Financial Terms Glossary

adjustable-rate mortgage (ARM)A mortgage whose interest rate changes periodically based on the changes in a specified index.

adjustment date
The date on which the interest rate changes for an adjustable-rate mortgage (ARM).

adjustment period
The period that elapses between the adjustment dates for an adjustable-rate mortgage (ARM).

amortizationThe repayment of a mortgage loan by installments with regular payments to cover the principal and interest.

amortization termThe amount of time required to amortize the mortgage loan. The amortization term is expressed as a number of months. For example, for a 30-year fixed-rate mortgage, the amortization term is 360 months.

annual percentage rate (APR)The cost of a mortgage stated as a yearly rate; includes such items as interest, mortgage insurance, and loan origination fee (points).

appreciationAn increase in the value of a property due to changes in market conditions or other causes. The opposite of depreciation.

assetAnything of monetary value that is owned by a person. Assets include real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, and so on).

assignmentThe transfer of a mortgage from one person to another.

assumable mortgageA mortgage that can be taken over ("assumed") by the buyer when a home is sold.

assumption
The transfer of the seller's existing mortgage to the buyer.

assumption clause
A provision in an assumable mortgage that allows a buyer to assume responsibility for the mortgage from the seller. The loan does not need to be paid in full by the original borrower upon sale or transfer of the property.

assumption feeThe fee paid to a lender (usually by the purchaser of real property) resulting from the assumption of an existing mortgage.

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balance sheetA financial statement that shows assets, liabilities, and net worth as of a specific date.

balloon mortgageA mortgage that has level monthly payments that will amortize it over a stated term but that provides for a lump sum payment to be due at the end of an earlier specified term.

balloon paymentThe final lump sum payment that is made at the maturity date of a balloon mortgage.

basis pointA basis point is 1/100th of a percentage point. For example, a fee calculated as 50 basis points of a loan amount of $100,000 would be 0.50% or $500.

binderA preliminary agreement, secured by the payment of an earnest money deposit, under which a buyer offers to purchase real estate.

biweekly payment mortgageA mortgage that requires payments to reduce the debt every two weeks (instead of the standard monthly payment schedule). The 26 (or possibly 27) biweekly payments are each equal to one-half of the monthly payment that would be required if the loan were a standard 30-year fixed-rate mortgage, and they are usually drafted from the borrower's bank account. The result for the borrower is a substantial savings in interest.

blanket mortgageThe mortgage that is secured by a cooperative project, as opposed to the share loans on individual units within the project.

breachA violation of any legal obligation.

bridge loanA form of second trust that is collateralized by the borrower's present home (which is usually for sale) in a manner that allows the proceeds to be used for closing on a new house before the present home is sold. Also known as "swing loan."

brokerA person who, for a commission or a fee, brings parties together and assists in negotiating contracts between them.

buydown mortgageA temporary buydown is a mortgage on which an initial lump sum payment is made by any party to reduce a borrower's monthly payments during the first few years of a mortgage. A permanent buydown reduces the interest rate over the entire life of a mortgage.

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call optionA provision in the mortgage that gives the mortgagee the right to call the mortgage due and payable at the end of a specified period for whatever reason.

capA provision of an adjustable-rate mortgage (ARM) that limits how much the interest rate or mortgage payments may increase or decrease.

capital improvementAny structure or component erected as a permanent improvement to real property that adds to its value and useful life.

cash-out refinanceA refinance transaction in which the amount of money received from the new loan exceeds the total of the money needed to repay the existing first mortgage, closing costs, points, and the amount required to satisfy any outstanding subordinate mortgage liens. In other words, a refinance transaction in which the borrower receives additional cash that can be used for any purpose.

certificate of depositCommonly known as a "CD," certificates of deposit bear a maturity date and a specified rate of interest. Penalties may apply for early withdrawal.

certificate of eligibilityA document issued by the federal government certifying a veteran's eligibility for a Department of Veterans Affairs (VA) mortgage.

certificate of reasonable value (CRV)A document issued by the Department of Veterans Affairs (VA) that establishes the maximum value and loan amount for a VA mortgage.

certificate of titleA statement provided by an abstract company, title company, or attorney stating that the title to real estate is legally held by the current owner.

chain of titleThe history of all of the documents that transfer title to a parcel of real property, starting with the earliest existing document and ending with the most recent.

change frequencyThe frequency (in months) of payment and/or interest rate changes in an adjustable-rate mortgage (ARM).

