Mortgage Glossary

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A

Abstract of title
A specified piece of real estate's title history in the form of a written summary.

Abstract of Title
A summary of recorded transactions concerning a property. (An attorney or title insurance company examines an abstract of title for any title defects which must be cleared before a buyer can purchase clear, marketable and insurable title.)

Acceleration Clause
Condition in a mortgage that gives the lender the right to require immediate repayment of the loan balance if regular mortgage payments are not made, or for breach of other conditions of the mortgage.

Acceleration Clause
A provision of a mortgage or note which provides that the entire outstanding balance will become due and payable in the event of default.

Accrued interest
Interest that is due but hasn't yet been paid. It most often comes into play when you buy bonds in the secondary market. Bonds usually pay interest every six months, but it is earned (accrued) by bondholders every month. If you buy a bond halfway between interest payment dates, you must pay the seller for the three months' interest accrued but not yet received. You get the money back three months later when you receive the interest payment for the entire six-month period.

Accrued Interest
Interest which has been incurred but not paid.

Acquisition indebtedness
Mortgage debt on which the interest is deductible. The debt must be used to buy, build or substantially improve your principal residence or second home and must be secured by the property. Qualifying interest paid on up to $1 million can be deducted.

Active participation
The level of involvement that real estate owners must meet to qualify to deduct up to $25,000 of losses from rental real estate. Failure to pass this test could make such losses nondeductible under passive-loss rules.

Adjustable Rate Mortgage (ARM)
A mortgage in which the interest rate is adjusted periodically based on an index. Also called a variable rate mortgage.

Adjustable Rate Mortgage (ARM)
A mortgage in which the interest rate is adjusted periodically based on a pre-selected index. Subject to certain limitations, the rate and payments on an ARM loan rise and fall with the market.

Adjusted basis
Your basis in property is the stepping-off point for determining taxable gain or loss. The basis generally starts out as what you pay for the property, although special rules apply to assets you inherit or receive as a gift. Your basis can be adjusted while you own property. When rental property is involved, for example, you reduce your basis by the amount of any depreciation you deduct while you own the property.

Adjusted gross income
This is your income from all taxable sources minus certain adjustments. The adjustments — sometimes called above-the-line deductions because you can claim them whether or not you itemize deductions — include deductible contributions to regular individual retirement accounts, medical savings accounts and Keogh plans, any penalty paid on early withdrawal of savings, the deduction for 50% of the self-employment tax paid by self-employed taxpayers, alimony payments and job-related moving expenses.

Adjusted Gross Income (AGI)
The amount used in the calculation of an individual's income tax liability; one's income after certain adjustments are made, but before standardized and itemized deductions and personal exemptions are made.

Adjustment Interval
For an adjustable rate mortgage, the time between changes in the interest rate charged. The most common adjustment intervals are one, three or five years.

Adjustment Interval or Adjustment Period
The length of time between rate adjustments on an Adjustable Rate Mortgage (ARM).

Agreement of Sale
Contract signed by buyer and seller stating the terms and conditions under which a property will be sold.

Alimony
Qualifying payments to an ex-spouse that can be deducted as adjustments to income whether or not you itemize. The recipient must include the payments in his or her taxable income.

Alternative Documentation
A substitute method of providing the documentation necessary to approve a loan. For example, bank statements may be substituted if it is not possible to provide written verification of the bank balance directly from the borrower's bank.

Amortization
Literally to "kill off" (root: mort) the outstanding balance of a loan by making equal payments on a regular schedule (usually monthly). The payments are structured so that the borrower pays both interest and principal with each equal payment.

Amortization
The process of paying off a mortgage in regular increments.

Amortization Schedule
This is the formal name for the repayment schedule that shows each of your mortgage payments with a breakdown of how much goes to principal and interest.

Amortization Schedule
A monthly repayment schedule outlining how a loan will be paid off in fixed payments combining principal and interest.

Annual Percentage Rate (APR)
The interest rate which reflects the cost of a mortgage as a yearly rate. This rate is usually higher than the stated loan rate for the mortgage, because it takes into account points and other charges.

Annual Percentage Rate (APR)
A calculation that expresses the total cost of a mortgage loan as a yearly rate (according to a federally mandated procedure). The APR calculation takes into account monthly interest payments, mortgage insurance, points, and certain fees paid at origination. It generally results in a rate slightly higher than the stated interest rate on the loan.

Annuity
A series of regular payments, usually from an insurance company, guaranteed to continue for a specific time, usually the annuitant's lifetime, in exchange for a single payment or a series of payments to the company. With a deferred annuity, payments begin sometime in the future. With an immediate annuity, payments begin right away. A fixed annuity pays a fixed income stream for the life of the contract. With a variable annuity, the payments may change according to the relative investment success of the insurance company.

Application
An initial statement of personal and financial information required to approve a loan provided by the borrower and necessary to intitiate the approval process for a loan.

Application Fee
The fee charged by the lender to the borrower for applying for a loan. Payment of this fee does not guarantee that a loan will be approved. Some lenders may apply the cost of the application fee to certain closing costs.

