Acceleration Clause
Allows the lender to demand immediate payment of the balance of the loan should you default on your payments.
Adjustable Rate Mortgage (ARM)
A mortgage in which the interest rate is adjusted periodically based on a designated financial index. Also known as variable rate mortgage.
Adjustment Interval
On an adjustable rate mortgage, the time between changes in the interest rate and/or monthly payment.
Amortization
Equal periodic payments calculated to pay off the loan at the end of a fixed period, typically 15 or 30 years.
Annual Percentage Rate (APR)
An interest rate reflecting the cost of a loan as a yearly rate. This rate is likely to be higher than the stated note rate on the mortgage, as it takes into account points and other credit costs. The APR allows borrowers to compare different types of mortgages based on the annual cost for each loan.
Appraisal
Estimate of the value of property by a qualified professional called an "appraiser."
Assumption
Agreement between buyer and lender where the buyer takes over the payments on an existing mortgage.
B
Balloon Payment Mortgage
Usually a short-term loan involving small payments for a set period of time and one large payment for the remaining principal balance at a specified time.
Broker
An individual in the business of assisting, arranging, funding or negotiating loans for a client, but does not loan the money himself.
Business Inventories And Sales
These figures measure the inventories and sales of manufacturing,
wholesalers, and retail establishments. These figures are released
monthly by the Bureau of Census. In most cases, an increase in these
numbers indicates an expanding economy which could be inflationary. Bond
Market Moves Down In Price.
Buy Down
When the lender and/or the home builder subsidizes the mortgage by lowering the interest rate during the first few years of the loan. While the payments are initially low, they will increase when the subsidy expires.
C
Capacity Utilization
The capacity utilization rate measures the percent of industrial
output currently in use. A change in the rate indicates a change in the
direction of economic activity. As the percentage rate moves closer to
90% the industrial output is practically at full capacity and is
inflationary. A number closer to 70% is recessionary. A higher percent-
age indicates a stronger manufacturing sector and an expanding economy
which can be inflationary. Bond Market Moves Down in Price.
Consumer Price Index (CPI)
The consumer price index is an indicator of the general level of
prices. Components include energy, food and beverages, housing, apparel,
transportation, medical care, and entertainment. When the consumer price
index goes up, it is a sign of an inflationary environment. Consumers
have to pay more for the same amount of goods and services. Bond Market
Moves Down In Price.
CAPS (Interest)
Consumer safeguards that limit the amount that the interest rate on an ARM loan may change per year and/or life of the loan.
CAPS (Payment)
Consumer safeguards which limit the amount monthly payments on an adjustable rate mortgage may change.
Closing
Meeting between the buyer, seller and lender escrow officer where the property and funds legally change hands. Also called settlement.
Closing Costs
Usually include an origination fee, appraisal fee, title search and insurance, taxes, deed recording fee, credit report charge and other costs assessed at settlement.
Commitment
An 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.
Construction Loan
Short term interim loan for financing the cost of construction. The lender advances funds to the builder at periodic intervals as the work progresses.
Conventional Loan
A loan not insured by FHA, VA or Farmers Home Administration.
Credit Report
Report listing borrower's consumer credit use, including past and current debts, payment ratings and terms.
Credit 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 loans) or gross monthly income (Conventional loans). See Housing Expenses-to-Income Ratio.
D
Deed of Trust
Document used in many states to secure the payment of a note.
Default
Failure to make the required payments on a loan. Often results in foreclosure.
Delinquency
Failure to make loan payments on time. This could lead to default or foreclosure.
Department of Veterans Affairs
Independent agency of the federal government which guarantees long-term, low or no-down payment loans to eligible veterans.
Discount Points
See POINTS.
Down Payment
Money paid to make up the difference between the purchase price and loan amount. Down payments usually are 10 to 20 percent of the sales price on conventional loans.
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.
Durable Goods Orders
This gives a reading on the country's future manufacturing activity.
Durable goods include those manufactured items with a normal life
expectancy of three years or longer. An increase in the amount of
durable goods orders may indicate an expansion in the economy and, if
inflationary, the Federal Reserve could choose to tighten money by
raising interest rates. Bond Market Moves Down In Price.
E
Earnest Money
Money given by a buyer as part of the purchase price to bind a transaction or assure payment. Also called DEPOSIT.
Effect Of Economic Indicators On Fixed Income Investments
Market participants look to U.S. Government economic releases as an
indication of the economy's strength and general direction. Overall,
economic indicators reflect the rate of economic growth and inflation
which, in turn, affects interest rates. There is an inverse relationship
between interest rates and bond prices. If the economic indicators
indicate that the rate if inflation is on the rise, it will most likely
result in higher interest rates and lower bond prices. Conversely, if
these indicators indicate the rate of inflation is falling this will
result in lower interest rates and higher bond prices. The following
glossary defines what these indicators are and how they might affect the
bond market.
Equal Credit Opportunity Act (ECOA)
Federal law requiring lenders and other 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
The difference between market value and current loan, also known as owner's interest.