clear titleA title that is free of liens or legal questions as to ownership of the property.

closingA meeting at which a sale of a property is finalized by the buyer signing the mortgage documents and paying closing costs. Also called "settlement."

closing cost itemA fee or amount that a home buyer must pay at closing for a single service, tax, or product. Closing costs are made up of individual closing cost items such as origination fees and attorney's fees. Many closing cost items are included as numbered items on the HUD-1 statement.  Expenses (over and above the price of the property) incurred by buyers and sellers in transferring ownership of a property. Closing costs normally include an origination fee, an attorney's fee, taxes, an amount placed in escrow, and charges for obtaining title insurance and a survey. Closing costs percentage will vary according to the area of the country.

closing statementAlso referred to as the HUD-1. The final statement of costs incurred to close on a loan or to purchase a home.

cloud on titleAny conditions revealed by a title search that adversely affect the title to real estate. Usually clouds on title cannot be removed except by a quitclaim deed, release, or court action.

collateralAn asset (such as a car or a home) that guarantees the repayment of a loan. The borrower risks losing the asset if the loan is not repaid according to the terms of the loan contract.

collectionThe efforts used to bring a delinquent mortgage current and to file the necessary notices to proceed with foreclosure when necessary.

combination loanWith this type of loan, you receive a first mortgage for 80 percent of the loan amount, and a second mortgage at the same time for the remainder of the balance. If avoiding PMI (mortgage insurance) is important to you, consider combination loans--known as 80/10/10 loans or 80/20's.

combined loan-to-value (CLTV)The unpaid principal balances of all the mortgages on a property (first and second usually) divided by the property's appraised value.

co-makerA person who signs a promissory note along with the borrower. A co-maker's signature guarantees that the loan will be repaid, because the borrower and the co-maker are equally responsible for the repayment. See endorser.

commissionThe fee charged by a broker or agent for negotiating a real estate or loan transaction. A commission is generally a percentage of the price of the property or loan.

commitment letterA formal offer by a lender stating the terms under which it agrees to lend money to a home buyer. Also known as a "loan commitment."

common areasThose portions of a building, land, and amenities owned (or managed) by a planned unit development (PUD) or condominium project's homeowners' association (or a cooperative project's cooperative corporation) that are used by all of the unit owners, who share in the common expenses of their operation and maintenance. Common areas include swimming pools, tennis courts, and other recreational facilities, as well as common corridors of buildings, parking areas, means of ingress and egress, etc.

Community Home Improvement Mortgage LoanAn alternative financing option that allows low- and moderate-income home buyers to obtain 95 percent financing for the purchase and improvement of a home in need of modest repairs. The repair work can account for as much as 30 percent of the appraised value.

community propertyIn some western and southwestern states, a form of ownership under which property acquired during a marriage is presumed to be owned jointly unless acquired as separate property of either spouse.

comparablesAn abbreviation for "comparable properties"; used for comparative purposes in the appraisal process. Comparables are properties like the property under consideration; they have reasonably the same size, location, and amenities and have recently been sold. Comparables help the appraiser determine the approximate fair market value of the subject property.

compound interestE-LOAN CDs and Savings accounts compound interest daily. This refers to any interest earned on an account holder's principal balance, as well as any prior interest.

condominium conversionChanging the ownership of an existing building (usually a rental project) to the condominium form of ownership.

conforming loanThe current conforming loan limit is $417,000 and below. Conforming loan limits change annually.

construction loanA short-term, interim loan for financing the cost of construction. The lender makes payments to the builder at periodic intervals as the work progresses.

consumer reporting agency (or bureau)An organization that prepares reports that are used by lenders to determine a potential borrower's credit history. The agency obtains data for these reports from a credit repository as well as from other sources.

contingencyA condition that must be met before a contract is legally binding. For example, home purchasers often include a contingency that specifies that the contract is not binding until the purchaser obtains a satisfactory home inspection report from a qualified home inspector.

conventional mortgageA mortgage that is not insured or guaranteed by the federal government.

convertibility clauseA provision in some adjustable-rate mortgages (ARMs) that allows the borrower to change the ARM to a fixed-rate mortgage at specified timeframes after loan origination.

convertible ARMAn adjustable-rate mortgage (ARM) that can be converted to a fixed-rate mortgage under specified conditions.

cooperative (co-op)A type of multiple ownership in which the residents of a multiunit housing complex own shares in the cooperative corporation that owns the property, giving each resident the right to occupy a specific apartment or unit.