Appraisal
The determination of property value based on recent sales information of similar properties.

Appraisal
A written estimate of a property's current market value, based on recent sales information for similar properties, the condition of the property and the neighborhood's impact on future property value.

Appraisal Fee
A fee charged by a licensed, certified appraiser to provide an appraisal.

APR
See Annual Percentage Rate.

ARM
See Adjustable Rate Mortgage.

ARM fund
A mutual fund that invests in adjustable-rate mortgages (ARMs).

Assessment
A local tax levied against a property for a specific purpose, such as road or sidewalk construction or sewer or street light installation.

Assignment
The transfer of property rights by one person, the assignor, to another, the assignee.

Assumability
A loan feature that allows the loan to be transferred from the seller to the purchaser of a home with the same terms and conditions, subject to lender approval.

Assumable Loan
These loans may be passed on from a seller of a home to the buyer. The buyer "assumes" all outstanding payments.

B

Balance Sheet
A document showing the financial situation--assets, liabilities, and net worth--of a company at a specific point in time.

Balloon Mortgage
Behaves like a fixed-rate mortgage for a set number of years (usually five or seven) and then must be paid off in full in a single "balloon" payment.Balloon loans are popular with those expecting to sell or refinance their property within a definite period of time.

Balloon Mortgage
A short-term, fixed-rate loan with low payments for a set number of years and a large balloon payment of the remainder of the principal due at the end of the term.

Balloon Payment
A balloon payment is a large payment at the end of a mortgage term. Balloon payments are usually required when the interest rate or payment is low enough that the payment is not enough to cover the principal and interest during the loan. At the end of the mortgage there is still a balance which must be settled in one payment.

Bankruptcy
Proclamation by a court of an individual's (or organization's) state of insolvency, or inability to pay debts. Petition may be brought by an individual or creditors, with a goal of orderly and equitable settlement of obligations.

Basis
See Adjusted basis.

Bearer
The legal owner of a piece of property.

Below-market-rate loans
If you make an interest-free or bargain-rate loan to a friend or relative, you may be required to include in your taxable income some of the interest the IRS figures you should have charged.

Bequest
A gift of personal property by will.

Bi-weekly Mortgage
A payment plan under which the borrower pays one half of a monthly payment every two weeks.

Bill of Sale
A document by which one transfers ownership of goods to another.

Bona Fide
In good faith.

Bond
A document representing a right to certain payments on underlying collateral.

Borrower
(Mortgagor) - An individual who applies for and receives a loan in the form of a mortgage with the intention of repaying the loan in full

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

Broker
An individual who assists in arranging funding or negotiating contracts for a client but does not loan money himself.

Buy-down
A situation in which the seller contributes money, allowing the lender to give the buyer a lower rate and payment, usually in exchange for an increase in sales price.

Buyers' Market
Market conditions that favor buyers. With more sellers than buyers in the market, buyers have ample choice of properties and can negotiate lower prices.

Buyer's Broker
An agent hired by a buyer to locate a property for purchase and to represent the buyer in negotiations with the seller's broker.

C

Call Option
A loan feature that allows the lender to require repayment of the loan in full before the term of the loan is up.

Caps
A set percentage amount by which an adjustable rate mortgage may adjust each adjustment period. For adjustable loans, caps are usually quoted as two numbers as in 2/6. The first number indicates how much a loan may adjust at each adjustment period while the second number indicates how much a loan may adjust over its lifetime.

Loans like the 3/1 and 5/1 adjustable which have an initial fixed period are quoted with 3 numbers as in 3/2/6 which would mean that the first adjustment may be as much as 3%, subsequent adjustments are capped at 2% each, and the lifetime cap is 6%.

Two-Step loans are quoted with a single cap, which is the amount by which the loan may adjust at its single adjustment date.

Caps
Limits on changes in ARM interest rates or monthly payments, either in an adjustment period or over the life of the loan.

Caps (interest)
Consumer safeguards which limit the amount the interest rate on an adjustable rate mortgage can change in an adjustment interval and/or over the life of the loan.

Caps (payment)
Consumer safeguards which limit the amount monthly payments on an adjustable rate mortgage may change. Since they do not limit the amount of interest the lender is earning, payment caps may cause negative amortization.

Cash Out
A refinance for more than the balance of the current mortgage. The excess money taken out reduces the borrower's equity.

Cashier's Check (or Bank Check)
A check whose payment is guaranteed because it was paid for in advance and is drawn on the bank's account instead of the customer's.

CC&Rs
See Covenants, Conditions and Restrictions

Ceiling
The maximum allowable interest rate of an adjustable rate mortgage.

Certificate of Eligibility
Document issued by the Veterans Administration to qualified veterans which entitles them to VA-guaranteed loans. Obtainable through local VA offices by submitting form DD-214 (Separation Paper) and VA form 1880 (request for Certificate of Eligibility).

Certificate of Occupancy
Document issued by local government agency stating that a property meets the requirements of health and building codes.

Certificate of Reasonable Value (CRV)
A property appraisal performed by a VA approved appraiser which establishes the limit on the principal of the VA loan.

