Adjustable-Rate Mortgage (ARM)
A mortgage in which your rate can be adjusted at specified intervals by a given formula, using an index and a margin.
The method by which your loan is fully paid off by the end of your loan life. (30 years is most common.) You will pay mostly interest at first, and as the principal balance of your mortgage goes down, more and more of your payment will go to principal until it is paid off.
Annual Percentage Rate(APR)
The actual interest rate you would have paid on your mortgage, including all up-front costs such as points, title insurance, appraisal, etc., if you kept your loan for the full term (say 30 years). This is only accurate on fixed-rate loans, and only truly reflects your costs if you keep the loan 30 years.
An estimate of the value of your property done by a licensed appraiser to a strictly defined set of guidelines and definitions.
As opposed to appraisal, the value placed on your property by the county Assessor's office. In California, due to Prop 13, this value is set by formula, and may have little bearing on the actual value of your property.
A fixed-rate mortgage where you may "buy down" (by paying a greater up-front cost) the rate for one or two years in order to lower your initial payments, qualify for a larger loan, and know exactly what your payments will be when the loan adjusts.
A ceiling that limits how much your loan may be adjusted. There are periodic caps, which limit how much your loan may be adjusted in one adjustment period, and a lifetime cap, which limits how much your loan may be adjusted in the life of the loan.
The amount of liquid money you will have left after the purchase or refinance transaction is completed. This is your safety net, and most lenders like to see at least three month's earnings in the bank. (This can be in the form of salable securities such as stocks and bonds.)
Costs charged in escrow against the proceeds of your loan or on top of your loan amount. These charges may be recurring or non-recurring.
The computation of costs payable at closing and the net proceeds to all parties involved in the transaction. Also known as a Settlement Sheet.
Combined Loan-to-Value Ratio (CLTV)
The ratio, expressed as a percentage, of your total loan amounts to the value of your property.
Cost-of-Funds Index (COFI)
An index made of several sub-components, which reflects the average cost of funds of member banks in a certain region, or district. This is considered the most stable of the commonly used indexes. This index is published daily in financial journals, such as the Wall Street Journal.
The document used to convey title to a property. Usually a grant deed, granting title to the buyer.
Deed of Trust
In California and many other states, a deed which transfers title and the right to sell your property to a disinterested third party, subject to your default on the loan. This is a substitute for judicial foreclosure, and should not be mistaken for it.
The difference between the value of your home and what you owe on all your loans.
The process by which a neutral third party (the title company) holds documents and funds, and carries out instructions agreed to by all parties.
A mortgage in which your interest rate is fixed for the life of the loan; it never adjusts or changes.
The person, employed by the mortgage banker, that reviews the file after all conditions have been satisfied and all final papers signed to ensure proper compliance with loan-program guidelines.
The account set up by the lender into which the monthly impound amounts you may pay toward taxes and insurance are placed.
A reference point to use to adjust your mortgage to go up or down as general market rates move. It is a published rate against which your adjustable rate mortgage is adjusted. Common indexes are 1-Year T-Bills, Cost-of-Funds Index (COFI, or coffee), and London Interbank Offered Rate, or LIBOR.
Ultimately your loan may be sold to an investor; a company that invests in mortgages that other companies have written. They buy your mortgage for a set amount and then collect your payments.
Loan-to-Value Ratio (LTV)
The relationship, expressed as a percentage, between your loan amount and the value of your property. See Combined Loan-to-Value Ratio
Lock, or Locking In
Rates and costs change daily (sometimes more often). You may select a rate at a given cost at any time during the loan process, from before your application to when your transaction is submitted to the title company for sign-off. This is called locking your rate. Once locked, the lender cannot change the rate, and neither can you.
London Interbank Offered Rate (LIBOR)
This index reflects European financial markets, obviously, and is generally considered the most volatile of the commonly used indexes. It is published daily in financial journals, such as the Wall Street Journal.
The number added to your index to find your new interest rate on an adjustable rate mortgage. A margin of 2.75 and a COFI index, for instance, means your new rate will be 2.75% over the current yield of the Cost-of-Funds Index.
