Adjustable or Variable Rate Mortgage (AVM or VRM) a mortgage loan in which the interest rate varies in accordance with changes in a specified index, and may result in changed monthly payments. For further information, refer to the “Consumer Handbook on Adjustable Rate Mortgages.”
Adverse Action a denial of loan in an amount and on terms acceptable to the borrower.
Annual Percentage Rate (APR) A measure of the cost of credit, expressed as a yearly rate. It includes interest as well as other charges. Because all lenders follow the same rules to ensure the accuracy of the APR, it provides consumers with a good basis for comparing the cost of loans, including mortgages.
Application an oral or written request for an extension of credit. Usually a printed form on which the Lender collects credit, income and debt information about a prospective borrower, plus facts about the property being used to secure the loan. A fee may be charged at the time of application.
Application fee Fees that are paid upon application. May include charges for property appraisal and a credit report.
Appraisal an inspection of the property to assure that its market value exceeds the amount of the loan. A fee may be charged for the appraisal.
Assumability When a home is sold, the seller may be able to transfer the mortgage to the new buyer. This means the mortgage is assumable. Lenders generally require a credit review of the new borrower and may charge a fee for the assumption. Some mortgages contain a due-on-sale clause, which means that the mortgage may not be transferrable to a new buyer. Instead, the lender makes you pay the entire balance that is due when you sell the home. Assumability can help you attract buyers if you sell your home.
Balloon payment A lump-sum payment that may be required when the plan ends.
Borrower the person, sometimes referred to as the mortgagor, who obtains a mortgage loan.
Buydown With a buydown, the seller pays an amount to the lender so that the lender can give you a lower rate and lower payments, usually for an early period in an ARM. The seller may increase the sales price to cover the cost of the buydown. Buydowns can occur in all types of mortgages, not just ARMs.
Cap A limit on how much the interest rate or the monthly payment can change, either at each adjustment or during the life of the mortgage. Payment caps don’t limit the amount of interest the lender is earning, so they may cause negative amortization.
Closing the time and date set for the transfer of property from seller to buyer and/or for the signing of the loan documents.
Closing or Settlement Costs fees, in addition to the purchase price of the property, charged at closing which include but are not limited to lawyer’s fees, title search and insurance, survey charges and fees to record the deed, mortgage and other documents.
Commitment letter a lender’s written offer to grant a mortgage loan outlining the terms, the amount of the loan, the interest rate and any other conditions. It can serve as a communication of the Lender’s decision on the borrower’s application.
Conversion Clause A provision in some ARMs that allows you to change the ARM to a fixed-rate loan at some point during the term. Usually conversion is allowed at the end of the first adjustment period. At the time of the conversion, the new fixed rate is generally set at one of the rates then prevailing for fixed-rate mortgages. The conversion feature may be available at an extra cost.
Counter-offer an offer made by the Lender to grant credit other than in the amount of terms requested by the applicant.
Credit Limit The maximum amount that may be borrowed under the home equity plan.
Discount In an ARM with an initial rate discount, the lender gives up a number of percentage points in interest to give you a lower rate and lower payments for part of the mortgage term (usually for one year or less). After the discount period, the ARM rate will probably go up depending on the interest rate.
Equal Credit Opportunity Act federal and state laws that prohibit discrimination in the granting of credit based on race, color, religion, national origin, sex, marital status, age, or whether a person is receiving public assistance or alimony.
Escrow Account money collected in advance by the Lender, usually on a monthly basis, for the payment of real estate taxes, betterments and/or insurance.
Equity The difference between the fair market value (appraised value) of the home and the outstanding mortgage balance.
Fixed Rate Mortgage a conventional mortgage loan with a set interest rate and equal monthly payments for the entire term of the loan.
Home Equity Line of Credit (HELOC) A home equity line of credit is a form of revolving credit in which your home serves as collateral. Because the home is likely to be a consumer’s largest asset, many homeowners use their credit lines only for major items such as education, home improvements, or medical bills and not for day-to-day expenses.
Index The index is the measure of interest rate changes that the lender uses to decide how much the interest rate on an ARM will change over time. No one can be sure when an index rate will go up or down. Some index rates tend to be higher than others, and some more volatile. (But if a lender bases interest rate adjustments on the average value of an index over time, your interest rate would not be as volatile.) You should ask your lender how the index for any ARM you are considering has changed in recent years, and where it is reported.
Interest rate The periodic charge, expressed as a percentage, for use of credit.
Lender the entity or person, sometimes referred to as the mortgagee, who offers the mortgage loan.
Lien a legal claim, granted by contract or by a court, against property. A mortgage is one kind of lien.
Loan-to-Value Ratio the percentage comparison between the unpaid principal balance of the mortgage and the sales price or the appraised value of the property, whichever is lower.
Margin The number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment.
Mortgage a lien placed by the lender on the borrower’s property to secure payment of the mortgage loan and removed when the note has been paid in full. If the borrower defaults on the note, the Lender can sell the property to satisfy the debt.
Minimum payment The minimum amount that you must pay (usually monthly) on your account. Under some plans, the minimum payment may cover interest only; under others, it may include both principal and interest.
Note the borrower’s legally binding written promise to repay a debt on a specified date.
Point an often non-refundable sum of money, equal to 1% of the principal amount of a mortgage, charged by the Lender to cover certain costs of making a loan. The number of points that may be charged must be disclosed to the borrower in writing prior to closing.
Points One point is equal to 1 percent of the amount of the credit line. Points must usually be paid at closing and are in addition to monthly interest.
Private Mortgage Insurance protection for lenders against borrower default. Paid for by the borrower and usually required when the down payment is less than 20% of the purchase price.
Rate-Lock Agreement/Interest Rate Commitment a written agreement by which a lender will hold an interest rate on a mortgage for a specified period of time. The terms and conditions of a rate-lock agreement vary from lender to lender.
(RESPA) Real Estate Settlement Procedures Act a federal law that requires a good faith estimate of closing costs to be given to a consumer on certain first mortgages and a settlement statement to be provided at the closing itemizing all costs to the borrower in connection with the mortgage loan. For further information refer to the booklet entitled “Buying Your Home – Settlement Costs and Helpful Information.”
Right of Recession state and federal laws that allow consumers who refinance first mortgages and certain second mortgages to cancel their contract and receive a refund of all fees if the mortgage or security interest is granted on the consumer’s principal residence. This must take place within three business days following the closing, or following the delivery of the required information and recission forms and disclosures, whichever occurs last.
Secondary Mortgage Market investors who purchase residential mortgages originated by lenders.
Security interest An interest that a lender takes in the borrower’s property to ensure repayment of a debt.
Title Insurance protection against loss due to defects in the title that were not uncovered in the title search and not listed in the title report. Both the Lender and the borrower may purchase title insurance to protect their own interests.
Title Search an examination of legal records to check the validity and completeness of the title to the property. The title search should uncover any liens, overdue assessments or other claims against the property.
Transaction fee A fee charged each time you draw on your credit line.
Truth-in-Lending federal and state laws that require lenders to provide borrowers with full disclosure of the true cost of a loan and easy-to-understand information about the annual percentage rate and terms of the loan.
Variable rate An interest rate that changes periodically in relation to an index. Payments may increase or decrease accordingly.