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Ask Our Expert

1. How do I know how much house I can afford? Answer
2. How much cash will I need to purchase a home? Answer
3. What does my mortgage payment include? Answer
4. What is the difference between a fixed-rate loan and an adjustable-rate loan? Answer
5. How is an index and margin used in an ARM? Answer
6. Common Mortgage Loan Programs Answer
7. How do I know which type of mortgage is best for me? Answer
8. MORTGAGE Glossary Answer


Q: How do I know how much house I can afford?
A: Generally speaking, you can purchase a home with a value of two or three times your annual household income. However, the amount that you can borrow will also depend upon your employment history, credit history, current savings and debts, and the amount of down payment you are willing to make. You may also be able to take advantage of special loan programs for first time buyers to purchase a home with a higher value. Give us a call, and we can help you determine exactly how much you can afford.
Q: How much cash will I need to purchase a home?
A: The amount of cash that is necessary depends on a number of items. Generally speaking, though, you will need to supply:

  • Earnest Money: The deposit that is supplied when you make an offer on the house
  • Down Payment: A percentage of the cost of the home that is due at settlement
  • Closing Costs: Costs associated with processing paperwork to purchase or refinance a house
Q: What does my mortgage payment include?
A: For most homeowners, the monthly mortgage payments include three separate parts:

  • Principal: Repayment on the amount borrowed
  • Interest: Payment to the lender for the amount borrowed
  • Taxes & Insurance: Monthly payments are normally made into a special escrow account for items like hazard insurance and property taxes. This feature is sometimes optional, in which case the fees will be paid by you directly to the County Tax Assessor and property insurance company.
Q: What is the difference between a fixed-rate loan and an adjustable-rate loan?
A: With a fixed-rate mortgage, the interest rate stays the same during the life of the loan. With an adjustable-rate mortgage (ARM), the interest changes periodically, typically in relation to an index. While the monthly payments that you make with a fixed-rate mortgage are relatively stable, payments on an ARM loan will likely change. There are advantages and disadvantages to each type of mortgage, and the best way to select a loan product is by talking to us.
Q: How is an index and margin used in an ARM?
A: An index is an economic indicator that lenders use to set the interest rate for an ARM. Generally the interest rate that you pay is a combination of the index rate and a pre-specified margin. Three commonly used indices are the One-Year Treasury Bill, the Cost of Funds of the 11th District Federal Home Loan Bank (COFI), and the London InterBank Offering Rate (LIBOR).
Q: Common Mortgage Loan Programs
A: Fixed Rate Mortgages
The most common type of mortgage loan program is the Fixed Rate Mortgage. This is where your monthly payments for interest and principal never change. Property taxes and homeowners insurance may increase, but generally your monthly payments will be very stable.Fixed-rate mortgages are available for 30 years, 20 years, 15 years and even 10 years. There are also “bi-weekly” mortgages, which shorten the loan by calling for half the monthly payment every two weeks. (Since there are 52 weeks in a year, you make 26 payments, or 13 “months” worth, every year.)Fixed rate fully amortizing loans have two distinct features. First, the interest rate remains fixed for the life of the loan. Secondly, the payments remain level for the life of the loan and are structured to repay the loan at the end of the loan term. The most common fixed rate loans are 15 year and 30 year mortgages.During the early amortization period, a large percentage of the monthly payment is used for paying the interest . As the loan is paid down, more of the monthly payment is applied to principal . A typical 30 year fixed rate mortgage takes 22.5 years of level payments to pay half of the original loan amount.Adjustable Rate Mortgages
These loans generally begin with an interest rate that is 2-3 percent below a comparable fixed rate mortgage, and could allow you to buy a more expensive home.However, the interest rate changes at specified intervals (for example, every year) depending on changing market conditions; if interest rates go up, your monthly mortgage payment will go up, too. However, if rates go down, your mortgage payment will drop also.

There are also mortgages that combine aspects of fixed and adjustable rate mortgages – starting at a low fixed-rate for seven to ten years, for example, then adjusting to market conditions. Ask your mortgage professional about these and other special kinds of mortgages that fit your specific financial situation

Introductory Rate ARM’s
Most adjustable rate loans (ARMs) have a low introductory rate or start rate, some times as much as 5.0% below the current market rate of a fixed loan. This start rate is usually good from 1 month to as long as 10 years. As a rule the lower the start rate the shorter the time before the loan makes its first adjustment. These loans are also called “delayed ARM’s”.

