Adjustable Rate Mortgage (ARM)
A mortgage or home equity loan in which the interest rate may vary during the life of the loan based on the fluctuation of a predetermined index. Most ARM’s have a rate cap that limits the amount the interest can change, both in an adjustment period, and over the life of the loan.

Amortization
The process of gradually paying down a debt usually by making monthly payments throughout the term of the loan. During the early years of the loan most of the monthly payment is applied to interest while during the later years payment is applied almost exclusively to principal.

Annual Adjustment Cap
The limit imposed on the amount an adjustable rate mortgage can increase each year.

Annual Percentage Rate (APR)
A figure that states the total yearly cost of a mortgage as expressed by the actual rate of interest paid. The APR includes the base interest rate, points and any other loan fees and costs. This results in the APR being higher than the actual interest rate of the loan. The Federal Truth in Lending Act requires that every consumer loan agreement disclose the APR. The APR is intended as a basis for borrowers to compare certain costs of loans.

Appraisal
A professional estimate of the value of a home generally based on the sale of other comparable homes within a defined area. A licensed appraiser hired by the mortgage lender typically performs the appraisal.

Appreciation
The increase of a property's value over time.

Assumable Mortgage
This type of mortgage will allow future buyers of a home to take over the remaining loan balance of a mortgage. This can be beneficial in selling a home if the current interest rates are higher than the rate of the sellers assumable mortgage. Sellers must be careful to take note of any restrictions applied to the assumption of the mortgage such as credit worthiness of the buyers.

Available Funds
The total amount of money available from savings, credit unions, retirement accounts and other sources that can be considered valid for down payment and closing costs associated with a home loan.

Balloon Loan
Loans that require level payments over a period of time with a large payment due, at a specified time, for the full remaining balance of the loan. This final payment of the loan is called the balloon payment.

Buydown
A financing technique used to reduce the monthly payments for the first few years of a loan. Interest is paid upfront which reduces the monthly payment over a specified period of generally one, two or three years. During this time the payments will gradually increase ending with the monthly payment specified in the note.

Cap
A limit on how much an adjustable rate can increase. Adjustable rate mortgages generally have both annual or semi annual rate caps and lifetime caps.

Closing Costs
Fees paid at or prior to closing of a loan and in addition to the down payment. These fees include but are not limited to expenses incurred in obtaining the loan as well as attorney fees, taxes, title insurance, underwriting fees, appraisal, credit report and recording fees.

Co-borrower
An additional person who assumes equal responsibility for repayment of a loan and is fully obligated under the terms of the loan. This person has equal rights to the proceeds of the loan.

Combined loan-to-value ratio (CLTV)
The ratio between the unpaid principal amount of a first mortgage, plus any additional second loans including lines of credit and the appraised value of a home. This is expressed as a percentage.

Conforming Loan
Mortgages that fall within Fannie Mae and Freddie Mac’s loan parameters and limits.

Credit Reporting Agency or Credit Bureau
An organization that gathers, records, updates and stores financial and public records of individual's who have been granted credit and provides this information to lenders and other authorized users for a fee.

Credit Report
A compiled record of an individual's debt and payment history. It is used to help a lender determine whether or not a potential borrower is a good business risk.

Debt Consolidation
Obtaining a single loan to pay off multiple debts, generally at a lower interest rate and over a longer term. This is commonly accomplished through a cash-out home refinance, home equity loan or line of credit.

Debt to Income Ratio
The percentage of your total monthly payment debt compared to your total monthly income before taxes. Monthly payment debt is typically considered to be your minimum mortgage, installment loan and revolving loan payments. As a guideline, debt to income ratios between 36% and 43% are generally acceptable.

Deed (Warranty or Quick Claim)
A document that legally transfers ownership of real estate from a seller to a buyer. It’s delivered to the buyer at closing.

Discount Points
Money paid to the lender in conjunction with a mortgage loan in order to lower the interest rate. One discount point equals one percentage point of the loan amount.

Down Payment
The part of the purchase price that the buyer pays in cash and does not finance with a mortgage. Down payments generally range from 0% to 20% of the sales price. Down payments less than 20% generally require the purchase of Private Mortgage Insurance (PMI) unless alternative methods of financing are used.