Escrow
Neutral third party that carries out the instructions of both the borrower and lender to handle settlement or "closing." Escrow may also refer to an account held by the lender into which the borrower pays for tax or insurance payments.
F
Factory Orders
Manufacturer's shipments, inventories, and orders. Factory orders
include shipments, inventories, and new and unfilled orders. An increase
in the factory order total may indicate an expansion in the economy and
could be an inflationary factor. Bond Market Moves Down In Price.
Farmers Home Administration (FmHA)
Provides financing to farmers and other qualified borrowers who are unable to obtain loans elsewhere.
FED Is Easing
Exactly the opposite of Fed tightening. The Federal Reserve feels
that the economy is not growing at the desired level and eases credit
conditions by lowering interest rates to help stimulate the economy.
Bond Market Moves Up In Price.
FED Is Tightening
This term refers to efforts by the Federal Reserve to curb excessive
growth in the money supply. This can be accomplished by their raising
the discount rate and/or increasing the federal funds rate. Bond Market
Moves Down In Price.
FHA - Federal Housing Administration
A division of the Department of Housing and Urban Development. Its main activity is the insuring of residential mortgage loans made by private lenders. FHA also sets standard for underwriting mortgages.
FHA Loan
Loan insured by the Federal Housing Administration open to qualified home purchasers. While limited in size, they are generous enough to handle moderate-priced homes almost anywhere in the country.
FHA Mortgage Insurance
Requires a small fee (up to 3 percent of the loan amount) paid at closing or a portion of this fee added to each monthly payment of an FHA loan to insure the loan with FHA. On a 9.5 percent $75,000 30-year fixed-rate FHA loan, this fee would amount t o either $2,250 at closing or an extra $31 a month for the life of the loan. In addition, FHA mortgage insurance requires an annual fee of 0.5 percent of the current loan amount, the more years the fee must be paid.
FNMA - Federal National Mortgage Association
Also known as Fannie Mae. A tax-paying 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.
Fixed Rate Mortgage
Loan in which the interest rate is constant for the term of the loan.
Foreclosure
A legal procedure in which property securing debt is sold by the lender to pay the defaulting borrower's debt.
Freddie Mac
Federal Home Loan Mortgage Corporation (FHLMC)
Also called Freddie Mac, is a quasi-governmental agency that purchases conventional mortgages from insured depository institutions and HUD-approved mortgage bankers.
G
GNMA - Ginnie Mae
Government National Mortgage Association. Provides sources of funds for residential mortgages, insured or guaranteed by FHA or VA.
Gross National Product (GNP)
The Gross National Product is the broadest measure of the nation's
production. It measures the market value of all newly produced goods and
services in the United States. When GNP is down, it shows a slowing down
in the economy. To counteract this, the Federal Reserve may loosen money
by lowering interest rates. Bond Market Moves Up In Prices.
Graduated Payment Mortgage (GPM)
A type of flexible-payment mortgage where the payments increase for a specified period
of time and then level off. This type of mortgage has negative amortization built into it.
Gross Monthly Income
The total amount the borrower(s) earns each month, before any expenses are deducted.
Guarantee
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.
H
Hazard Insurance
Insurance which protects the borrower and home from specified losses, such as fire, windstorm, etc.
Housing Expenses-to-Income Ratio
The ratio, expressed as a percentage, obtained by dividing borrower's housing expenses by his/her gross monthly income. See debt-to-income ratio.
I
Impound
Portion of the borrower's monthly payment collected by the lender to pay taxes, hazard insurance, mortgage insurance, and other items as they become due. Also known as reserves.
Index
The rate against which lenders measure the difference between the current rate on adjustable rate loans and that earned by other investments, (U.S. Treasury security yields, monthly average interest rate on loans closed by savings and loans, and monthly average costs-of-funds incurred by savings and loans), which is then used to adjust the interest rate up or down.
Industrial Production Index
The industrial production index measures the monthly level of the
physical output of the manufacturing, mining, and gas and electric
utility industries. When industrial production is down, it indicates a
slowing of economic growth and, therefore, the Federal Reserve is
inclined to allow interest rates to drop to stimulate the economy. Bond
Market Moves Up In Price.
Investor
Money source for a lender.
J
Jumbo Loan
Loan which is larger than the limits ($214,600) set by FNMA and FHLMC. Because jumbo loans cannot be funded by these agencies, they usually carry a higher interest rate.
K
L
Leading Economic Indicators
This index is a composite of 11 statistics designed to foretell
economic activity 6 to 9 months hence, (i.e. building permits, new
orders for consumer goods and materials, the average workweek, index of
consumer expectations).
Lien
A claim upon a piece of property for the payment of satisfaction of a debt or obligation.
Loan-to-Value Ratio
The relationship between the amount of the loan and the appraised value of the property expressed as a percentage.
M
Margin
Rate expressed as a percentage that a lender adds to the index on an adjustable rate loan 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.
Merchandise Trade Balance
Released monthly, this figure measures the difference between imports
and exports. When exports are higher than imports, there is a surplus in
the balance of trade. When imports are higher than exports, there is a
deficit. The import-export differential is referred to as the trade gap.