Index – The index of an ARM is the financial instrument that the loan is “tied” to, or adjusted to. The most common indices, or, indexes are the 1-Year Treasury Security, LIBOR (London Interbank Offered Rate), Prime, 6-Month Certificate of Deposit (CD) and the 11th District Cost of Funds (COFI). Each of these indices move up or down based on conditions of the financial markets.

Margin – The margin is one of the most important aspects of ARMs because it is added to the index to determine the interest rate that you pay. The margin added to the index is known as the fully indexed rate. As an example if the current index value is 5.50% and your loan has a margin of 2.5%, your fully indexed rate is 8.00%. Margins on loans range from 1.75% to 3.5% depending on the index and the amount financed in relation to the property value.

Interim Caps – All adjustable rate loans carry interim caps. Many ARMs have interest rate caps of six-months or a year. There are loans that have interest rate caps of three years. Interest rate caps are beneficial in rising interest rate markets, but can also keep your interest rate higher than the fully indexed rate if rates are falling rapidly.

Payment Caps – Some loans have payment caps instead of interest rate caps. These loans reduce payment shock in a rising interest rate market, but can also lead to deferred interest or “negative amortization”. These loans generally cap your annual payment increases to 7.5% of the previous payment.

Lifetime Caps – Almost all ARMs have a maximum interest rate or lifetime interest rate cap. The lifetime cap varies from company to company and loan to loan. Loans with low lifetime caps usually have higher margins, and the reverse is also true. Those loans that carry low margins often have higher lifetime caps.

Standard ARM Programs
A few options are available to fit your individual needs and your risk tolerance with the various market instruments.

ARMs with different indexes are available for both purchases and refinances. Choosing an ARM with an index that reacts quickly lets you take full advantage of falling interest rates. An index that lags behind the market lets you take advantage of lower rates after market rates have started to adjust upward.

The interest rate and monthly payment can change based on adjustments to the index rate.

6-Month Certificate of Deposit (CD) ARM Has a maximum interest rate adjustment of 1% every six months. The 6-month Certificate of Deposit (CD) index is generally considered to react quickly to changes in the market.

1-Year Treasury Spot ARM Has a maximum interest rate adjustment of 2% every 12 months. The 1-Year Treasury Spot index generally reacts more slowly than the CD index, but more quickly than the Treasury Average index.

6-Month Treasury Average ARM Has a maximum interest rate adjustment of 1% every six months. The Treasury Average index generally reacts more slowly in fluctuating markets so adjustments in the ARM interest rate will lag behind some other market indicators.

12-Month Treasury Average ARM Has a maximum interest rate adjustment of 2% every 12 months. The treasury Average index generally reacts more slowly in fluctuating markets so adjustments in the ARM interest rate will lag behind some other market indicators.

No Income Verification Loans
A no income verification loan is more of a way to qualify for a loan than a loan program. However, I am adding it here because with the ever growing popularity of small businesses, more and more people are using this form of qualification to obtain mortgages.

Simply put, a no income verification loan (NIV)is a loan that you do not have to verify your income to get approved. It’s typically limited to people who can prove that they are self employed, but I have worked with a few lenders that have accepted NIV loans for w-2 employees. Depending on the quality of credit and the purpose of the loan (purchase, refinance the current mortgage balance only, or cash out), the rate can vary.

Some lenders require a certain level of assets (bank accounts, 401(k), IRA) to be verified in order to be approved, but others do not. The two most common types of loan programs that are offered with an NIV are a fixed rate loan and a delayed ARM. The delayed ARM usually offers a lower introductory rate assuming all other factors are the same.

The credit requirements can vary widely depending on the lender. As typical with any mortgage loan, the better your credit rating, the lower the interest rate. Some lenders will mark the rate up slightly for a NIV loan over a standard loan where the income is verified, however, if you have good enough credit and are not getting cash out, I have one lender that offers an NIV at no increase to the rate. For most people however, expect to pay a bit higher rate than normal, simply because the lender is assuming a higher risk of you defaulting if they don’t verify your income.

Reverse Mortgage
A reverse mortgage is a special type of loan made to older homeowners to enable them to convert the equity in their home to cash to finance living expenses, home improvements, in-home health care, or other needs.

With a reverse mortgage, the payment stream is “reversed.” That is, payments are made by the lender to the borrower, rather than monthly repayments by the borrower to the lender, as occurs with a regular home purchase mortgage.