Escrow
The process of placing an amount of money and documents with a neutral third party, called an escrow agent, who’s given the authority to deposit, disburse and distribute to the proper parties all the money and documents involved in a real estate transaction. The purpose is to protect both the buyer and seller in the transaction from the other side’s unauthorized use of funds and ensures an arm’s-length transaction between both sides.

The term also refers to an escrow account or impound account, required by many lenders and held by the lender during the term of the loan. This deposit is used to hold the borrower’s advanced payments toward insurance and property taxes until they become due.

Fannie Mae
Federal National Mortgage Association, a government-sponsored enterprise that primarily buys mortgages for re-sale in the secondary market.

FHA
Federal Housing Administration, which is an agency of the Department of Housing and Urban Development. The FHA provides mortgage insurance for certain residential mortgages. It sets standards for underwriting these mortgages and for construction of homes secured by these mortgages. FHA mortgages may allow borrowers to qualify with less money upfront than conventional loans.

FICO
An acronym for Fair Isaac Company, Inc., which develops the mathematical formulas used to produce credit scores for assessing credit risk.

Fixed-Rate Mortgage
A home loan with a predetermined fixed interest rate for the entire term of the loan. In other words, the interest rate remains unchanged for as long as the borrower has the loan.

Flood Certification
A determination by a reputable source about whether property is located within a special flood hazard zone.

Foreclosure
A legal procedure in which property securing a defaulted loan is sold by the lender in order to repay a borrower’s loan. The amount paid by a buyer at the foreclosure may not be enough to fully repay the loan and the borrower may continue to owe the lender the difference.

Freddie Mac
The Federal Home Loan Mortgage Corporation, which is a government-sponsored enterprise that primarily, buys mortgages for resale in the secondary market.

Gift Funds
The funds a borrower receives from a third party, who is not associated with the transaction, which does not have to be paid back.

Good Faith Estimate (GFE)
An itemized, detailed list of certain estimated costs associated with a home loan that the lender is required to provide to the borrower within three business days of the application.

Hazard Insurance
See homeowner’s insurance

Home Equity Line of Credit (HELOC)
A line of credit secured by the equity in a home owned by the borrower. The borrower has access to the approved line of credit generally through checks or debit cards issued by the approving bank or lender.

Home Inspection
An inspection of the condition of a property generally paid for and on behalf of the person buying the property. The home inspection includes an evaluation of such things as major appliances, plumbing, electrical wiring, the furnace, structural integrity, roofing and many other items. A home inspection should not be confused with an appraisal, which is performed on behalf of the lending institution and is a determination of a properties value as compared with similar properties.

Homeowner’s Insurance
An insurance policy that protects homeowner’s against damage from fire, hurricanes and other catastrophes. Generally, homeowners insurance also protects against loss from theft and vandalism as well as personal liability in case someone is hurt or injured on the covered property. Lender’s generally require a one year pre-paid homeowners policy prior to closing.

HUD
An acronym for the U.S. Department of Housing and Urban Development.

Index
The measurement used typically in an Adjustable Rate Mortgage (ARM) to decide how much the percentage rate will change at the beginning of each adjustment period. Generally, the index plus the margin equals the new rate that will be charged, subject to any caps. There are many different index rates used including treasury bills, the cost of funds index, the LIBOR index and others.

Interest Rate
The cost of borrowing money expressed as a percentage of the loan, paid over a specific period of time. The interest rate does not include fees charged for the loan.

Jumbo Loan
A loan that is classified as non-conforming because it exceeds the upper limit of loan amount as set by Fannie Mae and Freddie Mac standards.

Lien
A legal claim of a creditor on the property of another as security for a debt.

Lien Holder
An individual or entity that has placed a lien on real property.

Loan-To-Value (LTV)
The ratio between the unpaid balance of a loan for a given property and the appraised value of that property. The LTV is expressed as a percentage.

Manufactured Housing
A structure that has been partially or entirely constructed at another location and moved onto the property (on a permanent foundation). A manufactured home may or may not be a mobile home.

Margin
The number of percentage points the lender adds to the index rate to determine the interest rate on a variable or adjustable rate loan.

Mobile Home
A type of residence that’s built upon a wheeled chassis that can be transported from site to site.

