A-F | G-L | M-R | S-Z | FAQs

Adjustable Rate--An interest rate that changes periodically in relation to an index. Payments may increase or decrease accordingly.

Amortization--A repayment method in which the amount you borrow is repaid gradually though regular monthly payments of principal and interest. During the first few years, most of each payment is applied toward the interest owed. During the final years of the loan, payment amounts are applied almost exclusively to the remaining principal.

Annual Membership--An amount that may be charged annually for having a line of credit available. Often charged regardless of whether or not you use the line. Also referred to as a "participation fee."

Annual Percentage Rate (APR)--The cost of credit on a yearly basis, expressed as a percentage. Required to be disclosed by the lender under the federal Truth in Lending Act, Regulation Z. Includes up-front costs paid to obtain the loan, and is, therefore, usually a higher amount than the interest rate stipulated in the mortgage note. Does not include title insurance, appraisal, and credit report.

Application--An initial statement of personal and financial information which is required to approve your loan.

Application Fee--Fees that are paid upon application. An application fee may frequently include charges for property appraisal ($200-$400) and a credit report ($30-50).

Appraisal--A fee charged by an appraiser to render an opinion of market value as of a specific date. Required by most lenders to obtain a loan.

Assumption of Mortgage--The agreement of a purchaser to become primarily liable for the payments on a mortgage loan. Unless otherwise specified by the lender, the seller may remain secondarily liable for payments.

Balloon Payment--A lump sum payment for the unpaid balance of the loan.

Cap--The maximum allowable increase, for either payment or interest rate, for a specified amount of time on an adjustable rate mortgage.

Cash Out--Receiving money back when refinancing your present mortgage.

Ceiling--The maximum allowable interest rate over the life of the loan of an adjustable rate mortgage.

Closing Costs--Any fees paid by the borrowers or sellers during the closing of the mortgage loan. This normally includes an origination fee, discount points, attorney's fees, title insurance, survey, and any items which must be prepaid, such as taxes and insurance escrow payments.

Conforming Loan--Generally, a mortgage loan under $203,150. Qualifying ratios and underwriting methods are standardized to a large degree.

Contract of Sale--The agreement between the buyer and seller on the purchase price, terms, and conditions necessary to both parties to convey the title to the buyer.

Credit Limit--The maximum amount that you can borrow under a home equity plan.

Debt Service--The total amount of credit card, auto, mortgage or other debt upon which you must pay.

Deed of Trust--Used in many western states, the agreement used to pledge your home or other real estate as security for a loan. Similar to a mortgage.

Discount Points (or Points)--The amount paid either to maintain or lower the interest rate charged. Each point is equal to one percent (1%) of the loan amount (i.e., two points on a $100,000 mortgage would equal $2,000).

Down Payment--The difference between the purchase price and that portion of the purchase price being financed. Most lenders require the down payment to be paid from the buyer's own funds. Gifts from related parties are sometimes acceptable, and must be disclosed to the lender.

Due on Sale--A clause in a mortgage agreement providing that, if the mortgagor (the borrower) sells, transfers, or, in some instances, encumbers the property, the mortgagee (the lender) has the right to demand the outstanding balance in full.

Effective Interest Rate--The cost of credit on a yearly basis expressed as a percentage. Includes up-front costs paid to obtain the loan, and is, therefore, usually a higher amount than the interest rate stipulated in the mortgage note. Useful in comparing loan programs with different rates and points.

Encumbrance--A claim against a property by another party which usually affects the ability to transfer ownership of the property.

Equity--The difference between the fair market value (appraised value) of your home and your outstanding mortgage balance.

First Mortgage--A mortgage which is in first lien position, taking priority over all other liens (which are financial encumbrances).

Fixed Rate--An interest rate which is fixed for the term of the loan. Payments as well are fixed at one amount.

FHA Loan--More appropriately termed "FHA Insured Loan." A loan for which the Federal Housing Administration insures the lender against losses the lender may incur due to your default.

Grace Period--A period of time during which a loan payment may be paid after its due date but not incur a late penalty. Such late payments may be reported on your credit report.

Good Faith Estimate--A written estimate of closing costs which a lender must provide you within three days of submitting an application.

Gross Income--For qualifying purposes, the income of the borrower before taxes or expenses are deducted.

Home Equity Line of Credit--A loan providing you with the ability to borrow funds at the time and in the amount you choose, up to a maximum credit limit for which you have qualified. Repayment is secured by the equity in your home. Simple interest (interest-only payments on the outstanding balance) is usually tax-deductible. Often used for home improvements, major purchases or expenses, and debt consolidation.