Certificate of Title
Written opinion of the status of title to a property, given by an attorney or title company. This certificate does not offer the protection given by title insurance.

Certificate of Veteran Status
Document given to veterans or reservists who have served 90 days of continuous active duty (including training time) which enables them to obtain lower down payments on certain FAHFHA-insured loans. Obtainable through local VA offices by submitting form DD-214 (Separation Paper) with form 26-8261a (request for certificate of veteran status.)

Certified Check
A check drawn on the issuer's account for funds that have been segregated by the bank, thus guaranteeing sufficient funds for payment.

Chain of Title
The chronological order of conveyance of a property from the original owner to the present owner.

Charitable contribution
A gift of cash or property to a qualified charity for which a tax deduction is allowed.

Child support
Payments made under a divorce or separation agreement for support of a child. Payments are neither deductible by the person who pays them nor taxable income to the person who receives the money.

Clear Title
A marketable title, free of clouds and disputes.

Closing (or Settlement)
Meeting between the buyer, seller and lender or their agents at which property and funds legally change hands.

Closing Agent
Neutral third party appointed to act as a custodian for documents and funds during the transfer of property from seller to buyer. Depending on local law and custom, this could be an attorney, escrow agent or title company.

Closing Costs
Fees incurred in a real estate or mortgage transaction paid by borrower and/or seller at the closing of the transaction.

Closing/Settlement Statement
A form prepared by the closing agent that itemizes the closing costs associated with purchasing or refinancing a home. Also see HUD-1.

Cloud on Title
An outstanding claim or encumbrance that, if valid, would affect or impair the owner's title.

COFI
See Cost of Funds Index

Collateral
Assets that secure a loan (in the case of a mortgage, real property serves as collateral).

Combined Loan to Value (CLTV)
The percentage of the property valued borrowed through a combination of more than one loan (for example, first mortgage and home equity line of credit. Mathematically, combined loan and line of credit amounts/property value = Combined Loan to Value Ratio).

Commission
Money paid to a real estate agent or broker by the seller (usually 6-7% of the sale price of the house).

Commitment
A formal offer by a lender to make a loan under certain terms or conditions. to a borrower.

Condominium
A form of property ownership in which the homeowner holds title to an individual dwelling unit and an interest in common areas and facilities of a multi-unit project.

Conforming Loan
A mortgage loan eligible for purchase by the two Federally sponsored housing agencies, Fannie Mae and Freddie Mac.

Construction APR
A calculation that expresses the cost of a mortgage loan as a yearly rate (according to a federally mandated procedure) over the life of the loan, including the construction phase. The APR calculation takes into account monthly interest payments, mortgage insurance, points, and certain fees paid at origination. It generally results in a rate higher than the stated interest rate on the Note, as well as the estimated APR disclosed on the permanent financing phase of the loan term. You may receive two APRs, one for the construction period of your loan and the other for the permanent financing of your loan or the APR can be combined for both the construction and permanent periods of your loan.

Construction Loan
A short term interim loan to fund the construction of buildings or homes, which usually advances the money in installments as work progresses.

Construction-to-Permanent (CTP) Loan
A construction loan that automatically converts to a permanent loan at the end of the construction period.

Contingency
A condition which must be satisfied before a contract is legally binding--before a sale can close.

Contract of Sale
The agreement between the buyer and seller on the purchase price, terms, and conditions of a sale.

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

Conversion Clause
A provision in some ARMs that allows changing an ARM to a fixed-rate loan, usually after the first adjustment period. The new fixed rate is set at based on a formula tied to current rates, and there may be a charge for the conversion feature.

Convertible ARMs
ARMs with the option of conversion to a fixed loan during a given time period (see "Conversion Clause").

Conveyance
The transfer of a deed, lease or mortgage.

Cost of Funds Index (COFI)
A common index used in adjustable rate loans based on the weighted-average interest rate paid for deposits by savings institutions that are members of the 11th Federal Home Loan Bank District.

Courier / Mail Fees
Fees charged by the closing agent for shipment of loan documents and related paperwork. IndyMac Bank does not pass our own courier and mail fees to you.

Covenants, Conditions and Restrictions (CC&Rs)
A document that defines the use, requirements and restrictions of a condominium or Planned Unit Development (PUD).

Credit Report
A report detailing the credit history of a prospective borrower, used by lenders to help determine creditworthiness.

Credit Report Fee
Fee paid to a credit reporting agency so that we can obtain a copy of your credit history and credit score.

D

Debt-to-Income Ratio
A figure, expressed as a ratio, that compares the amount of recurring debt payments a borrower is obligated to make to the amount of their income.

Deductions
Expenses you are permitted to subtract from your taxable income. All taxpayers may claim a standard-deduction amount - $6,900 for 1997 and $7,100 for 1998 joint returns, for example. When qualifying expenses exceed the standard deduction, you claim the higher amount by itemizing your deductions. Although no records are needed to back up your standard deduction, you must maintain records of qualifying expenditures if you itemize.

Deed
Legal document by which title to a property is transferred from one owner to another. The deed contains a description of the property and is signed, witnessed, and delivered to the buyer at closing.