Modular Home
A factory built home that’s erected on-site, with the appearance and characteristics of a site-built home.

Mortgage
A legal document giving a lender a lien on real estate to secure repayment of a loan.

Mortgage Insurance
Insurance on loans, greater than 80% LTV, that protects the lender in case of a default on the loan. The cost of mortgage insurance increases as the LTV increases. In cases where borrowers are making a down payment of less than 20% mortgage insurance is generally required. Also called Private Mortgage Insurance or PMI.

Mortgagee
The lender or other party named in the mortgage as the party who’s entitled to receive repayment of the home loan.

Mortgagor
The borrower, or other party named in the mortgage as the party obligated to repay the loan.

Negative Amortization
The result when monthly payments don’t cover all the interest due on the loan. The unpaid interest is added to the unpaid balance, which could result in the unpaid balance being greater than the original loan amount. This generally occurs on variable interest rate loans with special circumstances that allow the borrower to pay less than the specified index plus margin.

Non-Conforming Loan
A mortgage loan that’s not eligible for sale to Fannie Mae and Freddie Mac due to non-standard features. These loans are often sold on the secondary market to private investors or held in the lender’s own portfolio.

Note
A written agreement in which the signer promises to pay to a named person or company a specific sum of money at a specified date or on demand.

Origination Fee
A fee imposed by a lender to cover certain processing expenses in connection with making a loan. The origination fee is generally a percentage of the loan amount.

PITI
An acronym for principal, interest, taxes and insurance paid each month. This is also referred to as the monthly housing expense.

PMI
See Mortgage Insurance

Points
Each point is equal to 1% of the loan amount and when charged is included on the Good Faith Estimate as a closing cost.

Prepaid Expenses
The expenses that are usually paid in advance, such as escrows for taxes and insurance, which are paid at closing.

Prepaid Interest
The interim interest that’s collected at closing of a first mortgage, covering the period from the date of disbursement to the first of the next month.

Prepayment Penalty
A penalty assessed on some loans if the loan is paid off early. This is a lump sum amount due and payable in addition to the loan balance, and is usually limited to the early years of a mortgage.

Prequalification
The process by which a mortgage professional determines the loan amount a prospective borrower will qualify for. This is based on an unconfirmed review of information such as the borrowers income, credit, assets and job history. This is considered a prequalification because the lending institution has not provided an official acceptance of the borrowers loan application.

Prime Rate
The interest rate that banks charge to their most creditworthy customers on short-term loans.

Principal
The amount of money borrowed on a loan.

Processing Fees
A fee charged to cover the administrative costs of processing a loan request.

Rate
The rate of interest on a loan, expressed as a percentage.
Interest = Principal x Rate x Time

Rate Cap
A limit on how much the interest rate can change, either per adjustment period or over the term of the loan.

Refinancing
Paying off one loan with the proceeds from another loan, generally using the same property as collateral.

Rescission
The cancellation of a contract. In real estate transactions that involve the refinance of a primary residence, applicants have three business days to cancel the transaction.

Revolving Line of Credit
A line of credit that allows up to the credit limit amount to be re-borrowed in repeated transactions once it’s been repaid. Credit cards are a type of revolving credit.

Secondary Market
The market in which lenders and investors buy and sell existing mortgages or mortgage-backed securities, which in turn provides greater availability of funds to lenders for additional mortgage lending.

Second Mortgage
The traditional term for a home loan that’s a subordinate lien and not a first mortgage. Home equity loans or lines of credit are considered second mortgages.

Term
The number of years it will take to pay off a loan.

Title Insurance
Insurance that covers the legal fees and expenses necessary to defend a homeowner’s title against claims that may be made against ownership of the property. To get a mortgage the applicants must buy title insurance for the lender in addition to their own optional policy.

Truth-in-Lending Act
A federal law requiring the disclosure of credit terms using a standard format.

Underwriting
The lender’s process of deciding whether to make a loan to a potential borrower based on credit, employment, assets and other factors.

VA
An acronym for the Veterans Affairs, a branch of the federal government that provides home loan guarantees for qualified veterans of the U.S. military forces.


Copyright© 2006 Renaissance Mortgage Company
Licensed by the NH and MA Banking Department:
NH License #5764-MBR; MA License #MB1611