corporate relocationArrangements under which an employer moves an employee to another area as part of the employer's normal course of business or under which it transfers a substantial part or all of its operations and employees to another area because it is relocating its headquarters or expanding its office capacity.

cost of funds index (COFI)An index that is used to determine interest rate changes for certain adjustable-rate mortgage (ARM) plans. It represents the weighted-average cost of savings, borrowings, and advances of the 11th District members of the Federal Home Loan Bank of San Francisco.

covenantA clause in a mortgage that obligates or restricts the borrower and that, if violated, can result in foreclosure.

credit repositoryAn organization that gathers, records, updates, and stores financial and public records information about the payment records of individuals who are being considered for credit.

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deedThe legal document conveying title to a property.

deed in lieuA deed given by a mortgagor to the mortgagee to satisfy a debt and avoid foreclosure.

deed of trustThe document used in some states instead of a mortgage; title is conveyed to a trustee.

defaultFailure to make mortgage payments on a timely basis or to comply with other requirements of a mortgage.

delinquencyFailure to make mortgage payments when mortgage payments are due.

depreciationA decline in the value of property; the opposite of appreciation.

due-on-sale provisionA provision in a mortgage that allows the lender to demand repayment in full if the borrower sells the property that serves as security for the mortgage.

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earnest money depositA deposit made by the potential home buyer to show that he or she is serious about buying the house.

easementA right of way giving persons other than the owner access to or over a property.

effective ageAn appraiser's estimate of the physical condition of a building. The actual age of a building may be shorter or longer than its effective age.

effective gross incomeNormal annual income including overtime that is regular or guaranteed. The income may be from more than one source. Salary is generally the principal source, but other income may qualify if it is significant and stable.

electronic funds transfer (EFT)EFT allows account holders to transfer funds from an account electronically. This method of transfer is not only highly secure, but also extremely efficient and easy to transact.

encumbranceAnything that affects or limits the fee simple title to a property, such as mortgages, leases, easements, or restrictions.

endorserA person who signs ownership interest over to another party. Contrast with co-maker.

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

equityA homeowner's financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on its mortgage.

escrowAn item of value, money, or documents deposited with a third party to be delivered upon the fulfillment of a condition. For example, the deposit by a borrower with the lender of funds to pay taxes and insurance premiums when they become due, or the deposit of funds or documents with an attorney or escrow agent to be disbursed upon the closing of a sale of real estate.

escrow accountThe account in which a mortgage servicer holds the borrower's escrow payments prior to paying property expenses.

escrow analysisThe periodic examination of escrow accounts to determine if current monthly deposits will provide sufficient funds to pay taxes, insurance, and other bills when due.

escrow collectionsFunds collected by the servicer and set aside in an escrow account to pay the borrower's property taxes, mortgage insurance, and hazard insurance.

escrow disbursementsThe use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, and other property expenses as they become due.

escrow paymentThe portion of a mortgagor's monthly payment that is held by the servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Known as "impounds" or "reserves" in some states.

estateThe ownership interest of an individual in real property. The sum total of all the real property and personal property owned by an individual at time of death.

evictionThe lawful expulsion of an occupant from real property.

examination of titleThe report on the title of a property from the public records or an abstract of the title.

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Fair Credit Reporting ActA consumer protection law that regulates the disclosure of consumer credit reports by consumer/credit reporting agencies and establishes procedures for correcting mistakes on one's credit record.

fair market valueThe highest price that a buyer, willing but not compelled to buy, would pay, and the lowest a seller, willing but not compelled to sell, would accept.

Fannie MaeA congressionally chartered, shareholder-owned company that is the nation's largest supplier of home mortgage funds.

Fannie Mae's Community Home Buyer's ProgramAn income-based community lending model, under which mortgage insurers and Fannie Mae offer flexible underwriting guidelines to increase a low- or moderate-income family's buying power and to decrease the total amount of cash needed to purchase a home. Borrowers who participate in this model are required to attend pre-purchase home-buyer education sessions.

fee simpleThe greatest possible interest a person can have in real estate.

Federal Housing Administration (FHA)An agency of the U.S. Department of Housing and Urban Development (HUD). Its main activity is the insuring of residential mortgage loans made by private lenders. The FHA sets standards for construction and underwriting but does not lend money or plan or construct housing.