A reverse mortgage is a sophisticated financial planning tool that enables seniors to stay in their home — or “age in place” — and maintain or improve their standard of living without taking on a monthly mortgage payment. The process of obtaining a reverse mortgage involves a number of different steps.

The first, most widely available reverse mortgage in the United States was the federally-insured Home Equity Conversion Mortgage (HECM), which was authorized in 1987.

A reverse mortgage is different from a home equity loan or line of credit, which many banks and thrifts offer. With a home equity loan or line of credit, an applicant must meet certain income and credit requirements, begin monthly repayments immediately, and the home can have an existing first mortgage on it. In addition, there is no restriction on the age of borrowers.

In general, reverse mortgages are limited to borrowers 62 years or older who own their home free and clear of debt or nearly so, and the home is free of tax liens.

Borrowers usually have a choice of receiving the proceeds from a reverse mortgage in the form of a lump-sum payment, fixed monthly payments for life, or line of credit. Some types of reverse mortgages also allow fixed monthly payments for a finite time period, or a combination of monthly payments and line of credit. The interest rate charged on a reverse mortgage is usually an adjustable rate that changes monthly or yearly. However, the size of monthly payments received by the senior doesn’t change.

Some reverse mortgage products also involve the purchase of an annuity that can assure continued monthly income to the senior homeowner even after they sell the home.

The size of reverse mortgage that a senior homeowner can receive depends on the type of reverse mortgage, the borrower’s age and current interest rates, and the home’s property value. The older the applicant is, the larger the monthly payments or line of credit. This is because of the use of projected life expectancies in determining the size of reverse mortgages.

Seniors do not have to meet income or credit requirements to qualify for a reverse mortgage.

Unlike a home purchase mortgage or home equity loan, a reverse mortgage doesn’t require monthly repayments by the borrower to the lender. A reverse mortgage isn’t repayable until the borrower no longer occupies the home as his or her principal residence.

This can occur if the sole remaining borrower dies, the borrower sells the home, or the borrower moves out of the home, say, to a nursing home.

The repayment obligation for a reverse mortgage is equal to the principal balance of the loan, plus accrued interest, plus any finance charges paid for through the mortgage. This repayment obligation, however, can’t exceed the value of the home.

The loan may be repaid by the borrower or by the borrower’s family or estate, with or without a sale of the home. If the home is sold and the sale proceeds exceed the repayment obligation, the excess funds go to the borrower or borrower’s estate. If the sales proceeds are less than the amount owed, the shortfall is usually covered by insurance or some other party and is not the responsibility of the borrower or borrower’s estate. In general, the repayment obligation of the borrower or borrower’s estate can’t exceed the value of the property.

In general, a borrower can’t be forced to sell their home to repay a reverse mortgage as long as they occupy the home, even if the total of the monthly payments to the borrower exceeds the value of the home.

LIBOR – London InterBank Offered Rate
LIBOR is the rate on dollar-denominated deposits, also know as Eurodollars, traded between banks in London. The index is quoted for one month, three months, six months as well as one-year periods.

LIBOR is the base interest rate paid on deposits between banks in the Eurodollar market. A Eurodollar is a dollar deposited in a bank in a country where the currency is not the dollar. The Eurodollar market has been around for over 40 years and is a major component of the International financial market. London is the center of the Euromarket in terms of volume.

The LIBOR rate quoted in the Wall Street Journal is an average of rate quotes from five major banks. Bank of America, Barclays, Bank of Tokyo, Deutsche Bank and Swiss Bank.

The most common quote for mortgages is the 6-month quote. LIBOR’s cost of money is a widely monitored international interest rate indicator. LIBOR is currently being used by both Fannie Mae and Freddie Mac as an index on the loans they purchase.

LIBOR is quoted daily in the Wall Street Journal’s Money Rates and compares most closely to the 1-Year Treasury Security index.

Balloon Mortgages
Balloon loans are short term mortgages that have some features of a fixed rate mortgage. The loans provide a level payment feature during the term of the loan, but as opposed to the 30 year fixed rate mortgage, balloon loans do not fully amortize over the original term. Balloon loans can have many types of maturities, but most balloons that are first mortgages have a term of 5 to 7 years.

