Glossary of Mortgage Terms

Abstract of Title --   A summary of public records relating to the title for a particular piece of land. If there are any title defects, they must be cleared before a buyer can purchase clear, marketable, and insurable title.

Amount Financed -- Represents the dollar amount of the borrower's loan less points and certain closing fees as specified by Regulation Z. This figure is not the loan amount. Again, a wide spread between the actual loan amount and the amount financed could indicate higher points and closing fees.

Annual Percentage Rate (APR) -- Represents the actual note rate of the      borrower's loan at the time of the application plus points and certain closing fees added and re-calculated as if they were interest, and were computed on an annual basis. The APR is intended to give consumers a standardized basis to compare the costs of borrowing from different lenders. It is not the actual note rate that will be used to determine the borrower's monthly principal and interest payment.

APR for comparison -- Is there a wide spread between the APR and the actual note rate? Has a lender has quoted an unusually low note rate, but the APR on the truth in lending statement is equal or higher than the APR stated by competing lenders? Either of these scenarios indicate that a lender might be charging higher points and closing fees to offset a lower note rate.

Balloon -- Loan in 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 -- Mortgage in which the rate is offset by paying more points up front.

Caps -- The maximum amount the mortgage rate can change annually or over the life of the loan on a one-year adjustable. For example, if the caps are 2% annual and 6% life of loan, a mortgage whose first-year rate is 10% could rise to no more than 12% the second year and 16% over the entire loan term.

COFI -- Adjustable-rate mortgage with rate that adjusts based on a cost-of- funds index, often the 11th District Cost of Funds.

Conventional Loans -- Mortgage loans other than those insured or guaranteed by a government agency such as the FHA (Federal Housing Administration), the VA (Veteran's Administration), or the Rural Development Services (formerly known as Farmers Home Administration) or FmHA).

Escrow -- Escrow is the holding of money or documents by a neutral third party prior to closing. It can also be an account held by the lender (or servicer) into which a homeowner pays money for taxes and insurance.

Finance Charge -- Represents the total interest that would be paid if the loan were repaid over the full contact term (usually 30 years)

Good Faith Estimate -- Lists fees that are charged to process, approves, and makes the mortgage loan. It is a federal requirement that every lending institution send out a good faith estimate (Regulation Z) within three days of the loan application.

Index -- A floating index lenders use to calculate the rate on a one-year    adjustable-rate mortgage. The most common indexes are the one-year Treasury Constant Maturity Yield and the FHLB 11th District Cost of Funds.

Indexed Rate -- The sum of the published index plus the margin. For example if the index were 9% and the margin 2.75%, the indexed rate would be 11.75%. Often, lenders charge less than the indexed rate the first year of an adjustable-rate mortgage.

Jumbo Mortgages -- Mortgages that go over the $417,000 Fannie Mae and Freddie Mac limit.

Loan-to-Value -- Ratio portion of a home's value upon which an institution will issue a loan.

Lock-in -- Refers to a written agreement guaranteeing a home buyer a specific interest rate on a home loan provided that the loan is closed within a certain period of time, such as 60 or 90 days. Often the agreement also specifies the number of points to be paid at closing. 

Margin -- The number of percentage points added to the index on a one-year adjustable. For example, if the index rate is 9% and the margin is 3%, then the fully-indexed rate is 12%.

Mortgages -7/23 and 5/25 -- Mortgages with a onetime rate adjustment after seven years and five years respectively. 3/1, 5/1, 7/1 and 10/1 ARMs- Adjustable-rate  mortgages in which rate is fixed for three-year, five-year, seven-year and 10-year periods, respectively, but may adjust annually after that.

Negative Amortization -- When interest rates increase faster than monthly       payments, on an adjustable-rate mortgage, your balance may grow despite efforts to pay it down.

One-year Adjustable -- Mortgage whose annual rate changes yearly. The rate is usually based on movements of a published index plus a specified margin, chosen by the lender.

PMI -- "private mortgage insurance", also called "mutual mortgage insurance", is an insurance policy that insures the lender for loss that might occur due to foreclosure on a loan that exceeds 80% of a property's value. PMI does not insure the borrower from loss. A premium is paid as part of the buyer's closing costs equaling one year of coverage, and a three month impound of monthly premium is usually also charged. PMI may require that borrowers maintain a minimum of two months cash reserves in their bank account, and additional sums may be impounded through escrow pursuant to the requirements of the lending institution or the PMI company

Points -- Points are a one-time, up-front fee charged by the lender to originate the loan. One point equals 1 percent of the loan amount.

Total of Payments -- Shows total dollar amount that would be paid if the borrower makes all the payments required for the full contract term (usually 30 years). 

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