FHA mortgageA mortgage that is insured by the Federal Housing Administration (FHA). Also known as a government mortgage.

finder's feeA fee or commission paid to a mortgage broker for finding a mortgage loan for a prospective borrower.

first adjustmentWhen you can expect the first rate adjustment in your ARM loan.

first mortgageA mortgage that is the primary lien against a property.

float down optionAn option to choose a lower rate within 30 days before the closing of your loan and "float down" to a lower rate than the previously locked-in rate. This allows you to pick the best rate within that time period.

fixed-rate mortgage (FRM)A mortgage in which the interest rate does not change during the entire term of the loan.

fixed second mortgage See home equity loan.

flood insuranceInsurance that compensates for physical property damage resulting from flooding. It is required for properties located in federally designated flood areas.

foreclosureThe legal process by which a borrower in default under a mortgage is deprived of his or her interest in the mortgaged property. This usually involves a forced sale of the property at public auction with the proceeds of the sale being applied to the mortgage debt.

fully amortized ARMAn adjustable-rate mortgage (ARM) with a monthly payment that is sufficient to amortize the remaining balance, at the interest accrual rate, over the amortization term.

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good faith estimateAn estimate of charges which a borrower is likely to incur in connection with a settlement.

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hazard insuranceInsurance protecting against loss to real estate caused by fire, some natural causes, vandalism, etc., depending upon the terms of the policy.

home equity line of credita credit line that is secured by a second deed of trust on a house. Equity lines of credit are revolving accounts that work like a credit card, which can be paid down or charged up for the term of the loan. The minimum payment due each month is interest only.

home equity loana loan secured by a second deed of trust on a house, typically used as a home improvement loan.

housing ratioThe ratio of the monthly housing payment in total (PITI - Principal, Interest, Taxes, and Insurance) divided by the gross monthly income. This ratio is sometimes referred to as the top ratio or front end ratio.

HUD
The U.S. Department of Housing and Urban Development.

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indexA published interest rate to which the interest rate on an Adjustable Rate Mortgage (ARM) is tied. Some commonly used indices include the 1 Year Treasury Bill, 6 Month LIBOR, and the 11th District Cost of Funds (COFI).

impound accountAn impound account is an account established by the lender to pay a borrower's tax and insurance costs. The borrower's monthly mortgage payment is then increased to cover these costs, with the additional amount being held in the impound account and disbursed by the lender when the payments are due. Lenders typically prefer this arrangement because it reduces the possibility of a lapse in tax or insurance payments that could diminish the value of the lender's investment (your house). Therefore, while it is often possible to opt out of an impound account it will result in additional charges.

interest-only loan optionLoan payments have two components, principal and interest. An interest-only loan has no principal component for a specified period of time. These special loans minimize your monthly payments by eliminating the need to pay down your balance during the interest-only period, giving you greater cash flow control and/or increased purchasing power.

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jumbo mortgageThe current loan limit for a conforming loan is $417,000. Loan amounts of $359,651 and above are considered non-conforming or jumbo mortgages and are usually subject to higher pricing.

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lienAn encumbrance against property for money due, either voluntary or involuntary.

lenderThe bank, mortgage company, or mortgage broker offering the loan.

LIBORLIBOR stands for London Inter-Bank Offered Rate. This is a favorable interest rate offered for U.S. dollar deposits between a group of London banks. There are several different LIBOR rates, defined by the maturity of their deposit. The LIBOR is an international index that follows world economic conditions. LIBOR-indexed ARMs offer borrowers aggressive initial rates and have proven to be competitive with popular ARM indexes like the Treasury bill.

lifetime capA provision of an ARM that limits the highest rate that can occur over the life of the loan.

loan to value ratio (LTV)The unpaid principal balance of the mortgage on a property divided by the property's appraised value. The LTV will affect programs available to the borrower and generally, the lower the LTV the more favorable the terms of the programs offered by lenders.

lock periodThe amount of time that a lender will guarantee a loan's interest rate. Once you've locked in the interest rate on a loan, the lender will guarantee that rate for a certain period of time, usually for 30, 45 or 60 days.

lock-inA 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 of points to be paid at closing.