At the end of the loan term there is still a remaining principal loan balance and the mortgage company generally requires that the loan be paid in full, which can be accomplished by refinancing. Many companies have other options such as a conversion feature at the end of the term. For example, the loan may convert to a 30 year fixed loan at the thirty year market rate plus 3/8 of a percentage point. Your conversion can be guaranteed based on certain criteria such as having made your last 24 payments on time. The balloon mortgage program with the conversion option is often called a 7/23 Convertible or 5/25 Convertible.

Buydown Options
The most common buydown is the 2-1 buydown. In the past, for a buyer to secure a 2-1 buydown they would pay 3 points above current market points in order to pay a below market interest rate during the first two years of the loan. At the end of the two years they would then pay the old market rate for the remaining term.

As an example, if the current market rate for a conforming fixed rate loan is 6.5% at a cost of 1.5 points, the buydown gives the borrower a first year rate of 4.50%, a second year rate of 5.50% and a third through 30th year rate of 6.50% and the cost would be 4.5 points. Buydown were usually paid for by a transferring company because of the high points associated with them.

In today’s market, mortgage companies have designed variations of the old buydowns rather than charge higher points to the buyer in the beginning they increase the note rate to cover their yields in the later years.

As an example, if the current rate for a conforming fixed rate loan is 6.50% at a cost of 1.5 points, the buydown would give the buyer a first year rate of 5.25%, a second year rate of 6.25% and a third through 30th year rate of 7.25% , or a three-quarter point higher note rate than the current market and the cost would remain at 1.5 points.

Another common buydown is the 3-2-1 buydown which works much in the same ways as the 2-1 buydown, with the exception of the starting interest rate being 3% below the note rate. Another variation is the flex-fixed buydown programs that increase at six month interval rather than annual intervals.

As an example, for a flex-fixed jumbo buydown at a cost of 1.5 points, the first six months rate would be 5.50%, the second six months the rate would be 6.00%, the next six months rate would be 6.50%, the next six months rate would be 7.00%, the next six months the rate would be 7.50% and at the 37th month the rate would reach the note rate of 7.875% and would remain there for the remainder of the term. A comparable jumbo 30 year fixed at 1.5 points would be 7.875%.

COFI ARM Cost of Funds Index
The 11th District Cost of Funds is more prevalent in the West and the 1-Year Treasury Security is more prevalent in the East. Buyers prefer the slowly moving 11th District Cost of Funds and investors prefer the 1-Year Treasury Security.

The monthly weighted average Eleventh District has been published by the Federal Home Loan Bank of San Francisco since August 1981. Currently more than one half of the savings institutions loans made in California are tied to the 11th District Cost of Funds (COF) index.

The Federal Home Loan Bank’s 11th District is comprised of saving institutions in Arizona, California and Nevada.

Few people who use and follow the 11th District Cost of Funds understand exactly how it is calculated, what it represents, how it moves and what factors affect it.

The predecessor to the 11th District Cost of Funds index was the District semiannual weighted average cost of funds published for a six month period ending in June and December. The San Francisco Bank was the first Federal Home Loan Bank to publish a monthly cost of funds index.

The funds used as a basis for the calculation of the 11th District Cost of Funds index are the liabilities at the District savings institutions: money on deposit at the institutions, money borrowed from a Federal Home Loan Bank (known as advances) and all other money borrowed. The interest paid on these types of funds is the cost of these funds.

The ratio of the dollar amount paid in interest during the month to the average dollar amount of the funds for that month constitutes the weighted average cost of funds ratio for that month.

The average cost of funds is said to be weighted because the three kinds of funds and their costs are added together before a ratio is computed rather than calculating averages individually for the three sources and using a simple average of the three ratios. This gives the greatest weight to the interest paid on deposits, and explains the delayed reaction of the index to rising fixed-rate mortgages.

GPM Graduated Payment Mortgage
The GPM is another alternative to the conventional adjustable rate mortgage, and is making a comeback as borrowers and mortgage companies seek alternatives to assist in qualify for home financing

Unlike an ARM, GPMs have a fixed note rate and payment schedule. With a GPM the payments are usually fixed for one year at a time. Each year for five years the payments graduate at 7.5% – 12.5% of the previous years payment.

GPMs are available in 30 year and 15 year amortization, and for both conforming and jumbo loans. With the graduated payments and a fixed note rate, GPMs have scheduled negative amortization of approximately 10% – 12% of the loan amount depending on the note rate. The higher the note rate the larger degree of negative amortization. This compares to the possible negative amortization of a monthly adjusting ARM of 10% of the loan amount. Both loans give the consumer the ability to pay the additional principal and avoid the negative amortization. In contrast, the GPM has a fixed payment schedule so the additional principal payments reduce the term of the loan. The ARMs additional payments avoid the negative amortization and the payments decrease while the term of the loan remains constant.