Home Equity Loan--A fixed or adjustable rate loan obtained for a variety of purposes, secured by the equity in your home. Interest paid is usually tax -deductible. Often used for home improvement or freeing of equity for investment in other real estate or investment. Recommended by many to replace or substitute for consumer loans whose interest is not tax-deductible, such as auto or boat loans, credit card debt, medical debt, and education loans.

Hazard Insurance--A contract between purchaser and an insurer, to compensate the insured for loss of property due to hazards (fire, hail damage, etc.), for a premium.

HUD I Settlement Statement--A form utilized at loan closing to itemize the costs associated with purchasing the home. Used universally by mandate of HUD, the Department of Housing and Urban Development.

Index--A number, usually a percentage, upon which future interest rates for adjustable rate mortgages are based. Common indexes include the Cost of Funds for the Eleventh Federal District of banks or the average rate of a one year Government Treasury Security.

Interest Rate--The periodic charge, expressed as a percentage, for use of credit.

Jumbo Loan--Mortgage loans over $203,150. Terms and underwriting requirements may vary from conforming loans.

Loan to Value Ratio (LTV)--A ratio determined by dividing the sales price or appraised value into the loan amount, expressed as a percentage. For example, with a sales price of $100,000 and a mortgage loan of $80,000, your loan to value ratio would be 80%. Loans with an LTV over 80% may require Private Mortgage Insurance, defined below.

Lock or Lock In--A commitment you obtain from a lender assuring you a particular interest rate or feature for a definite time period. Provides protection should interest rates rise between the time you apply for a loan, acquire loan approval, and, subsequently, close the loan and receive the funds you have borrowed.

Margin--An amount, usually a percentage, which is added to the index to determine the interest rate for adjustable rate mortgages.

Minimum Payment--The minimum amount that you must pay, usually monthly, on a home equity loan or line of credit. In some plans, the minimum payment may be "interest only," (simple interest). In other plans, the minimum payment may include principal and interest (amortized).

Mortgage Banker--Originates mortgage loans, loaning you their funds and closing the loan in their name.

Mortgage Broker--As do mortgage bankers, takes loan application and processes the necessary paperwork. Unlike a mortgage banker, brokers do not fund the loan with their own money, but work on behalf of several investors, such as mortgage bankers, S and L's, banks, or investment bankers.

Mortgage Insurance (MIP or PMI)--Insurance purchased by the borrower to insure the lender or the government against loss should you default. MIP, or Mortgage Insurance Premium, is paid on government-insured loans (FHA or VA loans) regardless of your LTV (loan-to-value). Should you pay off a government-insured loan in advance of maturity, you may be entitled to a small refund of MIP. PMI, or Private Mortgage Insurance, is paid on those loans which are not government-insured and whose LTV is greater than 80%. When you have accumulated 20% of your home's value as equity, your lender may waive PMI at your request. Please note that such insurance does not constitute a form of life insurance which pays off the loan in case of death.

Mortgage Loan--A loan which utilizes real estate as security or collateral to provide for repayment should you default on the terms of your loan. The mortgage or Deed of Trust is your agreement to pledge your home or other real estate as security.

Mortgagee--The lender in a mortgage loan transaction.

Mortgagor--The borrower in a mortgage loan transaction.

Negative Amortization--Amortization in which the payment made is insufficient to fund complete repayment of the loan at its termination. Usually occurs when the increase in the monthly payment is limited by a ceiling. The portion of the payment which should be paid is added to the remaining balance owed. The balance owed may increase, rather than decrease over the life of the loan.

PITI--Principal, interest, taxes and insurance, which comprise your monthly mortgage payment.

Points--The amount paid either to maintain or lower the interest rate charged. Each point is equal to one percent (1%) of the loan amount (i.e., two points on a $100,000 mortgage would equal $2,000).

Prepayment Penalty--A fee paid to the lending institution for paying a loan prior to the scheduled maturity date.

Qualifying Ratios--Comparisons of a borrower's debts and gross monthly income.

Right to Rescission--The legal right to void or cancel your mortgage contract in such a way as to treat the contract as if it never existed. Right of rescission is not applicable to mortgages made to purchase a home, but may be applicable to other mortgages, such as home equity loans.

Security Interest--An interest that a lender takes in the borrower's property to assure repayment of a debt.

Servicing a Loan--The ongoing process of collecting your monthly mortgage payment, including accounting for and payment of your yearly tax and/or homeowners insurance bills.

Title--The written evidence that proves the right of ownership of a specific piece of property.

Title Insurance--Protection for lenders or homeowners against financial loss resulting from legal defects in the title.

Transaction Fee--A fee which may be charged each time you draw on a home equity credit line.

Underwriting--The process of verifying data and approving a loan.

Variable Rate--An interest rate that changes periodically in relation to an index. Payments may increase or decrease accordingly.