Deed of Trust
Document creating a lien on a property as security for the payment of a debt. In some states, a mortgage is used instead.

Default
Failure to meet legal obligations in a contract, including failure to make payments on a loan. A mortgage is generally considered to be in default when a payment is 30 days past due.

Deferred Interest
Amount added to the balance of a loan when monthly payments are insufficient to cover the interest incurred. This results in negative amortization.

Delinquency
Failure to make required payments on time.

Deposit
Cash paid to the seller when a formal sales contract is signed.

Depreciation
A deduction to reflect the gradual loss of value of business property as it wears out. The law assigns a tax life to various types of property; your basis in such property is deducted over that time period.

Depreciation
Decline in property value.

Discount Points
See Points

Document Review
Fee charged by lender for review of documents necessary to fund a loan.

Documentary Stamps
A state tax, in the forms of stamps, required on deeds and mortgages when real estate title passes from one owner to another.

Down Payment
In a home purchase, the difference between the purchase price and the mortgage amount.

E

Earned income
Compensation, such as salary, commissions and tips, you receive for your personal services. This is distinguished from unearned or investment income, such as interest, dividends and capital gains.

Earnest Money
Deposit made by a buyer toward the down payment as evidence of good faith when the purchase agreement is signed.

ECOA
See Equal Credit Opportunity Act

Effective Interest Rate
The cost of a mortgage expressed as a yearly rate, usually higher than the interest rate on the mortgage since this figure factors in the up-front costs of acquiring the loan.

Encumbrance
A legal right or interest in a property that affects title and may lessen the property value.

Equal Credit Opportunity Act (ECOA)
Federal law requiring creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status or receipt of income from public assistance programs.

Equity
Equity is the value of the property minus the amount of money still owed on the loan. If you have a $150,000 home and still owe $125,000 on the mortgage, you have $25,000 in equity assuming no complicating factors like market value changes.

Equity
The difference between the current market value of a property and the outstanding mortgage balance.

Equity Loan
A loan based on the borrower's equity in his or her home.

Escrow
An escrow is a holding account for money (or other securities) that is to be used for a specific purpose. In the case of a mortgage, when you make a mortgage payment, you are paying an additional amount above the principal and interest which is to be held for taxes and insurance. This money is held in escrow until it is time to make a payment to your insurance company or to the tax collector. At that time the escrow agent will disburse funds to make the payment.

Escrow
1. Neutral third party appointed to act as a custodian for documents and funds during the transfer of property from seller to buyer or in the course of refinancing property.

2. Account held by lender containing funds collected in conjunction with monthly mortgage payments. The funds in the escrow account are used by the lender to pay annual expenses such as taxes and insurance on behalf of the borrower.

Escrow Account
Account held by lender containing funds collected in conjunction with monthly mortgage payments. Also known as impounds, the funds in this account are held in trust by the lender on behalf of the borrower, and are used to pay expenses such as property taxes and homeowner's insurance.

Escrow Fee
This is the fee paid to the escrow agent, title agent, or attorney to execute the closing of your loan. This party completes tasks including coordinating document signing, obtaining payoff information for existing liens, obtain evidence of homeowners insurance, coordinate with the title insurer to obtain clear title, and disburse loan proceeds.

Escrow Officer
See Closing Agent

Estate
All assets owned by an individual at death, to be distributed according to the individual's will (or a court ruling if there is no will). see also real estate, administrator, beneficiary, decedent, executor, gross estate, net estate, inheritance.

Estimated Settlement (or Closing) Statement
A document provided by the closing agent a few days before closing, detailing all costs and indicating the final sum the buyer will be required to bring to the closing.

Expense-to-Income Ratio
Also known as Back-End Ratio and Debt-to-Income Ratio. The figure derived by dividing a borrower's monthly financial obligations by his/her gross monthly income.

F

Fannie Mae
The acronym for the Federal National Mortgage Association, which buys mortgages on the secondary market, repackages them and sells off pieces to investors. The effect is to infuse the mortgage markets with fresh money.

Fannie Mae (FNMA)
Corporation created by Congress that buys and sells residential mortgages. Fannie Mae provides funds for one in seven mortgages.

Farmer's Home Administration (FmHA)
An agency of the U.S. Department of Agriculture, that provides financing for purchasers of homes and farms in small towns and rural areas.

FDIC
See Federal Deposit Insurance Corporation.

Federal Deposit Insurance Corporation (FDIC)
Independent deposit insurance agency created by Congress to maintain stability and public confidence in the nation's banking system.

Federal Home Loan Bank Board (FHLBB)
Former name for the regulatory and supervisory agency of federally chartered savings institutions, now called the Office of Thrift Supervision.

Federal Home Loan Mortgage Corporation (FHLMC)
See Freddie Mac

Federal Housing Administration (FHA)
Government agency, division of the Department of Housing and Urban Development, which insures residential mortgage loans made by private lenders and sets standards for underwriting mortgage loans.

Federal National Mortgage Association (FNMA)
See Fannie Mae

Federal Reserve
Central bank of the United States and major regulatory agency for many commercial banks.

Fee Simple
Absolute ownership of real property. FHA - See Federal Housing Administration.