Money Supply
The amount of money in circulation. M1 = cash + regular demand
deposits + other check-type deposits. M2 = M1 + savings and small
denomination time-deposits. When the money supply figure is up, it is an
inflationary factor and, therefore, generates concern that the Federal
Reserve will tighten money growth by allowing short-term interest rates
to rise. Bond Market Moves Down In Price.
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 balance of the loan.
Net Effective Income
The borrower's gross income minus federal income tax.
Non-Assumption Clause
Statement in a loan contract forbidding the assumption of the loan without the prior approval of the lender.
Non-Farm Payroll
The non-farm payroll figure is a component of total civilian
employment and measures the number of people employed in all activities
except agriculture.
O
Origination Fee
Fee charged by lender to prepare loan documents, credit checks, etc.; usually computed as a percentage of face value of the loan.
P
PITI
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 1 percent of the loan amount.
Power of Attorney
A legal document authorizing one person to act on behalf of another.
Prepaids
Expenses necessary to create an escrow account or to adjust an existing account. Can include taxes, hazard insurance, private mortgage insurance and special assessments.
Prepayment Penalty
Fee charged for early repayment of some types loans. Usually 6 months interest on 80% of current balance.
Principal
The balance, not including interest, left on a loan.
Private Mortgage Insurance (PMI)
For loans over 80% loan-to-value. Lenders will loan up to 95% in some cases. With the higher LTV loans, borrowers are required to carry private mortgage insurance, which requires an initial premium and may require an additional monthly fee depending on your loan's structure. BR>
Producer Price Index (PPI)
The monthly producer price index measures the level of prices for all
goods produced and imported for sale in the primary marketplace.
Increase in the PPI tend to lead other measures of inflation. Bond
Market Moves Down In Price.
Realtor
Real estate broker or agent belonging to the National Association of Realtors.
Recision
Law that gives the borrower 3 days after signing to cancel a contract in some cases, if the transaction uses home equity as security.
Recording Fees
Paid to the county for recording a home sale, thereby making it part of the public records.
Renegotiable Rate Mortgage (RRM)
A loan in which the interest rate is adjusted periodically. See adjustable rate mortgage.
RESPA Real Estate Settlement Procedures Act
Federal law allowing consumers to receive and review information on known or estimated settlement costs after application and again at settlement. Requires lenders to furnish information after application only.
Retail Sales
Key components of retail sales include automobiles, building
materials, furniture, department store sales, food stores, gasoline,
clothing, restaurants and drugstores. High retail sales are an indication of economic growth and an expanding economy. Bond Market Moves Down
In Price.
Reverse Annuity Mortgage (RAM)
A Mortgage in which the lender makes periodic payments to the borrower using the borrower's equity in the home as security.
S
Servicing
All steps and operations a lender performs to keep a loan in good standing, such as collection of payments, payment of taxes, insurance, and property inspections.
Settlement Costs/Settlement Closing Costs
See closing costs
Shared Appreciation Mortgage (SAM)
A mortgage in which a borrower receives a below-market interest rate in return for which
a lender (or another investor such as a family member or other partner) receives a portion
of the future appreciation in the value of the property. May also apply to mortgages where
the borrower shares the monthly principal and interest payments with another party in
exchange for a part of the appreciation.
Survey
A measurement of land, prepared by a registered land surveyor, showing location of the land with reference to known points, dimensions, and the location and dimensions of any building.
Title
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 homebuyer against errors in the title search.
Title Search
An examination of public records to determine the legal ownership of property. Usually is performed by a title company.
Truth-in-Lending
A federal law requiring disclosure of the Annual Percentage Rate to homebuyers shortly after they apply for the loan.
Two-Step Mortgage
Mortgage in which the borrower receives a below-market interest rate for a specified number of years (usually 5 or 7 years), and then a new interest rate adjusted (within limits) to market conditions at that time.
U
Unemployment Rate
This is the percent of the civilian labor force currently unemployed.
If unemployment figures are up, it indicates a lack of expansion within
the economy and is, therefore, good for the bond market. Conversely, a
big gain in employment would be an obvious cue for the Federal Reserve
to tighten (raise) either the federal funds rate or the discount rate.
Bond Market Moves Up In Price.
Underwriting
The decision whether to make a loan based on credit, employment, assets, and other factors and matching this risk to an appropriate rate, term and loan amount.
V
VA Loan
Long-term, low-or no-down payment loan guaranteed by the Department of Veterans Affairs. Borrowers qualified by military service or other entitlements.
VA Mortgage Funding Fee
Premium of up to 17/9 percent (depending on the size of the down payment) paid on a VA loan.
Variable Rate Mortgage (VRM)
See adjustable rate mortgage.
Verification of Deposit (VOD)
Form signed by the borrower's bank or lender verifying the status and balance of financial accounts.
Verification of Employment
Form signed by the borrower's employer(s) verifying his/her position and salary.
W
Wraparound
When an existing assumable loan is combined with a new loan, resulting in an interest rate somewhere between the old rate and the current market rate. The payments are made to a second lender or the previous homeowner, who then forwards the payments to the first lender after taking the additional amount off the top.
