Glossary of Terms Used with Mortgages
While working with me as your mortgage loan specialist, you may hear terms or phrases you may not understand. Mortgages are complex products, and usually involve large amounts of money, so it is important to familiarize yourself with the language so you can make informed decisions about your home loan and finances.
Adjustable-Rate Mortgage (ARM)
A mortgage loan with an interest rate that can change at periodic intervals, usually in response to changes in the financial markets, as reflected in interest rate indexes like the LIBOR Index or U.S. Treasury Bill rates. These types of loans usually start off with a lower interest rate comparable to a fixed-rate mortgage. Most current ARM loans start with an initial period where the rate is fixed for a number of months or years. These loans are also referred to as “Intermediate Term” ARMs. Perhaps the most common ARM loan today has a fixed rate and payment for the first 5 years of the loan. Afterwards the rate and payment might adjust once a year for the remaining 25 year term of the loan, base on a market rate index like the LIBOR Index. ARM loans have features that limit, restrain or “cap” the amount that the interest rate and payment can change over the course of the loan.
Amortize
Paying off a debt by making regular installment payments over a set period of time, at the end of which the loan balance is zero.
Balloon Mortgage
A mortgage loan with initially low interest payments, but that requires one large payment due upon maturity (for example, at the end of seven years).
Buy-down Mortgage
A mortgage loan in which one party pays an initial lump sum in order to reduce the borrowers monthly payments.
Collections
The efforts a lender takes to collect past due payments.
Convertible ARM
An Adjustable-Rate Mortgage loan that can be converted into a fixed-rate mortgage during a certain time period.
Deed
A legal document under which ownership of a property is conveyed.
Deed-in-Lieu
The transfer of title from a borrower to the lender to satisfy the mortgage debt and avoid foreclosure; also called a "voluntary conveyance."
Deferred Payments
Payments that are authorized to be postponed as part of a workout process to avoid foreclosure.
Delinquency
Failure to make a payment when it is due. A loan is generally considered delinquent when it is 30 or more days past due.
Equity
Ownership interest in a project after liabilities are deducted. Also referred to as your assets.
Escrow
The term Escrow in the mortgage industry can be a confusing because it is applied to two different things.
1) It can refer to the system whereby a lender collects one-twelfth of the borrower’s property taxes and homeowners insurance every month, along with the borrower’s monthly principal and interest payment. Also referred to as “Impounding”. It is most commonly used or required when a borrower has not made a 20% down payment when purchasing a property.
2) Escrow also refers to a third-party company, that acts as a liaison between the borrower and lender during the creation of a new loan. The escrow company’s officers process the loan papers, and has fiduciary duties to the lender and the borrower. In California this function is sometimes provided by the same company that provides title insurance services.
Escrow Account
The actual lender-held bookkeeping account where the escrow funds are held in trust, until paid to the property tax collector or insurance company. Also referred to as an Impound Account.
Escrow Analysis
A periodic review of escrow accounts to make sure that there are sufficient funds to pay the property taxes and insurance on a home when they are due. Usually the loan service does a review at least annually. Lenders are required by Federal law to give the borrower a written accounting of the payments made and funds held, on an annual basis.
Fixed-Rate Mortgage
A mortgage loan in which the interest rate remains the same for the whole life of the loan.
Forbearance
The lender's postponement of legal action when a borrower is delinquent or in default. It is usually granted when a borrower makes satisfactory arrangements to bring the overdue mortgage payments up to date.
Foreclosure
The legal process by which a property may be sold and the proceeds of the sale applied to pay off the mortgage debt. A foreclosure occurs when the loan becomes delinquent because payments have not been made or when the borrower is in default for a reason other than the failure to make timely mortgage payments. The foreclosed property owner loses the right to keep and occupy the property.
Foreclosure Prevention
Steps by which the servicer works with the borrower to find a permanent solution to resolve an existing or impending loan delinquency.
Hazard Insurance
Also called “Homeowner’s”, “Casualty”, or “Fire” Insurance, it is basic insurance coverage that pays for the loss or damage of a person's home or property.
