Adjustable Rate Mortgage (ARM) - Also known as a variable rate mortgage. The interest rate on these mortgages changes periodically.

Adjustment Period - The length of time for which the interest rate is fixed on an adjustable. If the adjustment period is six months, then the interest rate will remain fixed for six months, after which time it will adjust.

Annual Percentage Rate (APR) - The effective rate of interest for a loan per year. This rate is typically higher than the note rate because it takes into account closing costs. This is one way to compare loan programs offered by different lenders. Caution: the APR is sometimes computed differently by different lenders and can be misleading.

Appraisal - An opinion or estimate of the value of a property at a given date.

Assumable Mortgage - A mortgage loan which allows a new home buyer to take over the obligation of making loan payments with no change in the terms of the loan. Assumable loans do not have a due-on-sale clause. The lender has to be notified and agree to the assumption. The lender may require the buyer to qualify for the loan and may charge an assumption fee. The seller should obtain a written release from the lender stating clearly that he/she is no longer liable to make mortgage payments.

Balloon (Payment) Mortgage - Usually a short-term fixed-rate loan, which involves small payments for a certain period of time and one large payment for the remaining amount of the principal at a time specified in the contract.

Example : A balloon mortgage for $25,000 has interest-only payments for 5 years at 12 percent ($250 per month), with the full principal of $25,000 due and payable after five years.

Bridge Loan - An interim loan typically used when the buyer is unable to sell his/her house but needs money to close the transaction on the house he/she is buying. The bridge loan is made on the buyer's current residence to finance the buyer's new residence. The loan is paid off when the buyer's current residence is sold.

Buydown - Obtaining a lower interest rate (buying down the rate) by paying additional points to the lender. The lower rate may apply for the full duration of the loan or for just the first few years. A buydown may be used to qualify a borrower who would otherwise not qualify since a buydown results in lower payments.

Certificate of Reasonable Value (CRV) - An appraisal performed by a VA approved appraiser which establishes the property's current market value. This value establishes the ceiling on the maximum VA mortgage loan principal.

Certificate of Title - An opinion rendered by an attorney as to the status of title to a property, according to the public records. This certificate does not offer the same level of protection as title insurance.

Clear Title - A marketable title, free of clouds and disputed interests. Most lenders require a clear title prior to closing.

Closing Costs - Expenses incurred by the buyer and seller in a real estate or mortgage transaction. There are two types of costs: recurring and non-recurring. Non-recurring costs are one time, transactional costs which include

• Discount and origination points
• Lender fees: underwriting, processing, document preparations
• Title insurance fees
• Recording fees
• Inspection and appraisal fees

Recurring fees are costs associated with owning the property and they recur month after month. These costs may include hazard insurance, interest, property taxes, mortgage insurance (PMI), and association fees. A pro-rated amount of these fees may have to be paid at closing including:

Pre-paid interest - interest charges from the date of closing to the end of the month

• Property taxes, if due
• Hazard insurance, fire insurance or homeowners insurance has to be paid for one year.
• Mortgage insurance (PMI) may be required if the loan amount is more than 80 percent of the value of the property. In the past, a whole year of PMI had to be paid up-front. However, in recent years many PMI companies only require one to two months up-front. Mortgage insurance premiums are normally paid every month with the loan payment
• Impound account may need money to be set up for future payments

Commitment - A written document provided by a lender agreeing to make a loan on specific terms to a borrower or builder.

Conditional Commitment - A written document provided by a lender agreeing to make a loan, provided certain conditions are met prior to closing.

Conditional Sales Contract (Land Contract) - A real estate sales contract in which the seller (vendor) agrees to convey title to the buyer (vendee) after certain conditions have been met and transfer is not required within one year. (Installment selling arrangement whereby the buyer may use and occupy land, but no deed is given by seller until the sales price has been paid.)

Convertible Adjustable Rate Mortgage (CARM) - Some variable loans come with options to convert to a fixed loan, based on a pre-determined formula, during a given time period. For example, the 1 Year T-Bill ARM may be converted to a fixed rate during the first five years on the adjustment date. One could convert during the thirteenth, twenty-fifth, thirty-seventh, forty-ninth or sixty-first month of the loan.

Credit Report - A report detailing a borrower's credit and payment history including: revolving and installment accounts; public records such as tax liens and judgments.

Default - Failure to meet legal obligations in a contract, such as the failure to make the monthly mortgage payment.

