Appendix A
Glossary
adjustable rate mortgage (ARM) Mortgage with an interest rate that may change, usually in response to changes in the Treasury Bill rate or the prime rate.
adjustment period Period during the life of an ARM between one rate change and the next.
amortization Gradual elimination of a debt, like a mortgage, with regular fixed payments over a specified period of time.
annual percentage rate (APR) Cost of the loan as an annual rate. It includes points paid to secure the loan, mortgage insurance, and other fees.
appraisal Third-party estimate of the value of the property at a specific point in time
asset Item of value.
back end ratio Applicant’s total housing expense plus all other monthly debt divided by total monthly pretax income.
basis points (BPs) Each basis point is one hundredth of a percent. They are used in measuring the yield differences among bonds, but in the mortgage industry, BPs describe the percentage of commission a mortgage broker receives.
cash out To take a larger mortgage, in a refinance, than the outstanding debt in order to get funds that can be used for other purposes such as home improvement, reducing credit card debt, paying for big-ticket items, and so on.
clouds Defects or problems with the title of a property that must be resolved prior to closing.
combined loan-to-value (CLTV) Ratio of the fair market value of the house to all the loans on the property.
commission Fee or percentage paid to a mortgage broker for services rendered.
condominium Building where each apartment or residence is individually owned and the common grounds are owned jointly by all the owners of the premises.
condotel Condominium that is serviced as if it were a hotel. These kinds of units are becoming popular as vacation homes.
conforming loan A loan that meets the requirements necessary to be eligible for purchase by Fannie Mae and Freddie Mac.
consumer price index Measures the change in the cost of basic goods and services in comparison with a fixed base period.
cooperative (co-op) Multi-unit housing complex in which owners have shares in the cooperative corporation that owns the property. Each shareholder has the right to occupy a specific unit or apartment.
depository institutions Commercial banks, savings and loans, and credit unions.
discount interest rate Set by the Federal Reserve, it is the rate at which commercial banks can borrow money from the Federal Reserve.
Fannie Mae (Federal National Mortgage Association) Private corporation, chartered by Congress, that acts as a secondary mortgage market investor. Like Freddie Mac, it sets many of the guidelines for conventional mortgage loans.
fixed rate mortgage Loan with an interest rate that does not change during the entire term of the loan.
flip tax Fee levied by co-op if a shareholder re-sells the unit within a set period of time, usually three to four years.
float down One-time opportunity to secure a lower rate, provided by lenders to borrowers who have locked in and interest rates have then fallen.
Freddie Mac (Federal Home Loan Mortgage Corporation) Quasi-governmental, federally sponsored company that acts as a secondary mortgage market investor to buy and sell loans. Like Fannie Mae, Freddie Mac sets many of the guidelines for conforming loans.
front end ratio Total monthly housing expenses (principal, interest, taxes, and insurance) divided by the applicant’s total monthly pretax income.
Ginnie Mae (Government National Mortgage Association) Government-owned corporation that securitizes pools of FHA, VA, Rural Housing Service, and Public and Indian Housing loans.
guarantor Person who makes a legally binding promise to pay another person’s debt if that person defaults.
hard prepayment Clause in loan agreement that requires borrower to pay a penalty for paying off a loan before it’s due.
home equity Current market value of a home minus any debts against it.
home equity conversion mortgage (HECM) A reverse mortgage insured by the federal government.
home equity line of credit (HELOC) Revolving credit line using the home as collateral.
hybrid mortgage Mortgage that is a combination of a fixed loan and an ARM. It begins as a fixed rate loan, but later becomes an ARM.
installment account An account, like a mortgage, in which the amount of the payment and the number of payments is prefixed.
lender rebate Also known as yield spread premium, it is the payment from a lender to a mortgage broker for originating a loan at an “above par” rate.
liability Recurrent payment that an applicant owes, including monthly obligations such as rent and utilities, credit card debt, student loans, car loans, and child support.
lifetime cap Also known as rate ceiling, it limits the amount of interest that can be charged over the life of an adjustable rate mortgage.
limited cash out In a refinancing, closing costs are included in the loan amount, based on the borrower’s home equity, plus a limited amount of additional money can be taken out, up to 2 percent.
liquid asset Item of value that can be converted to cash.
loan originator Serves as an intermediary between the lender and the borrower, also called a mortgage broker.
loan processor Person who handles the paperwork to support the loan application. He works under the supervision of a mortgage broker.
loan-to-value (LTV) Ratio of the fair market value of the house to the loan that will finance its purchase.