FHA
The Federal Housing Administration (FHA) is a federal organization that guarantees mortgage loans. The FHA does not loan money. There are many rules in the FHA designed to qualify buyers and property. The FHA qualifies the buyer according to gross income, and the property to be purchased must meet the FHA standards.

FHA Loan
Loan insured by the FHA for low to middle income homes, open to all qualified home purchasers.

FHLBB
See Federal Home Loan Bank Board.

FHLMC
See Federal Home Loan Mortgage Corporation. First Mortgage - The primary lien against a property.

FICO Score
A credit evaluation score developed by Fair, Isaac, and Co., used by lenders as one factor in making a loan decision. Some methods of improving a score are to establish and maintain a payment history on credit accounts, keep public records (bankruptcies, judgments, etc.) and collection accounts to a minimum, pay down loans, keep credit cards well below their limit, avoid late payments, and limit applying for new credit applied.

Fixed Rate
An interest rate that is fixed for the term of the loan.

Fixed-Rate Mortgage
A mortgage whose interest rate does not change for the life of the loan. Payments are also fixed.

Flood Certification
Federal law requires that you obtain flood insurance, if you obtain a mortgage, and you property is in a designated flood zone. This fee is paid to a third party to determine the flood zone status of your property, and to notify us of changes to the flood zone map that effect your property during the life of your loan.

Flood Insurance
A form of hazard insurance required by the federal government to cover property damage or loss in flood zones.

Floor
The minimum interest rate payable on an adjustable-rate mortgage.

Forbearance
Grace period given when a lender postpones foreclosure to give the borrower time to catch up on overdue payments.

Foreclosure (or Repossession)
Legal process by which the lender forces the sale of a property when the borrower has not met the mortgage terms.

Freddie Mac
The nickname for the Federal Home Loan Mortgage Corporation; it operates similarly to Fannie Mae.

Freddie Mac (FHLMC)
Quasi-governmental agency that purchases conventional mortgages from insured depository institutions and HUD-approved mortgage bankers.

Future Value of Money
The future value of money is the value that your money will have after it has compounded at some interest rate for a period of time. If you put $100 in the bank now at 3% interest rate compounded annually, its future value is $103. Conversely, the present value of the $103 that you will have in one year is presently $100 if it compounds annually at 3% interest. Future and present values are essential when comparing values of money now and its worth in the future. For example, you may have a lottery in your state. You might know that the next prize amount is worth $1,000,000. What is not said many times is that this is $1,000,000 future value. That is, you will likely not receive $1,000,000 cash (less income tax, of course) if you were to be the sole winner. Instead you will probably receive a considerably reduced sum of money, that if invested at prevailing rates, will be worth $1,000,000 in 20 years. Let us say the prevailing rate is 5% compounded annually. If you receive $376,500 and deposit into this account you will have $998,966 after 20 years. So the future value of $376,000 is nearly $1M! Conversely, the present value of $1,000,000 twenty years from now is $376,000 now.

G

GFE
See Good Faith Estimate

Ginnie Mae
The nickname for the Government National Mortgage Association, which buys up mortgages in the secondary market and sells them to investors via securities known as pass-through certificates.

Ginnie Mae
See Government National Mortgage Association.

GNMA
See Government National Mortgage Association.

GNMA, or Ginnie Mae
Government agency that provides funds for VA and FHA loans.

Good Faith Estimate
Written estimate of costs the borrower will pay at closing, provided by a lender within three days of loan application.

Grace Period
Period of time during which a loan payment may be made after its due date without incurring a late penalty.

Graduated Payment Mortgage
A mortgage where the payments start out lower so the borrower can qualify easier. The payments will gradually increase over three to five years to a standard fixed payment. This type of mortgage can cause the principal to actually increase for the first few years resulting in you owing more than you initially started with. In some cases the interest on the mortgage will be more than the payment resulting in this strange situation.

Graduated Payment Mortgage (GPM)
Mortgage in which initial low payments (with potential negative amortization) increase regularly for several years and then level off.

Gross income
All of your income from taxable sources, before subtracting any adjustments, deductions or exemptions.

Gross Income
Total income before taxes or expenses are deducted.

Gross Monthly Income
Total monthly income before taxes or expenses are deducted. Used in the loan origination process to calculate borrower's ability to make payments on a loan.

Growing Equity Mortgage
A fixed-rate loan in which payments increase by a predetermined amount each year, reducing the outstanding balance of the loan. This accelerated payment plan allows repayment of a 30-year loan in 15 to 20 years.

Guarantee or Guaranty
A promise by one party to pay a debt or perform an obligation contracted by another in the event of that person's default.

H

Hazard Insurance
A policy that protects the insured against loss due to fire or certain natural disasters in exchange for a premium paid to the insurer. Also known as Home Owner's Insurance or fire insurance.

Head of household
A filing status with tax rates that are lower than those that apply to single individuals. It's available to unmarried taxpayers who pay more than half the cost of maintaining a home for a dependent relative or unmarried child. Generally, the taxpayer and dependent must live in the same home.