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marginThe number of percentage points a lender adds to the index value to calculate the ARM interest rate at each adjustment period.

maturity dateA pre-set date informing account owners when they can withdraw principal funds without incurring a penalty. (Please note that you may withdraw any generated interest before reaching an account's maturity date at E-LOAN.)

mortgageA legal document that pledges a property to the lender as security for payment of a debt

mortgage disability insuranceA disability insurance policy which will pay the monthly mortgage payment in the event of a covered disability of an insured borrower for a specified period of time.

mortgage insurance (MI)Insurance written by an independent mortgage insurance company protecting the mortgage lender against loss incurred by a mortgage default. Usually required for loans with an LTV of 80.01% or higher.

mortgageeThe person or company who receives the mortgage as a pledge for repayment of the loan. The mortgage lender.

mortgagorThe mortgage borrower who gives the mortgage as a pledge to repay.

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negative amortizationNegative Amortization, or "deferred interest," occurs when the mortgage payment is less than a loan's accruing interest. This causes a loan's balance to grow instead of reduce or "amortize."

non-conforming loanAlso called a jumbo loan. Conventional home mortgages not eligible for sale and delivery to either Fannie Mae (FNMA) or Freddie Mac (FHLMC) because of various reasons, including loan amount, loan characteristics or underwriting guidelines. Non-conforming loans usually incur a rate and origination fee premium. The current non-conforming loan limit is $333,701 and above.

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origination feeA fee imposed by a lender to cover certain processing expenses in connection with making a real estate loan. Usually a percentage of the amount loaned, such as one percent.

owner financingA property purchase transaction in which the property seller provides all or part of the financing.

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periodic capThe maximum rate increase for a specific period for a specific loan (ARM) only.

PITIPrincipal, interest, taxes and insurance--the components of a monthly mortgage payment.

planned unit developments (PUD)A subdivision of five or more individually owned lots with one or more other parcels owned in common or with reciprocal rights in one or more other parcels.

pointsCharges levied by the mortgage lender and usually payable at closing. One point represents 1% of the face value of the mortgage loan.

prepaidsThose expenses of property which are paid in advance of their due date and will usually be prorated upon sale, such as taxes, insurance, rent, etc.

prepayment penaltyA charge imposed by a mortgage lender on a borrower who wants to pay off part or all of a mortgage loan in advance of schedule.

principalThis term refers to the total amount of money originally deposited into a Savings or CD account. When taking out a loan however, it refers to the amount of debt, not including interest.

private mortgage insurance (PMI)Insurance provided by nongovernment insurers that protects lenders against loss if a borrower defaults. Fannie Mae generally requires private mortgage insurance for loans with loan-to-value (LTV) percentages greater than 80%.

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qualifying ratiosThe ratio of your fixed monthly expenses to your gross monthly income, used to determine how much you can afford to borrow. The fixed monthly expenses would include PITI along with other obligations such as student loans, car loans, or credit card payments.

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rateThe annual rate of interest on a loan, expressed as a percentage of 100.

rate capA limit on how much the interest rate can change, either at each adjustment period or over the life of the loan.

rate lock-inA written agreement in which the lender guarantees the borrower a specified interest rate, provided the loan closes within a set period of time.

rebateCompensation received from a wholesale lender which can be used to cover closing costs or as a refund to the borrower. Loans with rebates often carry higher interest rates than loans with "points" (see above).

refinancingThe process of paying off one loan with the proceeds from a new loan using the same property as security.

residential mortgage credit report (RMCR)A report requested by your lender that utilizes information from at least two of the three national credit bureaus and information provided on your loan application.

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seller carry backAn agreement in which the owner of a property provides financing, often in combination with an assumed mortgage.

simple interestAn amount earned on an account holder's principal, according to a specified rate. This does not include any compounding interest.

stated/documented incomeSome loan products require only that applicants "state" the source of their income without providing supporting documentation such as tax returns.

subordinationIf you are refinancing your first mortgage and have an existing second or home equity line, one option is to "subordinate" the second mortgage: request that your second mortgage holder go back into the second lien position when you replace your existing first mortgage with the new refinance loan.

surveyA print showing the measurements of the boundaries of a parcel of land, together with the location of all improvements on the land and sometimes its area and topography.

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tenants in commonAn undivided interest in property taken by two or more persons. The interest need not be equal. Upon death of one or more persons, there is no right of survivorship.

title insuranceInsurance against loss resulting from defects of title to a specifically described parcel of real property.

title searchAn investigation into the history of ownership of a property to check for liens, unpaid claims, restrictions or problems, to prove that the seller can transfer free and clear ownership.

total debt ratioMonthly debt and housing payments divided by gross monthly income. Also known as Obligations-to-Income Ratio or Back-End Ratio.

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variable rateAn interest rate that may change once an account opens.

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