This glossary will help you understand some of the more common terms used during the structuring, application, processing, and closing of your mortgage loan.

Adjustable Rate Mortgages

An adjustable rate mortgage (ARM) usually has a lower initial interest rate than a fixed-rate mortgage, then changes during the life of the loan according to movements in an index rate.

The rate for your ARM is based on the index rate (see Index Rate;) and can go up or down, depending on what the index rate is doing. Simply put, you obtain a lower rate with an ARM in exchange for assuming the risk that your payments may increase. The terms that follow will help you understand some of the important ARM concepts.

Adjustment Periods

There are several types of ARMs available. The most common are one-year, three-year, five-year, seven-year or ten-year ARMs. The rate remains constant until the initial adjustment date and then can change once every year thereafter. For example, a five-year ARM has a fixed monthly principal and interest payment for the first five years and then adjusts annually based on the index rate.

Index Rate

The index is the measure of interest rate changes a lender uses to decide the amount an interest rate on an ARM will change over time. The index is generally a published number or percentage such as the average interest rate or yield on Treasury bills. Some index rates tend to be higher than others and some more volatile.

Margin

To determine your ARM rate, lenders usually charge a few percentage points over the Index Rate. Margin is the difference between the Index Rate and your ARM rate. Margins can differ from one loan type to another, but are usually constant over the life of the loan. Be sure to discuss the margin with your lender.

Interest Rate Caps

This is a limit on the amount your interest rate can increase. There are two different types of Interest Rate Caps:

Periodic caps limit the amount that an interest rate can increase or decrease from one adjustment period to the next.

Lifetime caps limit the amount that an interest-rate increase or decrease over the life of the loan.

Amortization

The repayment of a mortgage loan, both principal and interest, by installments.

Appraisal

An appraisal is a written analysis prepared by a qualified appraiser estimating the value of a property.

Appraised Value

The appraised value is an opinion of a propertys fair market value, based on an appraisers knowledge, experience and analysis of the property. In some cases you may pay more or less than the appraised value of the home.

Annual Percentage Rate (APR)

The cost of credit, expressed as a yearly rate including interest, mortgage insurance and loan origination fees. This allows a buyer to compare loans. The APR should not be confused with the actual Note rate.

Certificate of Eligibility

A document issued by the federal government certifying a veterans 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.

Closing Costs

These are expenses, over and above the price of the property, that are incurred by buyers and sellers when transferring ownership of a property. Closing costs normally include an origination fee, property taxes, charges for title insurance and escrow costs, appraisal fees, etc. Closing costs will vary according to the region and loan type.

Consumer Reporting Agency (or Bureau)

An organization that handles the preparation of reports used by lenders to determine a potential borrower’s credit history. The agency gets data for these reports from a credit repository and from other sources.

Credit Report

A report detailing an individual’s credit history that is prepared by a credit bureau and used by a lender to determine a loan applicant’s creditworthiness.

Credit Risk Score

A credit score measures a consumer’s credit risk relative to the rest of the U.S. population, based on the individual’s credit usage history. The credit score most widely used by lenders is the FICO score, developed by Fair, Issac and Company. This 3-digit number, ranging from 300 to 850, is calculated by a mathematical equation that evaluates many types of information that are on your credit report. Higher FICO scores represents lower credit risks, which typically equate to better loan terms. In general, credit scores are critical in the mortgage loan underwriting process.

Deed of Trust

The document used in some states instead of a mortgage. Title is conveyed to a trustee.

Default

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

Deposit

This is a sum of money given to bind the sale of real estate, or a sum of money given to ensure payment or an advance of funds in the processing of a loan.

Down Payment

Part of the purchase price of a property that is paid in cash and not financed with a mortgage.

Equity

This is the difference between what you owe on your mortgage loan and the appraised value of the home. Your equity increases if your home goes up in value.

Fannie Mae

A congressionally chartered, shareholder-owned company that is the nation’s largest supplier of home mortgage funds.

FHA Mortgage

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

FICO Score

FICO scores are the most widely used credit score in U.S. mortgage loan underwriting. This 3-digit number, ranging from 300 to 850, is calculated by a mathematical equation that evaluates many types of information that are on your credit report. Higher FICO scores represent lower credit risks, which typically equate to better loan terms.

Homeowner’s Insurance

To obtain a mortgage, homeowners insurance is required based on the value and contents of your home. Your lender or real estate agent may be able to help you estimate typical payments in your area.

Housing Expense Ratio

The percentage of gross monthly income budgeted to pay housing expenses.

HUD-1 statement

A document that provides an itemized listing of the funds that are payable at closing. Items that appear on the statement include real estate commissions, loan fees, points, and initial escrow amounts. Each item on the statement is represented by a separate number within a standardized numbering system. The totals at the bottom of the HUD-1 statement define the seller’s net proceeds and the buyer’s net payment at closing.

Tax and Insurance Impounds

The part of your monthly payment that is held by your mortgage servicer to pay for real estate taxes. homeowner’s insurance and mortgage insurance.

Late Charge

The penalty a borrower must pay when a payment is made a stated number of days (usually 15) after the due date.

Liabilities

A person’s financial obligations. Liabilities include long-term and short-term debt.

Loan To Value (LTV)

The relationship between the principal balance of the mortgage and the appraised value (or purchase price if it is lower) of the property. For example, a $100,000 home with an $80,000 mortgage has an LTV of 80.