Home Equity Line of Credit
A revolving line of credit secured by the equity in the home. Unlike a Home Equity Loan, these funds may be drawn and repaid like a credit card.

Home equity loan
Debt secured by your principal residence or second home (such as a second mortgage or home-equity line of credit) that is not used to buy, build or substantially improve the property. Although interest on most loans is not deductible (see Personal interest), interest on up to $100,000 of home-equity debt remains deductible.

Home Equity Loan
An additional mortgage secured by the equity in the home. All funds for this loan are disbursed at closing. (In contrast, see Home Equity Line of Credit)

Homeowners Warranty
A type of insurance that covers repairs to specified parts of a house for a specific period of time.

Housing and Urban Development (HUD)
A U.S. government agency established to implement federal housing and community development programs; oversees the Federal Housing Administration.

Housing Code
Local government ordinance that sets minimum standards of safety and sanitation for existing residential buildings.

Housing Expense-to-Income Ratio
The ratio, expressed as a percentage, the result of dividing a borrower's housing expenses by his/her gross monthly income. HUD - See Housing and Urban Development.

HUD-1 Settlement Statement
A form mandated by the federal government that itemizes the closing costs associated with purchasing a home. Also see Estimated Settlement Statement.

I

Impound (or Reserves)
Portion of a borrower's monthly payments held by the lender to pay for taxes, insurance, and other items as they become due.

Impound Account
See Escrow Account

Index
A published rate used by lenders to calculate interest adjustments on adjustable rate mortgages (Index + Margin = Interest Rate). Common indexes include 1-Year Treasury securities, COFI (Cost Of Funds Index) and Six-Month LIBOR (London Interbank Offered Rate).

Initial Rate
The rate charged during the first interval of an adjustable rate mortgage.

Insolvency
Condition of a person unable to pay debts as they fall due.

Interest
Interest is money you pay a lender for the use of their money. When a lender loans you money, the lender wants all the money back plus a fee for the use of that money. It is usually expressed in terms of a percentage of the principal. There are several ways to identify interest rates. In its basic form interest can be a flat percentage of the initial amount loaned. If you borrow $1,000 and agree to pay 10% interest, paying the loan back in one payment at the end of the year, you will pay $100 in interest for a total of $1,100. Mortgage interest is usually more complicated since the loan can extend for thirty years and payments can be made at regular intervals of months or weeks. Interest rates are usually quoted for a one-year period and the monthly interest applied to a monthly payment is one-twelfth of the interest. If your annual interest is 12%, your monthly interest rate is 1%. The annual percentage rate (APR) actually is different from the interest you will pay, though. The actual interest rate you will pay is known as the effective rate. The difference is not great, but can add up to a substantial amount when the difference is accumulated over many years. As an example, let us take the same $1,000 at 12%. At the end of the first month, January, the interest paid is 1% so the balance becomes $1,010, less a payment of $88.85. The February balance is $921.15. Now the 1% of the new balance is $9.21, not $10 as was the first month. Minus a payment of $88.85 and the new March balance is $841.51. As you can see, you are paying $88.85 for 12 months, for a total of $1,066.20. This calculates to an effective interest rate of 6.62% ( $1,066.22 / $1.000).

Interest
Charge paid for borrowing money.

Interest Rate
The rate expressed as a percentage of the outstanding balance used to calculate interest charges.

Interest Rate Cap
A safeguard built into ARMs to prevent drastic changes in interest rates.

Investment interest
Interest paid on loans used for investment purposes. You can deduct this interest up to the amount of investment income you report

J

Joint Liability
Liability shared among two or more people, each of whom is liable for the full debt.

Joint Tenancy
The ownership of property by two or more persons with the survivor taking the share of the deceased.

Jumbo Loan
A mortgage with a principal balance that exceeds the amount eligible for purchase by Fannie Mae and Freddie Mac. Jumbo loans generally carry a higher interest rate.

Junior Mortgage
A mortgage subordinate or secondary to another mortgage. In the case of a foreclosure, a senior mortgage will be paid first.

L

Late Charge
Penalty paid by a borrower when a payment is made after the due date.

Lease-Purchase Mortgage Loan
An alternative financing option that allows low- and moderate-income homebuyers to lease a home from a nonprofit organization with an option to buy. Monthly rental payments cover mortgage payments and include an additional amount that is saved toward a down payment.

Lender
The bank, mortgage company, or mortgage broker offering the loan.

Lender's Title Insurance
Premium paid to the title insurance company to insure that you are the legal owner of the property, there are no liens or encumbrances on your property that effect the transaction, there are no legal claims or pending legal claims against the property, and there are no tax liens on the property.

LIBOR (London Interbank Offered Rate)
The interest rate charged among banks for short-term Eurodollar loans, and a common index for adjustable rate mortgages.

Lien
A legal claim against a property that must be paid when the property is sold.

Lifetime Interest Rate Cap
The highest interest rate that can be charged for an adjustable rate mortgage during the life of the loan.

Loan Administration (or Loan Servicing)
The collection of mortgage payments from borrowers and related responsibilities (such as handling escrows for property tax and insurance, foreclosing on defaulted loans and remitting payments to investors).