Home Equity Line of Credit
Also referred to or abbreviated as “HELOC”. A way of borrowing money against the equity or assets that you have in your home to pay for things such as home repairs, college education, or other personal uses. The equity line usually has a credit limit, not unlike a credit card, and money can be drawn as needed using special checks or debit cards. Money can be borrowed and/or repaid for an initial number of years, oftentimes while only being obligated to pay the accrued interest. At some point in time, the ability to make further draws on the loan stops, and the borrower must start a planned repayment of the loan. HELOC loans usually have variable interest rates that can change as often as monthly, and their interest rates are typically based on the Prime Rate Index.
Interest-Only Mortgage
A mortgage where the borrower pays only the interest on the loan for a specified amount of time.
Investment Property
A property not considered to be a primary residence that is to be occupied by the owner. It is property that is purchased by an investor in order to generate (rental) income, gain profit from reselling, or to gain income tax benefits.
Investor
The actual owner of the mortgage loan on a property. More often than not, this is NOT the entity that services or collects the monthly mortgage payments. The agencies Fannie Mae and Freddie Mac
Lender-Placed Insurance
Insurance placed on a home or property by a lender to protect their interest in the home which secures the loan. Lenders usually only obtain this insurance if the borrower’s insurance company notifies the lender that the borrower’s insurance policy has expired without renewal. This lender-placed insurance is very expensive, and only protects the lender. It provides no protection from loss or liability for the homeowner. The lender then proceeds to collect payment for the lender-placed insurance from their borrower/homeowner.
Modification
Any change to the terms of a mortgage loan, including changes to the interest rate, loan balance or loan term.
Mortgage
A legal document that pledges property to a lender as security for the repayment of a loan. The term is also casually or generically used to refer to the loan itself. In California, the actual legal document used is a Trust Deed. The mortgage or Trust Deed is the legal document that has the borrower’s notarized signature, and is the document that is made part of the public record, by a process called “recording” in the local County Recorder’s Office. It makes reference to the promissory note, but it does not contain all the fine details regarding the repayment terms of the loan.
Mortgage Insurance
Insurance that protects lenders against losses caused by a borrower's default on a mortgage loan. Mortgage insurance (or MI) typically is required if the borrower's down payment is less than 20% of the purchase price.
Portfolio Loan
A portfolio loan is a loan that a lender originates with a borrower, that they don’t necessarily intend to sell to an investor. Portfolio loans are loans that the lender usually intends to keep in their own investment portfolio, and they can have stricter or more lenient requirements than loans that the lender intends to sell off to an investor. Larger loans like Jumbo loans are sometimes portfolio loans.
Pre-foreclosure
The process in which a mortgage loan servicer works with a delinquent borrower to sell the house using a real estate agent, prior to a foreclosure sale. More commonly called a Short-Sale.
Refinance
Paying off an existing mortgage loan with a newer, usually lower interest rate loan.
Repayment Plan
A borrower promises to pay down past-due amounts on a mortgage while still making regular monthly payments.
Servicer
A firm—often a bank—that performs functions in support of a mortgage, that include collecting the monthly mortgage payments, paying the borrower's taxes and insurance, and generally managing borrower escrow accounts.
Short-Sale
The process in which a mortgage loan servicer works with a delinquent borrower to sell the house using a real estate agent, prior to the foreclosure sale. Also referred to a “Pre-foreclosure”. In 2011, the waiting period before being able to
Title or Chain-of-Title
The documented evidence that a person or organization has ownership of real property.
Title Insurance
A form of insurance purchased from a title insurance company, to protect against financial loss due to potential errors in the ownership chain-of-title. In a residential purchase transaction in California, an “Owner’s” Policy of Title Insurance is usually provided for the buyer’s benefit, and is paid for by the seller of the home. The buyer usually is then required to purchase a similar “Lender’s” Policy of Title Insurance, for the benefit of the new lender.
Voluntary Conveyance
The transfer of title from a borrower to the lender to satisfy the mortgage debt and avoid foreclosure; also called a "Deed-in-Lieu."
Work Out
A way to resolve or restructure a loan or prevent someone from going into foreclosure through a loan modification, forbearance or short sale.