The scheduled negative amortization on a GPM differs depending on the amortization schedule, the note rate and the payment increases of the loan. GPM loans with 7.5% annual payment increases offer the lowest qualifying rate but the largest amount of negative amortization.

On a loan of $150,000, with a 30 year amortization and a note rate of 10.50% with 12.5% annual payment increases, the negative amortization continues for 60 months. The qualifying rate is 5.75% and the negative amortization is 11.34% (approximately $17,010).

The note rate of a GPM is traditionally .5% to .75% higher than the note rate of a straight fixed rate mortgage. The higher note rate and scheduled negative amortization of the GPM makes the cost of the mortgage more expensive to the borrower in the long run. In addition, the borrowers monthly payment can increase by as much as 50% by the final payment adjustment.

The lower qualifying rate of the GPM can help borrowers maximize their purchasing power, and can be useful in a market with rapid appreciation. In markets where appreciation is moderate, and a borrower needs to move during the scheduled negative amortization period they could create an unpleasant situation.

Q: How do I know which type of mortgage is best for me?
A: There is no simple formula to determine the type of mortgage that is best for you. This choice depends on a number of factors, including your current financial picture and how long you intend to keep your house. One Source Mortgage Corporation can help you evaluate your choices and help you make the most appropriate decision.
Q: MORTGAGE Glossary
A: Acceleration
The right of the mortgage (lender) to demand the immediate repayment of the mortgage loan balance upon the default of the mortgager (borrower), or by using the right vested in the Due-on-Sale Clause.Adjustable Rate Mortgage (ARM)
Is a mortgage in which the interest rate is adjusted periodically based on a pre selected index. Also sometimes known as the renegotiable rate mortgage, the variable mortgage or the Canadian roll over mortgage.Adjustment Interval
On an adjustable rate mortgage, the time between changes in the interest rate and/or monthly payment, typically one, three or five years, depending on the index.Amortization
Means loan payment by equal periodic payment calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance. Comes from the French word, “mort”, literally to kill the loan owing.

Annual Percentage Rate (APR)
Is a interest rate reflecting the cost of a mortgage as a yearly rate. This rate is likely to be higher than the stated note rate or advertised rate on the mortgage, because it takes into account points and other credit cost. The APR allows home buyers to compare different types of mortgages based on the annual cost for each loan.

An estimate of the value of property, made by a qualified professional called an “appraiser”. There are different types of qualified appraisers. The highest qualification is considered to be the MAI.

A local tax levied the County usually against a property for a specific purpose, such as a sewer or street lights. Also can mean the assessed value of the property. Similar, but not the same as an “appraisal” see above.

The agreement between buyer and seller where the buyer takes over the payments on an existing mortgage from the seller. Assuming a loan can usually save the buyer money since this is an existing mortgage debt, unlike a new mortgage where closing cost and new, probably higher, market-rate interest charges will apply. Most mortgages today are unassumable as Lenders have found that assumed loans tend to have a far higher rate of default.
FHA loans closed before 12/15/89 and VA loans closed before 3/1/88 are freely assumable with no qualifying.
Note that the original borrower is still just as liable for the loan as the new home buyer unless the previous borrower gets a release from the Lender. This is called “novation”.

Balloon payment
A balloon mortgage is one where a lump sum, the balance of the loan principal, becomes payable at the end of the term. A mortgage can be interest only with the whole principal due at the end of the term or it may be calculated to amortize over a longer period, say 30 years, but with the outstanding principal balance payable at the end of, say, 10 years.

Blanket Mortgage
A mortgage covering at least two pieces of real estate as security for the same mortgage. This provides greater security for the Lender. It may be possible to get a “partial” release so the Borrower can sell one of the properties provided a suitable principal reduction is made.

Borrower (Mortgagor)
One who applies for and receives a loan in the form of a mortgage with the intention of repaying the loan in full. The mortgage is not actually the loan, it just creates the security interest in the property. It is the promissory note that spells out the repayment terms and interest.

An individual in the business of assisting in arranging funding or negotiating contracts for a client buy who does not loan the money himself. Brokers usually charge a fee or receive a commission for their services.

Caps (interest)
A limit on the amount the interest rate on an adjustable rate mortgage may change per year and/or the life of the loan. For example a 4/1 cap would mean a maximum interest increase of 4% over the life of the loan and no more than 1% each year.