A mortgage company with their own money, which funds under their own name with their own funds. Most often after escrow, your loan will be sold to an investor by the mortgage banker.
A mortgage company that does not fund with their own money, but rather shops your loan and finds a mortgage banker that will fund the loan.
Non-Recurring Closing Costs
Those closing costs associated with acquiring the loan. They include loan fees (points), appraisal and credit reports, title insurance, underwriting, processing fees, and miscellaneous smaller fees for various services. In the case of a purchase, you may also pay transfer taxes, fees for various other reports, and for some repairs through escrow. There will also be recurring closing costs.
An index reflective of the average yield on the sale of U.S. Treasury Securities due 12 months from the date of issuance. As the market for these securities changes constantly, so does the yield and thus the index. This index is published in daily financial journals, such as the Wall Street Journal.
The fee charged by the mortgage broker or mortgage banker to originate your loan. This may also be called the loan fee or points, and is considered a prepaid finance charge.
Principal, Interest, Taxes and Insurance. Your total monthly housing expense under a conventional mortgage.
Private Mortgage Insurance. If your loan exceeds 80% of the value or purchase price of your property, the lender may elect to insure the loan against default. They do this with Private Mortgage Insurance, which you pay as part of your monthly housing expense. The insurance comes out of your pocket and is not tax-deductible, but it allows the lender to make more aggressive loans than it otherwise could.
The prepaid finance charge. This is considered prepaid interest, and is the money paid as compensation to the agents and companies responsible for putting together your loan.
The process by which a broker submits your package to a lender prior to your finding a home to purchase, and gets an approval to make the loan subject to finding an appropriate property. This is much more convincing to a seller than a prequalification.
A fee levied by a lender if you pay your loan off early, generally to make up for interest the lender anticipated earning but will not as a result of the payoff. Not all loans have a prepayment penalty. Ask your loan officer about your loan.
The process whereby a broker looks at the information you have presented and renders an opinion as to whether or not he can successfully broker your loan. Contrast with Preapproval.
The letter you present with your offer, which confirms that you are qualified to purchase the property in question. You are taken more seriously with this letter in hand.
The person, employed by the broker, who, after your loan application is taken, gathers all the documentation to meet the guidelines of the specific loan program you have selected.
Ratios, or Qualifying Ratios
The ratio of your total gross income to your total housing expense, including principal, interest, taxes and insurance, and also the ratio of your total gross income to your total housing expense plus all other debt.
When an old loan is paid off, or any other lien satisfied, the lien then must be reconveyed, or taken off title. It is no longer considered a lien against your property.
Recurring Closing Costs
Those costs associated with having the loan, rather than getting the loan. For instance, pre-paid interest, property taxes, insurance, and any impounds. In the case of a refinance, you would pay these charges whether you refinance or not, but you may be required to pay them earlier than you otherwise would. These costs are distinguished from non-recurring closing costs.
Money you will have left over after the deal (purchase or refinance) is consummated. Lenders are not keen on lending to someone with absolutely no cash in the event of an emergency.
Self-employed people are those who report their main source of income on Schedule C in their tax returns, or in some cases those who own more than 25% of the equity interest in the company they work for.
The computation of costs payable at closing, and the net proceeds to all parties involved in the transaction. Also known as a Closing Statement.
Your loan is neither approved, nor denied, but the lender has asked for additional documentation or information. If we are able to provide it, you are approved.
Three-Day Right of Recission
If this is a refinance transaction on a residential property that you occupy, you have three days after signing loan papers in escrow to change your mind and legally cancel the transaction.
The document that establishes your rights of ownership in the property.
The company that insures that title to property is held without defect, and which in many locations handles the escrow.
Insurance that protects the buyer from loss that might result from disputes over legal ownership of a property (owner's policy), and that protects the lender from loss that might result from disputes over liens and encumbrances against a property.
The person, employed by the lender, who reviews your file to determine if you qualify for the loan you have requested. The underwriter's job is essentially twofold: (1) to ensure you fit within the guidelines as determined by the lender or, if not, whether the exception is important; and (2) to assess whether or not you are a good credit risk.