locking in Legal commitment between the lender and the borrower that guarantees a specific interest rate for the loan.
mandatory rental pool Requirement of owners of condotels to make their units available for rental, at least part of the time, when not in residence
margin Number of percentage points a lender adds to the index to determine the ARM interest rate.
mortgage banker A lending institution. Mortgage brokers deal with multiple lenders.
mortgage broker Person who serves as an intermediary between the lender and the borrower, originating loans, sometimes called a loan originator.
mortgage insurance premium (MIP) Insurance policy on a home equity conversion mortgage. It is charged both at the closing and as an add-on to the interest rate. At closing, the MIP is charged as 2 percent of the home’s value or 2 percent of the 203-b limit in the area, whichever is less. Plus, .5 percent is added to the interest rate charged on the loan balance.
multi-family housing Properties that contain more than one unit.
negative amortization Occurs when the monthly payments are insufficient to cover the interest accruing on the balance. The difference is added to the remaining principal due.
negative points Cash rebates offered by lenders to consumers as part of a higher-interest-rate loan. The rebate may only be used to defray settlement costs.
no cash-out mortgage No additional funds are borrowed above the balance of the debt and nonrecurrent closing costs.
open house House for sale is open to public viewing. Also realtors hold open houses for other agents prior to listing houses for sale.
option ARM Adjustable rate mortgage that gives borrower a choice of monthly payment alternatives, including some which do not cover the interest due. This can result in negative amortization.
par rate Lowest interest rate at which a lender will make a loan without charging discount points.
payment cap Limits the monthly dollar increase at the time of each adjustment, usually expressed as a percentage of the previous payment. Only monthly ARMs have payment caps.
periodic cap Limits the interest rate increase from one adjustment period to the next.
PITI Acronym for components of a mortgage payment: principal, interest, taxes, and insurance.
points Up-front charges, levied by the lender, to obtain a certain mortgage. Each point costs 1 percent of the loan.
pre-approved Preliminary written, binding approval by a lender of the maximum amount a buyer can borrow for a mortgage.
pre-qualified Process of giving an informal, nonbinding estimate, based on income and debt load, of the amount of money a buyer can spend on a house.
primary mortgage market Lenders who make loans to home buyers. Primarily consists of mortgage originators like commercial banks, savings and loans, credit unions, and so on.
private mortgage insurance (PMI) Insurance that protects the lender from loss in case of default by the borrower. Generally required for loans with less than 20 percent down payment.
producer price index Measures wholesale price levels in the economy.
quitclaim Legal document that transfers all interests a person, for example a former spouse, has in a property.
rainmaker Person who creates a significant amount of new business for a company.
rate ceiling Also known as lifetime cap, it limits the amount of interest that can be charged over the life of an adjustable rate mortgage.
refinancing Process of replacing the current loan with a new loan at a lower interest rate and/or better terms.
reverse mortgage Loan against a home that does not have to be repaid for as long as the homeowner lives there. Limited to owners who are 62 or older.
revolving account An account, like a credit card, that requires at least a specified minimum payment each month plus a service charge on the balance.
sales transfer fee Fee imposed by co-op on the shareholder when he sells his unit.
seasoned loan Loan that is at least 12 months old.
secondary mortgage market Institutions that buy and sell first mortgage trust deeds for investment from primary mortgage lenders through conduits like Freddie Mac, Fannie Mae, and Ginnie Mae, as well as private investment banks.
securitization Creation of a security by pooling mortgage loans purchased from originators. These securities are sold as bonds and their value is derived from the original mortgages from which they are created.
soft prepayment Clause in loan agreement that permits the borrower to repay the loan before it’s due without penalty.
split How the mortgage broker company divides the fees of a transaction.
sponsor Individual or company that builds the co-op or was responsible for its conversion from a rental to co-op building.
standard home equity loan Specified amount of money, loaned in a lump sum, for a specified period of time, using the home as collateral.
subprime market Mortgages that are high-risk, high-interest loans.
title search Thorough examination of all public records that involve title of a specific property. It is to guarantee that there are no outstanding claims against the property except for the liens that will be cleared at the closing.
total annual loan cost (TALC) Good-faith projection of the total cost of the credit.
Truth in Lending Act (TIL) Requires lenders to provide loan applicants a statement containing “good faith estimates” of the true cost of a loan. It will include the total finance charges and the annual percentage rate.
yield spread premium Payment from lender to a mortgage broker for originating a loan at an “above par” rate. Also known as a lender rebate.
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