Caps (payments)
Consumer safeguards which limit the amount monthly payments on an adjustable rate mortgage may change. Mortgage may change per year and/or the life of the loan.

The meeting between the buyer, seller and lender or their agents where the property and funds legally changes hands. Also called settlement. Closing costs usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording, credit report charge and other costs assessed at settlement. The cost of closing usually are about three to six percent of the mortgage amount. Commitment and agreement, often in writing, between a lender and a borrower to loan money at a future date subject to the completion of paperwork or compliance with stated conditions.

Credit Report
A report documenting the credit history and current status of a borrower’s credit standing. Credit is rated for mortgage purposes from A, excellent, down to D, very poor. To obtain a conforming loan that can be resold to Fannie Mae, the Borrower usually needs A grade credit.
We offer financing from A right down to D credit.

A promise by a lender to make a loan on specific terms or conditions to a borrower or builder. A promise by an investor to purchase mortgages from a lender with specific terms or conditions. Construction loan (interim loan) – A loan to provide the funds necessary to pay for the construction of buildings or homes. These are usually designed to provide periodic disbursements to the builder as it progresses.

Contract sale or deed
A contract between purchaser and a seller of real estate to convey title after certain conditions have been met. It is a form of installment sale.

Construction Loan
A short term interim loan for financing the cost of construction. The lender advance funds to the builder at periodic intervals as the work progresses.

Conventional Loan
A mortgage not insured by FHA or guaranteed by the VA.

Cross Default
Language often in a second mortgage that states that a failure to pay or a default on the first mortgage is a default on the second mortgage.
Also that if the borrower has more than one mortgage with the same lender, then a default on just one of the mortgages puts ALL the other mortgages into default.

Debt-to-Income Ratio
The ratio, expressed as a percentage, which results when a borrower’s monthly payment obligation on long-term debts is divided by his or her net effective income (FHA/VA) or gross monthly income (conventional). See Housing expenses-to-income ratio.

Deed of Trust
In many states, this document is used in place of a mortgage to secure the payment of a note. It involves a third party, the trustee, who holds the deed to the property.

Failure to meet legal obligations in a contract, specifically, failure to make the monthly payments on a mortgage. This can also mean failure to pay property taxes, maintain insurance on the property or even to maintain the interior and exterior of the property.

Deferred Interest
see Negative Amortization

Failure to make payments on time. This can lead to foreclosure. See default.

Discount Point
see Point

Down Payment
Money paid to make up the difference between the purchase price and the mortgage amount. Down payments usually are 10 to 20 percent of the sales price on a conventional loan. VA loans have no downpayment but are only available to Veterans who have not used up their VA entitlement. FHA loans are often as low as 3% downpayment.
When the down payment is less than 20% the Lender will usually require PMI (Private Mortgage Insurance) on a conventional loan, or MIP (Mortgage Insurance Premium) on an FHA loan.

Due-on-Sale Clause
A provision in a mortgage or deed of trust that allows the lender to demand immediate payment of the balance of the mortgage if the mortgage holder sells the home.

Earnest Money
Money given by a buyer when making an offer to a seller as part of the purchase price to bind a transaction or assure payment. It should be held in escrow by the real estate company, a title company or an attorney. This is usually returnable if the contract does not go through for valid reasons. It may not be returnable if the buyer just changes his mind.

Refers to a neutral third party who carries out the instruction of both the buyer and seller to handle all the paperwork of settlement or closing. Escrow may also refer to an account held by the lender into which the home buyer pays money for tax or insurance payments.

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, sex, marital status, handicap status or receipt income from public assistance programs.

The difference between the fair market value and current indebtedness, also referred to as the owner’s interest.

The federal Home Loan Mortgage Corporation provides a secondary market for saving and loans by purchasing their conventional loans. Also known as “Freddie Mac.”

Fixed Rate Mortgage
The mortgage interest rate will remain the same on these mortgages throughout the term of the mortgage for the original borrower.

The Federal National Mortgage Association is a secondary mortgage institution which is the largest single holder of home mortgages in the United States. FHMA buys VA, FHA and conventional mortgages from primary lenders. Also known as “Fannie Mae.”

A legal process by which the lender or the seller forces a sale of a mortgaged property because the borrower has not met the terms of the mortgage. Also known as a repossession of property.

