upon assets, reports, employment history, bankruptcy, etc. and making a decision on whether or not to make a loan

VA Funding fee–see VA Mortgage Funding Fee

VA Loan–a loan to individuals qualified by military service or other entitlements, the loan being long-term and requiring no down payment or a low down payment (usual down payment = 20% of the purchase price). The loan is guaranteed by the Department of Veterans Affairs (VA).

VA Mortgage Funding Fee–depending upon the amount of the down payment paid on a VA loan, a premium of up to 1 7/8 percent is paid on closing or added to the amount financed.

Variable Loan Rate–the interest rate may change during any period of the loan, as written into the loan agreement (a contractual agreement) that will be enforce by a Court. They are often called “Adjustable Rate Mortgages” (ARM); see also Adjustable Rate Mortgage

Verification of deposit–a signed document verifying the status and balance of the borrower’s account/financial accounts.

Verification of employment–a document signed by the employee’s employer verifying or affirming the borrower’s position, employment, salary and duration of employment with that particular employer. This information is used to help determine whether a loan should be granted and for how much.

Warehouse Fee–many/most mortgage firms borrow funds on a short-term basis in order to make more loans which are to be sold to the secondary mortgage market. When/if the prime rate of interest is higher on short term loans than on long-term mortgage loans, the mortgage firm would have a net economic loss.

Wraparound (Mortgage)–when an assumable loan is added to and combined with a new loan, usually on at least two (2) separate properties, resulting in a blend of the “old” and “new” or current market value interest rates.