VA Loan--More appropriately termed "VA Insured Loan." A loan for which the Veteran's Administration insures the lender against losses the lender may incur due to your default. Available only to veterans possessing a Certificate of Eligibility

Frequently Asked Questions

• What is the difference between pre-qualifying and pre-approval?
• What are credit scores?
• How can I increase my score?
• What if there is an error on my credit report?
• Why are interest rates different from day to day and one source to another?
• Do I need flood insurance?
• What are your rates?
• What happens if my loan gets sold or my lender goes out of business?
• Does zero points really mean zero points?
• What about no closing costs loans?
• Should I refinance?

What is the difference between pre-qualifying and pre-approval?

A pre-qualification for a specific loan dollar amount is based on a review of basic financial information you supply to us. No verification of this information is performed. The pre-qualification means that if the information you supplied to us is accurate, subject to verification of credit, appraisal of the property, and the lenders underwriting criteria for the loan amount, you should be able to receive a loan as described in the pre-qualification letter or document. This is not a final approval. A pre-qualification is not a commitment to lend. However, a pre-qualification letter indicates to you and the seller that in the opinion of the loan officer you are qualified to purchase the house you are making an offer on.

Pre-approval is a step above pre-qualification. Pre-approval involves verifying your credit, down payment, employment history, etc. Your loan application is submitted to an underwriter and a decision is made regarding your loan application. If your loan is pre-approved, the lender will loan you money on the basis that you requested subject to: a satisfactory appraisal (both as to value and type of product); your financial condition remains as stated on your application and satisfying any underwriting conditions from the lender.

Getting your loan pre-approved allows you to close very quickly when you do find a house. A pre-approval can help you negotiate a better price with the seller, since being pre-approved is very close to having cash in the bank to pay for the house!

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A credit score (such as FICO - developed by Fair Isaac & Co and used by Experian, or BECON - developed and used by Equifax or EMPIRICA - developed and used by Trans Union) or credit scoring is a method of determining the likelihood that a credit user (you) will pay their bills. Fair Isaac began its pioneering work with credit scoring in the late 1950's. Since then scoring has become widely accepted by lenders as a reliable means of credit evaluation. A credit score attempts to condense a borrowers credit history into a single number. Fair, Isaac & Co. and the credit bureaus do not reveal how these scores are computed. The Federal Trade Commission has ruled this practice to be acceptable.

Credit scores are calculated by using scoring models and mathematical tables that assign points for different pieces of information that best predict future credit performance. Developing these models involves studying how thousands, even millions, of people that have used credit. Score-model developers find predictive factors in the data that have proven to indicate future credit performance. Models can be developed from different sources of data. Credit-bureau models are developed from information in consumer credit-bureau reports.

Credit scores analyze a borrower's credit history considering many factors such as:

• Late payments
• The amount of time credit has been established
• The amount of credit used versus the amount of credit available
• Length of time at present residence
• Employment history
• Negative credit information such as bankruptcies, charge-off's, collections, etc.
  

There are really three credit scores computed by data provided by each of the three bureaus--Experian, Trans Union and Equifax. Some lenders use one of these three scores, while other lenders may use the middle score and still others may use all three.

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While it is difficult to increase your score over the short run, here are some tips to increase your score over a period of time.

• Pay your bills on time. Late payments and collections can have a serious impact on your score.
• Do not apply for credit frequently. Having a large number of inquiries on your credit report can worsen your score.
• Reduce your credit card balances. If you are "maxed" out on your credit cards, this will affect your credit score negatively.
• If you have limited credit, obtain additional credit. Not having sufficient credit can negatively impact your score. (Normally lenders like to see you have at least five (5) lines of credit not including utilities (such as telephone, gas and electric companies) and oil company credit cards.
  

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If you see an error on your report, to rectify it, you must contact the credit bureau. The three major bureaus in the U.S., Equifax (1-800-685-1111), Trans Union (1-800-916-8800) and Experian (1-888-397-3742) all have procedures for correcting information promptly. Alternatively, we as your mortgage company may help you correct this problem as well. Understand this process takes time, must be done in writing, and may require proof depending on the nature of the error.

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To understand why mortgage rates change we must first ask the more general question, "Why do interest rates change?"

Interest rate movements are based on the simple concept of supply and demand. If the demand for credit (loans) increases, so do interest rates. This is because there are more buyers, so sellers (those who loan the money) can command a better price, i.e. higher rates. If the demand for credit reduces, then so do interest rates. This is because there are more sellers than buyers, so buyers can command a lower better price, i.e. lower rates. When the economy is expanding there is a higher demand for credit, so rates move higher, whereas when the economy is slowing the demand for credit decreases and so do interest rates.

• Bad news (i.e. a slowing economy) is good news for interest rates (i.e. lower rates).
• Good news (i.e. a growing economy) is bad news for interest rates (i.e. higher rates).
  