Fannie Mae
see Federal National Mortgage Association.

Federal Home Loan Bank Board (FHLBB)
A regulatory and supervisory agency for federally chartered savings institutions.

Federal Home Loan Mortgage Corporation (FHLMC)
also referred to as “Freddie Mac”, is a quasi-government agency that purchases conventional mortgages from insured depository institutions and HUD approved mortgage bankers.

Federal National Mortgage Association (FNMA)
also know as “Fannie Mae” a taxpaying corporation created by Congress that purchases and sells conventional residential mortgages as well as those insured by FHA or guaranteed by VA. This institution, which provides funds for one in seven mortgages, makes mortgage money more available and more affordable.

Freddie Mac
see Federal Home Loan Mortgage Corporation

Ginnie Mae
see Government National Mortgage Association

Government National Mortgage Association (GNMA)
also known as “Ginnie Mae”, provides sources of funds for residential mortgage, insured or guaranteed by FHA or VA.

Graduated Payment Mortgage (GPM)
A type of flexible-payment where the payments increase for a specified period of time and then level off. This type of mortgage may have negative amortization built into it.

A promise by one party to pay a debt or perform an obligation contracted by another if the original party fails to pay or perform according to a contract.

Hard Money Lender
Equity lenders who base their funding decisions on the unencumbered property value and its salability. They do not calculate debt ratio and usually do not take into account the borrower’s credit and income. The combined loan-to-value ratio is usually less than 65%. Funding can be very fast. Sometime in 2 days or less.
Hazard Insurance
A form of insurance in which the insurance company protects the insured from specified losses, such as fire windstorm and the like.

Housing Expenses-to-Income Ratio
The ratio expressed as a percentage, which results when a borrower’s housing expenses are divided by his and/or her net effective income (FHA / VA loans) or gross monthly income (conventional loans). Also see Debt-to-Income Ratio.

That portion of a borrower’s monthly payment held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also known as Reserves.

A published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments (such as one, three and five year U.S. Treasury security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average costs of funds incurred by savings and loans), which is then used to adjust the interest rate on an adjustable mortgage up or down. The rate must be one that is outside the influence of the lender.

A money source for a lender.

Interim Financing
A construction loan made during completion of a building or a project. A permanent loan usually replaces this loan after completion.

Jumbo Loan
A loan which is larger (more than $322,700 Single Family, $413,100 2F, $499,100 3F & $620,500 4F) than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Because jumbo loans can not be funded by these two agencies, they usually carry a higher interest rate.

A claim upon a piece of property for the payment of a debt or obligation.

Loan-to-Value Ratio
The relationship between the amount of the mortgage loan and appraised value of the property expressed as a percentage.

The amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate.

Market Value
The highest price that a buyer would pay and the lowest price a seller would accept on a property. Market value may be different from the price a property could actually be sold for at a given time.

MIP: Mortgage Insurance Premium
MIP is the one-half percent borrowers pay each month on FHA insured mortgage loans. It is insurance from FHA to the lender against incurring a loss due to the borrower’s default. On September 1, 1983 the MIP was changed to a one time charge to the borrowers.

Mortgage Insurance
Money paid to insure the mortgage when the down payment is less than 20 percent. see Private Mortgage Insurance, FHA Mortgage Insurance.

The lender.

The borrower or home owner.

Negative Amortization
Occurs when your monthly payments are not large enough to pay all the interest due on the loan. This unpaid interest is added to the unpaid principal balance of the loan. The danger of negative amortization is that the home buyer ends up owing more than the original amount of the loan.

Net Effective Income
The borrower’s gross income minus federal tax.

Non Assumption Clause
A statement in a mortgage contract forbidding the assumption of the mortgage without the prior approval of the lender. Note: The signed obligation to pay a debt, as a mortgage note.

Negotiable Rate Mortgage
A loan in which the interest rate is adjusted periodically. see Adjustable Rate Mortgage.

Origination Fee
The fee charged by a lender to prepare loan documents, make credit checks, inspect and sometimes appraise a property; usually computed as a percentage of the face value of the loan.

Permanent Loan
A long term mortgage, usually ten years or more.

Principal, Interest, Taxes and Insurance. Also called monthly housing expense.

Points (Loan Discount Points)
Prepaid interest assessed at closing by the lender. Each point is equal to one percent of the loan amount.

Power of Attorney
A legal document authorizing one person to act on behalf of another.

