Mortgage Glossary
Adjustable Rate Mortgage (ARM): A mortgage with an interest rate that can be periodically adjusted based on an index during the term of the loan. Therefore, the borrower’s required payments may change over time with the changing interest rate. The timing and calculation of adjustments (also called resets) are determined by the loan program, and these details are disclosed in the mortgage documents. The borrower stands to benefit from reduced margins to the cost of borrowing compared to fixed rate mortgages. The borrower benefits if the interest rate falls over the term of the loan but also risks the possibility of rising interest rates.
APR (Annual Percentage Rate): The cost of credit, including the interest and fees, expressed as an annual interest rate rather than just a monthly fee/rate. APR was created to make it easier for consumers to compare home loans with different rates and costs, and by law, if a simple interest rate is given, then the APR must be disclosed in all advertising. The APR must also be included in the Loan Estimate (LE) and Closing Disclosure (CD) documents, defined here-in.
Appraisal: A written estimate of the value of a specific real estate property prepared by a certified appraiser. Mortgage lenders almost always require a property appraisal before providing their final approval for a home loan.
Cash-Out Refinancing: A refinance in which the new loan amount exceeds the total needed to pay off the existing mortgage and other liens on that property. The difference goes to the borrower and can be used for any purpose.
Note a cash-out refinance differs from a home equity loan in several ways:
- Cash-out refinance replaces a first mortgage while a home equity loan is an additional loan on top of a first mortgage
- Cash-out refinance interest rates are usually, but not always, lower than the interest rate on a home equity loan
- Cash-out refinance usually will require closing costs whereas a home equity loan usually does not
CFPB (Consumer Financial Protection Bureau): an independent U.S. government agency that makes sure banks, lenders, and other financial companies treat consumers fairly. The CFPB enforces federal consumer financial laws and holds financial service providers accountable for their actions. The CFPB’s creation was authorized by the Dodd–Frank Wall Street Reform and Consumer Protection Act in 2010.
Closing: The final step in a real estate transaction in which funds legally change hands and legal security instruments are filed in public records. Mortgage lenders often require title service, including title search and title insurance, appraisal, land survey, and attorneys to be involved with the closing. This is the stage where for a purchase money mortgage, the seller transfers title by executing a title transfer deed to the buyer. The closing is also called the mortgage loan settlement.
Closing Costs: Closing costs include a loan origination fee, points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement. Closing costs are incurred by either the buyer and/or the seller. The closing costs usually are about 2 percent to 6 percent of the mortgage amount.
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Closing Disclosure (CD): Lenders are required to provide a Closing Disclosure document at least three business days before consumation or a scheduled closing. The CD helps to confirm that all of the details of a pending home loan are correct (e.g. Legal names, loan term, loan amount etc.) See Sample Closing Disclosure
Conventional Loan/Mortgage: A mortgage that is not guaranteed or insured by any government agency, including the Federal Housing Administration (FHA), the Farmers Home Administration (FmHA) and the Department of Veterans Affairs (VA). Conventional loans are typically fixed in their terms and rate.
Credit Ratio: A credit ratio is expressed as a percentage and results when a borrower’s monthly payment obligation on long-term debts is divided by his or her net income for FHA/VA loans or gross monthly income for Conventional loans. (See also Educational resources about Credit including videos, podcasts, etc.)
Credit Reporting Agency (CRA): You are entitled to order (every 12 months) a free copy of your credit report from each of the major credit reporting agencies (Equifax, Experian, and TransUnion) through AnnualCreditReport.com. This website is the only one that is government authorized to provide you with free copies of your credit report.
You can also contact the credit agencies directly if you need to dispute information in your report, place a fraud alert or security freeze on your credit file, or have other questions.
Equifax.com or by phone at 1-866-349-5191
Experian.com or by phone at 1-888-397-3742
TransUnion.com or by phone at 1-800-916-8800
Debt Consolidation Loan: Debt consolidation is a process by which several debts are replaced by one debt. A Debt Consolidation loan may provide a lower overall interest rate to the entire debt and the convenience of having only one loan to manage.
Debt-to-Income Ratio: A debt income ratio (often abbreviated DTI) is the percentage of a consumer’s monthly gross income that goes toward paying debts. (DTIs often cover more than just debts; they can include principal, taxes, fees, and insurance premiums as well.)There are two main kinds of DTI, as discussed below.
The two main kinds of DTI are expressed as a pair using the notation x/y (for example, 28/36).
The first DTI, known as the front-end ratio, indicates the percentage of income that goes toward housing costs, which for renters is the rent amount and for homeowners is PITI (mortgage principal and interest, mortgage insurance premium [when applicable], hazard insurance premium, property taxes, and homeowners’ association dues [when applicable]).