Discount Points - Fees paid to a lender to reduce the interest rate.

Due on Sale Clause - A clause in the Deed of Trust or Mortgage that states that the entire loan is due upon the sale of the property.

Farmer's Home Administration (FmHA) - An agency, within the U.S. Department of Agriculture, that administers assistance programs for purchasers of homes and farms in small towns and rural areas.

Federal Home Loan Bank Board (FHLBB) - Provides financing to farmers.

Federal Home Loan Mortgage Corporation (FHLMC, Freddie Mac) - Freddie Mac maintains a nationwide secondary market primarily for conventional loans originated by banks, thrift institutions and other HUD-approved lenders. Freddie Mac finances most of its operations through the sale of Mortgage Participation Certificates.

Federal Housing Administration (FHA) - An agency within the U.S. Department of Housing and Urban Development (HUD). FHA offers mortgage insurance programs to protect the lender in the event of default. Because lenders are insured against loss, they can make affordable financing available to borrowers who would not otherwise qualify.

Federal National Mortgage Association (FNMA, Fannie Mae) - Provides a secondary market for FHA, VA and conventional loans. Fannie Mae issues mortgage-backed securities and guarantees timely payment of their principal and interest to investors.

Federal Reserve System - The central federal banking system that regulates and provides services to member commercial banks. Also has the responsibility for conducting federal monetary policy.

Finance Charge  - Interest charged by a lender.

First Mortgage - A mortgage that has priority as a lien over all other mortgages. In the case of a foreclosure the first mortgage will be satisfied before other mortgages. See also second mortgage.

Foreclosure (Repossession) - A legal process in which the right, title and interest of a mortgagor or trustor in real property are terminated by selling the property and applying the proceeds to satisfy liens of creditors.

Government National Mortgage Association (GNMA, Ginnie Mae) - A government corporation which guarantees mortgage-backed securities issued by approved lenders. GNMA mortgage-backed securities are considered by many to be as safe as Treasury securities.

Graduated Payment Mortgage (GPM) - A trust deed or mortgage requiring increasingly higher payments during the life of the loan. Negative amortization may occur under some circumstances.

Impound Account - That portion of a borrower's monthly payments held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also known as reserves.

Index  - A statistic that indicates some current economic or financial condition. Indexes are used to make adjustments in variable rate loans.

Joint and Several Liability - A creditor can demand full repayment from any and all of those who have borrowed. Each borrower is liable for the full debt, not just the prorated share.

Jumbo Loan - Loan size that is larger than the conforming loan limit established by the Fannie Mae or Freddie Mac.

Junior Mortgage - A mortgage subordinate to another mortgage. In the case of a foreclosure, a senior mortgage will be paid prior to a junior mortgage.

Lien - A claim against the property for the payment of a debt, judgment, mortgage or taxes.

Example : Unpaid contractors may file a mechanic's lien.

Loan Application - A document required by a lender prior to loan approval. The application includes detailed information about the borrower and the property.

Loan Origination - Fee or Points charged by a lender or broker connected with originating a loan. This is different from discount points, which are used to buy down the rate of interest.

Loan Servicing - The act of collecting loan payments, handling property tax and insurance escrows, foreclosing on defaulted loans and remitting payments to the investors.

Loan to Value Ratio (LTV)  - The loan amount divided by the value of the property.

Margin - A fixed number added to the index to compute the rate on an adjustable rate mortgage.

Mortgage - A written instrument that creates a lien upon real estate as security for the payment of a specified debt.

Mortgage Banker - Specializes in originating and servicing loans. They generally  sell their loans to investors, but may continue to service them.

Mortgage Broker - Arranges financing for a borrower by placing loans with lenders. Mortgage brokers are paid a fee by the borrower or the lender when a loan closes.

Mortgage Insurance - See private mortgage insurance (PMI)

Mortgage Note - A written agreement to repay a loan. The agreement is secured by a mortgage, serves as proof of an indebtedness, and states the manner in which it shall be paid. The note states the actual amount of the debt that the mortgage secures and renders the mortgagor personally responsible for repayment.

Open-end Mortgage - A mortgage permitting the mortgagor to borrow additional money under the same mortgage, with certain conditions.

Package Mortgage - Mortgage covering both real and personal property.

Paper- A mortgage, deed of trust or land contract provided in lieu of cash.

Permanent Loan or Mortgage - A mortgage for a long period of time. Often referred to as the mortgage that pays off a construction loan on a completed property.