Prepaid Expenses
Necessary to create an escrow account or to adjust the seller’s existing account. Can include taxes, hazard insurance, private mortgage insurance and special assessments.

A privilege in a mortgage permitting the borrower to make payments in advance of their due date. This can enable the mortgage to be paid off much more quickly, with a major savings in total interest costs.

Prepayment Penalty
Money charged for an early repayment of debt. Prepayment penalties are allowed in some form in 36 states and the District of Columbia.

Prepayment Risk
This is the risk to the Lender that the loan will be paid off before the end of the term. It is considered to be a risk becuase loans are often refinanced when interest rates drop. This means the Lender gets their capital back but have to lend it out at a lower rate.

Primary Mortgage Market
Lenders making mortgage loans directly to borrower’s such as savings and loan association, commercial banks and mortgage companies. These lenders usually sell their mortgages into the secondary mortgage markets such as FNMA of GNMA, etc. The original lender will usually still service the loan, that is, send the payment coupons or statements to the Borrower.

The amount of debt, not counting interest left on a loan.

Private Mortgage Insurance (PMI)
In the event that you do not have a 20 percent down payment, lenders will allow a smaller down payment (as low as five percent in some cases). With the smaller down payment loans, however, borrower’s are usually required to carry private mortgage insurance. Private mortgage insurance will require an initial premium payment of one to five percent of your mortgage amount and may require an additional monthly fee depending on your loan’s structure.

Quit Claim Deed
Type of deed that transfers all the rights that grantor (giver) may have, which might be none. Example, you could legally give someone a quit claim deed of your rights in the Brooklyn Bridge. That does not mean that the person you give the deed to now owns the Brooklyn Bridge.

A real estate broker or an associate holding active membership in a local real estate board affiliated with the National Association of Realtors.

The cancellation of a contract. With respect to mortgage refinancing, the law that gives the homeowner three days to cancel a contract in some cases once it is signed if the transaction uses equity in the home as security. This means the money for refinance is not disbursed till after the 3 days are up. The only exception would be an emergency.

Recording Fees
Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records. The record is given a official records book and page number making it easy to find.

Obtaining a new mortgage loan on a property already owned. Often to replace existing loans on the property.

Short for the Real Estate Settlement Procedures Act. RESPA is a federal law that allows consumers to review information known or estimated settlement cost once after application and once prior to or at a settlement. The law requires lenders to furnish the information after application only.

Reverse Annuity Mortgage (RAM)
A form of mortgage in which the lender makes periodic payments to the borrower using the borrower’s equity in the home as Satisfaction of Mortgage (The document issued by the mortgagee when the mortgage loan is paid in full.

Seasoned Mortgage
A mortgage that payments have been made on. The longer the seasoning and payment history of the mortgage, the greater the likelihood it will be paid in the future.

Second Mortgage
A mortgage made subsequent to another mortgage and subordinate to the first one. If the borrower does not make payments on the first mortgage, they can foreclose it and wipe out the interest of the second mortgage holder.

Secondary Mortgage Market
The place where primary mortgage lenders sell the mortgages they make to obtain more funds to originate more new loans. It provides liquidity for the lenders security.

All the steps and operations a lender performs to keep a loan in good standing, such as collection of payments, payment of taxes insurance, property inspections and the like.

Settlement / Settlement Costs
see Closing / Closing Costs

Simple Interest
Interest which is computed only on the principal balance.

A measure of land, land prepared by a registered land surveyor, showing the location of the land with reference to known points, its dimensions and the location and dimensions of any buildings.

Sweat Equity
Equity created by a purchasers work on a property purchased.

A document that gives evidence of an individual’s ownership of property

Title Insurance
A policy, usually issued by a title insurance company which insures a home buyer or lender against errors in the title search. The cost of the policy is usually a function of the value of property, and is often borne by the purchaser and /or seller.

Title Search
An examination of municipal records to determine the legal ownership of the property. Usually is performed by a title company

A federal law requiring disclosure of the Annual Percentage Rate to home buyers shortly after they apply for a the loan.

The decision whether to make a loan to a potential home buyer based on credit, employment, assets and other factors and the matching of this risk to an appropriate rate and term or loan amount.

Interest charged in excess of the legal rate established by law.

Variable Rate Mortgage
see Adjustable Rate Mortgage

Verification of Deposit (VOD)
A document signed by the borrower’s financial institution verifying the status and balance of his or her financial accounts.

Verification of Employment (VOE)
A document signed by the borrower’s