The second DTI, known as the back-end ratio, indicates the percentage of income that goes toward paying all recurring debt payments, including those covered by the first DTI, and other debts such as credit card payments, car loan payments, student loan payments, child support payments, alimony payments, and legal judgments. (See also Educational resources about Credit including videos, podcasts, etc.)
Deferred Interest: Interest that has accrued but not yet been paid by the borrower. Mortgage interest is paid in arrears, after it has been incurred. So mortgage payments cover interest that is already owed to the lender. “Deferred interest” accumulates when a loan payment is not large enough to cover all the interest currently due.
Down Payment: The difference between a home’s purchase price and the amount of the mortgage against the property. Any down payment must be paid upfront before the home purchase can close. A down payment helps the borrower reduce the total interest paid to finance the property purchase and also provides an indicator to the lender of the borrower’s ability to repay the mortgage. Tools: Mortgage Calculators
Equity: The difference between the fair market value of an asset, such as a home, and the amount of debt owed against that asset, such as a mortgage. For example, a GMFS mortgage customer with a $75,000 home loan balance remaining on a home appraised in value at $200,000, has $125,000 in equity in that home (assuming it can be sold at the appraised value).
Escrow: Escrow generally refers to money held by a third-party on behalf of transacting parties. The escrow account is separate from the mortgage account where deposit of funds occurs for payment of certain required conditions such as state and local property taxes and insurance (e.g. homeowners and flood).
Many mortgages are set-up so that the monthly payment includes a dollar amount to keep your escrow account properly funded to pay estimated annual costs of your property taxes and mortgage related insurances. Keep in mind that the amount needed in your escrow account can change year to year (even if you have a fixed rate loan) if your lender is informed of changes in tax assessments of your property (state or local) and/or changes to your homeowner or flood insurance policy rates.
Fannie Mae: The Federal National Mortgage Association (Fannie Mae) is a Government Sponsored Enterprise (GSE), meaning they are backed by the government but are not part of the government. Fannie Mae was created by Congress in 1938. Fannie Mae, along with Freddie Mac, purchase the bulk of U.S. residential mortgages from banks and other lenders, allowing them to free up liquidity to lend more mortgages.
FHA loan: A home loan insured by the Federal Housing Administration open to all qualified borrowers. FHA loans are insured by the federal government with mortgage insurance premiums (MIP) paid for by borrowers.
Fixed Rate Mortgage: A category of mortgage characterized by an interest rate that does not change over the life of the loan. Therefore, the monthly payments are “fixed”, meaning they do not change over the course of the loan, which can be helpful for borrowers to manage their budget and protects them from possible interest rate increases due to future market conditions.
Freddie Mac: The Federal Home Loan Mortgage Corporation (Freddie Mac) is a Government Sponsored Enterprise (GSE), meaning they are backed by the government but are not part of the government. Freddie Mac was created by Congress in 1970. Loans bought and sold by Freddie Mac are often referred to as “conforming” mortgages. Freddie Mac, along with Fannie Mae, purchase the bulk of U.S. residential mortgages from banks and other lenders, allowing them to free up liquidity to lend more mortgages.
HUD: U.S. Department of Housing and Urban Development. The Federal Housing Administration (FHA) within HUD insures home mortgage loans made by lenders and sets minimum standards for FHA loans.
Interest Rate: The rate a bank or lender charges to borrow its money. Interest rate is the amount of interest due per period, as a proportion of the amount borrowed (called the principal sum). The interest rate is a percentage of the principal sum. The total interest on an amount borrowed depends on the principal sum, the interest rate and the length of time over which it is borrowed.
Jumbo Loan (aka non-conforming loan): A jumbo loan is a loan with a loan amount larger than the maximum limits set by the GREs: Fannie Mae and Freddie Mac. Currently the limit is set at $417,000 for most areas. Since jumbo loans cannot be funded by these two GREs, they usually carry a higher interest rate than that of a conforming loan.
Lender Fees: Fees charged by Lenders for processing and funding a loan. This can include application fees, attorney fees, recording fees, and more.
Lien: The legal right of a creditor to sell the collateral property of a debtor who fails to meet the obligations of a loan or other contract. The property subject to the lien cannot be sold by the owner without the consent of the lien holder. (e.g. your mortgage company has a position of first lien on your home if you default on your loan)
Loan Estimate (LE): The Loan Estimate is a standardized form provided by a lender to make it easier to shop around and compare loan offers from multiple lenders. See Sample Loan Estimate
Lock Period: Because mortgage interest rates can change daily (sometimes hourly) some lenders offer a rate lock period during which the quoted interest rate won’t change during a certain timeframe prior to closing (as long as the loan closes within the specified timeframe and there are no changes to the loan application). If a lender offers a rate lock option, the locks are typically for 30, 45, or 60 day periods.
LTV (Loan-to-Value Ratio): The relationship between a property value and the amount of loans against it. LTV is calculated by dividing the loan amount by the property value.
