Here’s a glossary of terms often used in the lending industry:
Amortization
This is when monthly payments are large enough to pay the interest and reduce the principal on a mortgage. The opposite is Negative Amortization.
Annual Percentage Rate APR)
A measure of the cost of credit expressed as a yearly rate. It includes interest as well as other charges. Because all lenders follow the same rules to ensure the accuracy of the annual percentage rates, it provides consumers with a good basis for comparing the cost of loans, including mortgage plans.
Adjustable Rate
Mortgage (ARM)
A mortgage where the interest rate is not fixed but changes during the life of the loan in line with movements in an index rate.
Adjustable Mortgage
Loan (AML)
Same as an ARM.
Assumability
When a home is sold, the seller may be able to transfer the mortgage to the new buyer. This means the mortgage is “assumable.” Lenders generally require a credit review of the new borrower and may charge a fee for the assumption. Some mortgages contain a due-on-sale clause which means the mortgage may not be transferable to a new buyer. Instead, the lender may require the full balance.
Buydown
With a buydown, which can occur in all types of mortgages, the seller pays an amount to the lender so the lender can give a lower rate and lower payments. The seller may increase the sale price to cover the cost of the buydown.
Cap
A limit on how much the interest rate or the monthly payment can change in an ARM.
Conventional Loan
A mortgage not affiliated with either FHA or VA.
Conversion Clause
A provision in some ARMs that allows the borrowers to convert the loan to fixed rate at some point.
Discount
The number of percentage points given back by the lender to get a lower rate or lower payments for part of the mortgage term.
ECOA
The Equal Credit Opportunity Act is a Federal law prohibiting discrimination in lending.
FHA Loan
A type loan made through mortgage lenders and insured through the Federal government.
Index
The measure of the interest rate changes that the lender uses to decide how much the interest rate on an ARM will change.
LTV
“Loan to Value”. This is expressed in a percentage. If the loan is for $50,000 and the property is valued at $100,000, the LTV is 50 percent. Typically, the LTV is in the 80 percent range.
Margin
The number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment.
Mortgage Insurance
Premium (MIP)
A premium charged by the FHA for insuring loans. It usually is paid at closing by the buyer.
NEFAR Affiliate
Membership in the Northeast Florida Association of REALTORS® by an organization or person not directly involved in real estate sales, such as mortgage lenders. This membership allows access to NEFAR functions and opportunities to participate in many NEFAR activities.
Negative
Amortization
This occurs when monthly payments do not cover all of the interest cost. It can result when an ARM has a payment cap not high enough to cover interest due.
PITI
The acronym for the four elements which make up a monthly payment: Principal, Interest, Taxes and Insurance.
Private Mortgage
Insurance (PMI)
Insurance which covers the mortgage company in case of a default by the borrower. This is regularly required when a loan runs over 80 percent LTV.
Points
A point is equal to one percent of the principal amount of the mortgage. Lenders frequently charge points to increase the yield on the mortgage and to cover closing costs. Point payments usually are collected at closing and may be paid by the borrower or the seller, or split by both.
RESPA
The Real Estate Settlement Procedures Act is a Federal law which requires lenders to provide prospective homebuyers with information on known and estimated closing costs.
TRETS
Universal Residential Loan Application. A four-page application form used by lending institutions.
Variable Rate
Mortgage (VRM)
Same as an ARM.
VA Mortgage
A mortgage only available to veterans. It is handled through a mortgage lender and guaranteed by the Federal government.