A major factor driving interest rates is inflation. Higher inflation is associated with a growing economy. When the economy grows too strongly, the Federal Reserve increases interest rates to slow the economy down and reduce inflation. Inflation results from prices of goods and services increasing. When the economy is strong, there is more demand for goods and services, so the producers of those goods and services can increase prices. A strong economy therefore results in higher real estate prices, higher rents on apartments and higher mortgage rates.

Mortgage rates tend to move in the same direction as interest rates. However, actual mortgage rates are also based on supply and demand for mortgages. The supply/demand equation for mortgage rates may be different from the supply/demand equation for interest rates. This might sometimes result in mortgage rates moving differently from other rates. For example, one lender may be forced to close additional mortgages to meet a commitment they have made. This results in them offering lower rates even though interest rates may have moved up!

There is an inverse relationship between bond prices and bond rates. This can be confusing. When bond prices move up, interest rates move down and vice versa. This is because bonds tend to have a fixed price at maturity--typically $1000. If the price of the bond is currently at $900 and there are 10 years left on the bond and if interest rates start moving higher, the price of the bond starts dropping. The higher interest rates will cause increased accumulation of interest over the next 10 years, such that a lower price (e.g. $880) will result in the same maturity price, i.e. $1000.

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Most lenders will not lend you money to buy a home in a flood hazard area unless you pay for flood insurance. Some government loan programs will not allow you to purchase a home that is located in a flood hazard area. Your lender may charge you a fee to check for flood hazards. You will be notified if flood insurance is required. If a change in flood insurance maps brings your home within a flood hazard area after your loan is made, your lender or service may require you to buy flood insurance at that time.

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The first question customers usually ask when calling a mortgage company or lender is "What are your rates?" Because of the number of mortgage programs available and the various rate and point combinations, most mortgage companies have rate sheets that are 5-10 pages long.

Getting a rate quote is just a small part of shopping for a mortgage and usually not the best way to select a lender. Customer service, professional staff, convenience, and flexibility are some of the key attributes to selecting the best lender for your needs.

In helping you assess a rate, you will need to provide answers to a few basic questions like:

• What is your purchase price?
• What loan amount are you looking for or what loan amount do you want to finance?
• Do you prefer a fixed rate or an adjustable rate mortgage?
• How long do you plan to live in the house?
• How many points are you willing to pay?
  

The purchase price or the value of your home effects the rate because it effects the size of the loan. For example, Jumbo Loans, currently over $240,000, have a higher rate. Similarly, smaller loans have a higher rate or cost more because it cost the same and takes the same effort to do $35,000 loan as it does a $200,000 loan. Lenders and brokers need to make or charge a certain minimum amount of money to cover overhead, per loan (transaction) cost and make a profit.

The type of loan, fixed or variable for example, affect the rate because they affect the lenders income & inflation risk. For example, with a fixed rate loan, if rates go up the lender could lend out money at a higher rate than they are currently loaning it to you, and therefore earn more money. With a variable rate loan since the rate the lender can charge you changes regularly their income remains consistent with their current income opportunities. Therefore with variable rate loans they give you a better rate since they know that if rates go up they can charge you more.

The length of time you will own a house affects both the type of loan you may want and the amount of points it may make sense to pay. For example, if you are going to keep a house for a short period of time (let's say 3 years), you may be better off with a variable rate loan (e.g. a 3/1 ARM - fixed for 3 years and varies once a year every year there- after until the loan is paid off). Why? Because typically the 3/1 ARM has a lower rate associated with it than a 30 year fixed rate loan and since you will sell the house in 3 years you would not be affected by higher rates which may exist at that time. On the other hand, if you expect to live in the house for 30 years you might be willing to pay some points to receive a lower interest rate now. The lower interest rate would save you money every month over the life of the loan. The total savings in this situation should be greater than the cost of points, giving consideration to the amount that the point money could earn if invested (saved) after taxes.

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The simple answer is nothing. You will still have to pay your mortgage. The terms of your mortgage will not change nor will the requirement for you to pay on time change. The only thing that would change is to whom you make out your check.

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The answer is maybe. Remember there are more then one type of Points (Discount and Origination) not to mention a Mortgage Broker fee which is expressed as points. Remember that the lender and broker needs to make a living. Therefore the more lines on the closing statement or good faith estimate that says zero the more likely the rate you are paying is higher than it otherwise would be. Also, it is often unclear what a lender or broker means by no closing costs or no point loans. Sometimes the lender or broker will increase fees to compensate for the lack of points or a more favorable rate.

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Yes, if it saves you money or converts you out of a mortgage type you don't want. The saving money is obvious but not necessarily easy to calculate. Your mortgage broker at Concord Consultants can calculate the savings for you.

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