PITI - Acronym for principal, interest, taxes and insurance, which may be combined in a single monthly mortgage payment.

Points - Fees paid to lenders. 1 point = 1 percent of the loan amount. On a $100,000 loan 1 point is $1000. Points may be further classified into origination points or discount points.

Prepaid Interest - Prepaid interest is the interest charged to borrowers at closing to pay for the cost of borrowing for a balance of the month. For example, if a loan closes on the 19th of the month and the first payment is due on the 1st of the following month, the lender will charge 12 days of prepaid interest.

Prepayment - Full or partial payment of the principal before the due date. This might occur if the borrower makes extra payments, sells the property, or refinances the existing loan.

Prepayment Penalty - Fees paid by the borrower if they pay the loan before it’s due date.

Primary Mortgage Market - Companies that originate and service mortgage loans (banks, savings & loans, credit unions, mortgage bankers, institutional lenders) make up the primary mortgage market.

Prime Rate - The lowest commercial interest rate charged by a bank on short term loans to their most credit worthy customers.

Principal - The outstanding balance on a loan.

Private Mortgage Insurance (PMI) - In the event that you do not have a 20 percent down payment, lenders will allow a smaller down payment - as low as 2 percent in some cases. With the smaller down payment loans, however, borrowers are usually required to carry private mortgage insurance. Private mortgage insurance payments are normally made annual or monthly. An impound account may be required.

Reconveyance - When a mortgage is paid in full, the lender conveys the property back to the owner.

Recision - The cancellation of a contract. When refinancing a mortgage on a principal residence the law gives the homeowner three days to cancel the contract.

Refinancing - Repaying an existing loan from the proceeds of a new loan on the same property.

Regulation Z (Reg Z) - A federal regulation requiring creditors to provide full disclosure of the terms of a loan including the terms of the loan and the annual percentage rate (APR).

Reverse Mortgage - A mortgage used by the elderly that provides income. Payments may cause the loan principal to increase.

Rollover Loan - A loan that is amortized over a long period of time (e.g., 30 yrs) but the interest rate is fixed for a short period (e.g., 5 yrs). The loan may be extended or rolled over, at the end of the shorter term, based on the terms of the loan.

Second Mortgage - A subordinated lien, created by a mortgage loan, over the amount of a first mortgage. Second mortgages generally carry a higher rate than a first mortgage since they represent a higher risk for an investor.

Servicing - The act of billing, collecting payment, filing reports, managing impound accounts and handling defaults on a mortgage.

Shared Appreciation Mortgage - A residential loan with a fixed, below-market interest rate in which the lender is entitled to a specified share of property appreciation during an agreed upon time period.

Standard Uniform Loan Application (Form 1003) - A standard loan application widely used in the mortgage industry.

Subordination - A loan in a lower priority.  For example, a second mortgage is subordinate to a first.

Teaser Rate - A low initial interest rate on a mortgage.

Title Report - A document indicating the current state of title. The report includes information on the current ownership, outstanding deeds of trust or mortgages, liens, easements, covenants, restrictions, and any defects.

Title Search - An examination of the public records to determine the ownership and encumbrances affecting the property.

Two-Step Mortgage - A mortgage in which the borrower receives a fixed rate for a specified number of years (most often 5 or 7), and then receives a new interest rate based on the terms in the note.

Underwriting - The decision whether to make a loan to a potential home buyer based on credit, income, employment history, assets, etc.

VA Loan - Home loan guaranteed by the U.S. Veterans Administration, enabling a veteran to buy a home with no money down.

Variable Rate Mortgage - (See Adjustable Rate Mortgage)

Verification of Deposit (VOD) - A document signed by the borrower's bank or other financial institution verifying the account balance and history.

Verification of Employment - A document signed by the borrower's employer verifying his/her starting date, job title, salary and probability of continued employment.

Wraparound Mortgage - A loan arrangement whereby the existing loan is retained and a new loan is added to the property. Example: The seller sells his/her property for $200,000. The buyer puts $80,000 down. The seller has an existing loan balance of $100,000 for a remaining period of twenty-five years at an interest rate of 6 percent. The seller then makes a wraparound mortgage to the buyer, (where the seller acts as a lender) for $120,000 at 8 percent. The seller has to continue making payments on his old loan. They buyer has to pay the seller on the new loan. The buyer may, at a later date, refinance the property and close both loans.