Loan Application
Document required by lenders prior to loan approval containing detailed information about the borrower and property.

Loan Application Fee
Fee paid by prospective buyer to lender when applying for a mortgage. Loan Origination Fee (Processing Fee) - Fee charged by a lender that compensates for the work in evaluating and processing the loan.

Loan Servicing (or Loan Administration)
The collection of mortgage payments from borrowers and related responsibilities (such as handling escrows for property tax and insurance, foreclosing on defaulted loans and remitting payments to investors).

Loan to Value (LTV) Ratio
The percentage of the property value borrowed (loan amount/property value = loan to value ratio).

Lock or Lock In
A lender's guarantee of an interest rate and related points for a set period of time, usually between loan application and loan closing. Protects borrower against rate increases during that time.

LTV
See Loan To Value Ratio

M

Margin
The percentage amount added to an index to calculate the interest rate of an adjustable rate mortgage at each adjustment.

Market Value
The value that a willing seller would accept and a willing buyer would offer given a reasonable time for the seller to market a property.

Marketable Title
A title that is free and clear of liens, clouds, or other defects which would prevent the sale of the property.

MIP (Mortgage Insurance Premium)
Insurance purchased by borrower to insure against default on government (FHA or VA) loans.

Monthly Housing Expense
Total monthly expense of principal, interest, taxes and insurance.

Mortgage
A mortgage is a legal document that is used to secure the performance of an obligation. A typical real estate transaction consists of a lender (mortgagee) loaning money to the buyer (mortgagor). The mortgage creates a lien on the property as security for the debt; a promissory note is signed by the mortgagor to create the liability of the buyer. For a valid mortgage there must be both the note and the pledge.

Mortgage
Document creating a lien on a property as security for the payment of a debt. In some states, a Deed of Trust is used instead.

Mortgage Banker
A lender that originates and funds, then sells and services mortgage loans.

Mortgage Broker
A person or entity that arranges financing for borrowers, but places loans with lenders rather than funding them with the broker's own money.

Mortgage Insurance
Insurance purchased by a buyer to cover the lender's risk of loss. Mortgage Insurance is generally required by lenders when the down payment is less than 20% of the purchase price.

Mortgage interest
Deductible interest paid on debt that qualifies as acquisition indebtedness or home-equity debt.

Mortgage Loan
A loan for which real estate serves as collateral to provide for repayment in case of default. Mortgage Note - Legal document obligating a borrower to repay a loan at a stated interest rate during a specified period of time. The agreement is secured by a mortgage.

Mortgagee
The lender in a mortgage loan transaction.

Mortgagor
(Borrower) - An individual who applies for and receives a loan in the form of a mortgage with the intention of repaying the loan in full

Mortgagor
The borrower in a mortgage loan transaction.

N

Negative amortization
With some mortgages, it is possible to have a payment calculated such that the principal and interest total up to less than the amount that you would normally pay for a self-amortizing loan. In this situation, since your payment does not cover the principal and interest, the amount that you are short is still yet to be paid and can accumulate more interest than would normally be accumulated. Therefore the balance you owe does not decrease as much, and the total amount you will pay for the loan will be more than for a self-amortizing loan. In essence you are financing additional interest.

Negative Amortization
Increase in principal balance that occurs when monthly payments are not large enough to pay all interest incurred on a loan, usually caused when payment caps prevent sufficient payment increases. Deferred interest is added to the loan balance, resulting in the borrower owing more than the original amount of the loan.

Net
After taxes.

Net Effective Income
Gross income minus federal income tax.

Net worth
Your net worth is the value of your holdings after your liabilities are satisfied. For example, let us say you own one home already valued at $100,000. You still owe $80,000, you have $5,000 in loans and credit cards, and you have $25,000 in the bank. Your net worth is $25,000 + $100,000 - $80,000 - $5,000, or $40,000.

Non Assumption Clause
A statement in a mortgage contract forbidding the assumption of the mortgage by another borrower without the prior approval of the lender.

Nondischargeable Debt
Debt, such as taxes, that cannot be forgiven in a bankruptcy liquidation.

Note
Legal document stating the terms of a debt and a promise to repay it.

Notice of Default
Written notice to a borrower that a default has occurred and that legal action may be taken.

O

Office of Comptroller of the Currency
The oldest federal financial regulatory body, which oversees the nation's federally chartered banks.

Office of Thrift Supervision
Regulatory and supervisory agency for federally chartered savings institutions.

Online Application Credit
This is a rebate that is deducted from your closing costs as a benefit for applying for your loan online.

Origination Fee
See Loan Origination Fee

Owner Financing
A purchase in which the seller provides all or part of the financing.

P

Par
Mortgage Rate: The face value of a rate with no points charged or credited.

Stock Price: The face value of a stock or bond. Also called par value.

Payment
The periodic payment due on a mortgage loan each payment period (normally a month) to cover accrued interest and to repay a portion of the principal balance. Most mortgages are set up where the payments will reduce the principal balance a little with each payment until the balance is zero when the last payment is made.

