3/1, 5/1, 7/1 and 10/1 ARMS: Adjustable rate mortgages in which the rate is fixed for three-year, five-year, seven-year and ten-year periods, respectively. They may adjust annually after that or sometimes for another three, five, seven or ten year period.
7/23 and 5/25: Balloon mortgages - mortgages that may require a balloon payment after five and seven years respectively. Good for clients who know how long they will be in a home, because of the lower interest rate. Usually contains a conversion option of some kind included for a small fee.
Adjustable Rate Mortgages (ARM): A mortgage for which the interest rate and payment changes during the term of the loan. More popular when fixed rates are high.
Annual Percentage Rate (APR): Interest rate reflecting the first year rate including points and certain other fees. Used to determine the true cost of borrowing and compare lenders.
Balloon: Loan which little, if any, of your monthly payments go toward paying off the outstanding balance. Rather, one large, lump-sum payment is due at maturity,
Buydowns: Mortgages in which the rate is lowered by paying more points up front.
Caps: Limits on how high rates are or payments may go on an ARM loan at time of adjustment.
Closing Costs: Costs the buyer of a home has to pay at the time of the loan closing. Includes appraisal fees, recording fees, title charges, governmental fees and miscellaneous other fees.
Closing Statement: See HUD 1
Conventional Loan: A loan not guaranteed by the VA or insured by the FHA. See FNMA or Freddie Mac.
Debt-to-income-ratio: A percentage arrived at by dividing the borrower's fixed monthly obligations, including mortgage payments, by the borrower's monthly income.
Earnest Money: Advance payment of part of the purchase price to bind a contract for property.
Fannie Mae: Federal National Mortgage Association (also FNMA) is a private corporation, federally chartered to provide financial products and services that increase the availability and affordability of housing by purchasing conventional mortgage loans.
Federal Housing Administration (FHA): Guarantee - An insurance contract in which HUD through FHA insures that the named lender will recover a specific percentage if the loan goes bad.
Freddie Mac: Federal Home Loan Mortgage Corporation (also FHLMC) is a stockholder owned corporation chartered by Congress that purchases conventional mortgage loans.
Hazard or Homeowner Insurance: Lenders require home buyers to purchase homeowners insurance. This protects you against fire, windstorms and other common hazards.
HUD 1: The form settlement (closing) statement required by the U.S. Department of Housing and Urban Development (HUD) where federally related mortgages are being made on residential properties. It is a balance sheet showing the source of funds and the distribution of funds in connection with the purchase and/or mortgage of residential property.
Index: A reference used to measure fluctuations, in particular, factors of economic activity. For an ARM loan, an index of interest rates is used to calculate periodic adjustment in the rate and payment on the loan.
Jumbo Mortgages: Mortgages that go over the maximum Fannie Mae or Freddie Mac limit.
Life-of-loan cap: A consumer protection on some ARM loans. It limits the total upward adjustment that may occur during the life of the loan in reference to payment or interest rate. Also known as an overall cap.
Lock-in-rate: A rate commitment made by lenders when making a mortgage loan to commit to or "lock in" that rate pending loan approval. Lock-in commitment periods vary; loans will specify 30 -45, 60 or 90 days, for example. Minnesota law requires a loan lock-in to be in writing.
Margin: The difference between the index a lender uses to adjust ARM rates and the interest rate the lender actually charges the borrower.
Mortgage Broker: An individual or company that obtains mortgages for others by finding lending institutions, insurance companies, or private lenders to lend money.
Payment Cap: Limits the amount that monthly payments on an ARM loan can increase at the time of adjustment.
P.I.T.I.: Principal, interest, taxes and insurance.
Points: Sometimes called "discount points." A point is one percent of the loan amount. Used to permanently buy the interest rate down lower than the market rate. See buydowns.
Prepaid Expenses: Funds used to set up escrow accounts for taxes, homeowners insurance and private mortgage insurance. Also includes one year of hazard insurance premiums paid in advance and mortgage interest from closing to the end of the month.
Prepayment Penalty: Penalty for the payment of a mortgage note or deed of trust before it actually becomes due. Usually just applied to B/C loans and not "A" paper loans.
Private Mortgage Insurance (PMI): The insurance coverage offered by a private company that protects a lender against loss on a defaulted mortgage loan. Its use is usually limited to conventional loans with loan-to-value ratios above 80%. The borrower pays the premiums.
Prorate: To allocate between seller and buyer their proportionate share of an obligation paid or due. For example, real estate property taxes.
Rate Cap: Interest-rate cap on an ARM loan; it restricts the upward movement of a loan's interest rate at time of adjustment.
Veterans Administration (VA): A government agency that helps veterans of the armed forces obtain housing. It guarantees a portion of loans made by private lenders to veterans.