Mortgage: A mortgage is a legal agreement between a borrower and a lender allowing the lender to charge interest in exchange for providing money to the borrower in order to purchase a home. The home/real estate property is considered the security (aka “collateral”) for repayment of the loan.
Origination Fee: A fee charged by a mortgage lender for the many costs of originating a home loan (e.g. processing, underwriting, auditing, funding, etc.). It can be structured as a flat fee or a percentage of the amount borrowed.
PITI: Principal-Interest-Taxes-Insurance is the total monthly housing expense. This figure will also include monthly mortgage insurance (e.g. PMI) and homeowners association fees, if applicable.
PMI (Private Mortgage Insurance): An insurance policy that protect a mortgage lender if the borrower does not repay (defaults) the mortgage.
Points: A point is equal to one percent (1.00%) of the amount borrowed for a mortgage. Loan fees may be quoted in points or in flat dollar amounts. “Discount points” can also be paid upfront by borrowers as an option to get a lower mortgage rate.
Pre-Approved: The pre-approved process reveals exactly how much money can be borrowed. Unlike pre-qualification, being pre-approved means the lender is satisfied that the borrower’s income has been properly documented & verified, and that other critical loan conditions have been met.
Pre-Paids: Costs paid by a homebuyer at closing and put into an escrow account to cover the initial costs of expenses, such as private mortgage insurance, hazard insurance, taxes and special assessments.
Pre-Qualify: A process that results in a lender issuing the borrower a statement that estimates the home loan amount they could be qualified to purchase or refinance. Sellers often prefer offers from borrowers that are pre-qualified with a lender vs. other offers because it is based on the borrower’s credit report and the income claimed by the borrower (which has not yet been verified by the lender).
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Note: a pre-qualification letter is not a guarantee that the lender will approve a loan for the borrower and is not the same as pre-approved. |
Prepayment Penalty: Money charged by a lender if a debt is paid off early since the profit expected by the lender is dramatically reduced when the loan does not last for the original term period. (GMFS Mortgage does not charge prepayment penalties!)
Principal: The balance remaining on a loan. Monthly interest due is calculated by multiplying the principal balance by the monthly interest rate. If a monthly payment exceeds the interest due, the excess is applied to the principal balance, effectively reducing the amount owed.
Qualification Ratios: Limits set by lenders to state the maximum they will allow for the borrower’s income to housing expense ratio, and total income to debt ratio in order for a borrower to qualify for a loan.
Quitclaim Deed: A public filing that relinquishes whatever interest the maker of the deed (grantor) may have in the particular piece of real estate. Unlike most other property deeds, a quitclaim deed contains no title covenant and thus offers the grantee (deed recipient) no warranty as to the status of the property title.
Rate: The percentage used to calculate the interest charge for a loan. The rate and loan amount determine the interest expense and the loan payment. Also referred to as the interest rate, stated rate or loan rate.
Rate Lock (see “Lock Period“)
Refinancing: Replacing existing mortgage with a new loan. The purpose of refinancing is typically to improve the terms of a home loan by getting a lower interest rate, reducing the monthly mortgage payment, replacing an adjustable or variable rate loan with a fixed-rate loan or increasing the loan amount and taking the difference in cash.
Refinancing with GMFS Mortgage
Revolving Debt: Open-ended accounts, usually with variable interest rates, pre-determined credit limits and payments that are calculated as a percentage of the unpaid balance. Examples of revolving debt include credit cards, personal lines of credit and home equity lines of credit (HELOC).
Rural Development loan (see USDA Loan)
Second Home: A one-unit property owned by an individual, occupied by the borrower for some portion of the year, and not subject to any timesharing ownership arrangement. GMFS Mortgage offers multiple loan options for second home and investment properties.
Settlement: (see Closing)
Settlement Costs: (see Closing Costs)
Term: The period of time between the beginning loan date on the legal documents and the date the entire balance of the loan is due. (e.g. 30 year fixed loan)
Title: A legal document that gives evidence of an individual’s ownership of a specific property, such as a home.
Title Insurance: a policy, usually issued by a Title Insurance company, which guarantees that an owner has title to a specific property and insures against errors in the title search.
USDA Loan (aka Rural Development loan): The USDA Rural Development Guaranteed Housing Loan Program is offered to qualified rural property owners by the United States Department of Agriculture.
VA Funding Fee: VA loans require no down payment from the borrower. To help offset the costs to the taxpayers, the borrower must pay a VA funding fee.
VA Loan– A VA loan is made by an approved lender and guaranteed by the U.S. Department of Veterans Affairs. The VA loan was designed to offer long-term financing to eligible American veterans or their surviving spouses. GMFS Mortage has reduced fees for VA loans.
Variable Rate Mortgage: (see ARM)