Payment Cap
Limit on the amount by which a borrower's adjustable rate mortgage payments may increase, regardless of rise in interest rates. May result in negative amortization.

Per Diem Interest
Interest calculated per day. Depending on the day of the month on which closing takes place, borrower pays interest from the date of closing to the end of the month. The first mortgage payment of a loan is generally due the first of the following month.

Periodic Interest Rate Cap
A limit on the amount that interest rates can change at each adjustment period.

Permanent Loan
A long term mortgage of ten years or more.

PITI
This abbreviation stands for principal, interest, tax, insurance. It is a common term to describe the payment one makes on a mortgage, when that payment includes taxes and insurance.

PITI
Abbreviation for Principal, Interest, Taxes and Insurance, the components of a monthly mortgage payment, also called Monthly Housing Expenses.

Pledged Account Mortgage (PAM)
Money is placed in a pledged savings account. This fund, plus earned interest, is used to gradually reduce mortgage payments.

Points
Charges connected with getting a mortgage. Each point is equal to 1% of the mortgage amount. Points paid on a mortgage to buy or improve your principal residence are generally fully deductible in the year you pay them. Points paid to refinance a principal home or buy any other property must be deducted over the life of the loan.

Points (or Discount Points)
Money paid to a lender at closing in exchange for a lower interest rate. Each point is equal to 1% of the loan amount.

Prepayment penalty
Prepayment penalties are those charges which a lender imposes if you wish to pay off your loan early. The loans which will carry a prepayment penalty often penalize you only for paying off the loan early in the first five years, and thereafter a graduating scale may apply, or there may be no prepayment penalty at all after that initial five year period.

Present value of money
Present Value and Future of Money

The future value of money is the value that your money will have after it has compounded at some interest rate for a period of time. If you put $100 in the bank now at 3% interest rate compounded annually, its future value is $103. Conversely, the present value of the $103 that you will have in one year is presently $100 if it compounds annually at 3% interest. Future and present values are essential when comparing values of money now and its worth in the future. For example, you may have a lottery in your state. You might know that the next prize amount is worth $1,000,000. What is not said many times is that this is $1,000,000 future value. That is, you will likely not receive $1,000,000 cash (less income tax, of course) if you were to be the sole winner. Instead you will probably receive a considerably reduced sum of money, that if invested at prevailing rates, will be worth $1,000,000 in 20 years. Let us say the prevailing rate is 5% compounded annually. If you receive $376,500 and deposit into this account you will have $998,966 after 20 years. So the future value of $376,000 is nearly $1M! Conversely, the present value of $1,000,000 twenty years from now is $376,000 now.

Principal
The principal amount of the loan is the amount still owed on the loan. When you first obtain a loan, the principal is the amount borrowed. As you make payments, only a portion of each payment is applied to the principal; the rest is applied to interest, and property tax and insurance if those are included in your payment. You may also be paying for taxes and insurance if you are payment is set up that way. The principal amount for a fixed-interest rate mortgage typically decreases slowly at first, with most of the payment being applied to the interest. As time goes on, the principal gradually received more of the payment since less of the payment is applied to the interest.

R

Real estate investment trust (REIT)
A closed-end investment company that buys real estate properties or mortgages and passes virtually all of the profits on to its shareholders. REIT shares trade like stock on the NYSE and other stock exchanges and offer a convenient way for small investors to add a real estate component to their investment portfolio.

Refinancing
Refinancing is replacing your current mortgage with a totally new mortgage. This can be done to get a lower interest rate or just to pull out part of the equity you have built up in the mortgage. Normally you will have to pay the loaning institution a percentage of the new mortgage amount (called points where 1 point = 1 percent). The points are one of the ways the loaning institution makes profit.

S

Sallie Mae
Nickname for the Student Loan Marketing Association, which buys student loans from colleges, universities and other lenders and packages them into units to be sold to investors. Sallie Mae thus infuses the student-loan market with new money in much the same way that Ginnie Mae infuses the mortgage market with new money.

Self-amortizing loan
A loan is said to be self-amortizing when the payment amount is calculated such that there is no balance at the end of the loan period. Most fixed-rate mortgages are self-amortizing loans.

T

Taxable income
Income that is taxable (wages, interest and dividends) rather than tax-exempt (interest on municipal bonds). On tax returns, it is your income after subtracting all adjustments, deductions and exemptions — that is, the amount on which your tax bill is computed.

Title Insurance
A title is a right to own land and documents the ownership of the land. Title insurance is insurance that protects the insured from problems that may arise from things that may have gone wrong with the original filing of the title. If an illegal copy of a title was filed originally giving someone ownership of land that did not rightfully belong to them, and if it is not discovered at the time another buyer comes along, title insurance will insure the insured against the false original title. It also protects against misfiled documents or anything else that can affect who the rightful seller is.

V

VA
The Veterans Administration (VA) does not loan money but instead guarantees the loans. Military members can qualify for a VA loan. VA loans offer many benefits to the buyer, such as no down payment required.

W

W-2 Form
A tax form prepared by an employer and given to an employee to be filed with his/her 1040 form, listing wages earned during that year, federal and state taxes withheld, and Social Security tax information.