Acceleration Clause
Allows the lender to speed the rate at which your loan comes due or even to demand immediate payment of the entire outstanding balance of the loan should you default on your loan.

Adjustable Rate Mortgage (ARM)
A mortgage in which the interest rate is adjusted periodically based on a preselected index. Also sometimes known as the renegotiable rate mortgage, the variable rate mortgage or the Canadian rollover mortgage.

Adjustment Interval
On an adjustable rate mortgage, the time between changes in the interest rate and/or monthly payment, typically one, three or five years, depending on the index.

Amortization
Means loan payment by equal periodic payments calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance.

Amortization Period

The amortization period is the length during which the loan is repaid. The longer the amortization, the longer you are at risk that the buyer will default on the loan.

Annual Percentage Rate (APR)
An interest rate reflecting the cost of a mortgage as a yearly rate. This rate is likely to be higher than the stated note rate or advertised rate on the mortgage, because it takes into account points and other credit costs.The APR allows home buyers to compare different types of mortgages based on the annual cost for each loan.

Appraisal
An estimate of the value of property, made by a qualified professional called an appraiser.

Assumption
The agreement between buyer and seller where the buyer takes over the payments on a existing mortgage from the seller.Assuming a loan can usually save the buyer money since this is an existing mortgage debt, unlike a new mortgage where closing costs and new, possibly higher, market-rate interest charges will apply.

Balloon (Payment) Mortgage
Usually a short-term fixed-rate loan which involves small payments for the remaining amount of the principal at a time specified in the contract.

A common practice is to have the full amount of the loan due on a certain date, usually in 5 to 10 years. As the lender, this gives you a profitable short-term investment with the provision that your principal investment will be recouped in just 5 to 10 years. The buyer is usually in a better position to secure traditional financing after 5 to 10 years. Both the buyer's equity in the property and record of timely mortgage payments can help the buyer secure a loan to cover the balloon payment.

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

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.

Buyer's Credit & Income
The mortgage lender will want to review the buyer's credit history to determine the buyer's willingness to pay his/her debts. A credit report will give them a better understanding of the buyer's financial history. Red flags would include late payments and loan defaults. If a buyer has a less than commendable credit history, the lender may decide not to finance the loan or may require a larger down payment. In addition to the buyer's credit history, the lender will want to review the buyer's income sources. Is the buyer's salary sufficient to make the monthly payments? Does the buyer have additional income sources that could be accessed if the buyer lost his/her job?

Caps (Interest)
Consumer safeguards which limit the amount the interest rate on an adjustable rate mortgage may change per year and/or life of the loan.

Caps (Lifetime)
Consumer safeguards which establish the highest (maximum) rate an interest rate can be at any one time during the life of an adjustable rate mortgage.

Caps (Payment)
Consumer safeguards which limit the amount monthly payments on an adjustable rate mortgage may change.

Carrying Back a Second Mortgage
In the case of "carrying back a second mortgage", the seller loans the buyer part of the seller's equity. In this scenario, the buyer would finance the majority of the loan with a traditional mortgage lender and finance the remaining amount with the seller. Typically the buyer would pay a slightly higher interest rate on the loan financed by the seller.

Cash on hand

Cash you have for the down payment and closing costs.

Closing
The meeting between the buyer, seller and lender or their agents where the property and funds legally change hands. Also called settlement.

Closing Costs
Usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement. The costs of closing usually are about 3 percent to 6 percent of the mortgage amount.

Closing the Sale
Both buyer and seller will be responsible for paying the usual closing costs. You will also want the buyer to pay all the costs associated with setting up the mortgage financing. This would include the cost of having your attorney create the mortgage note.

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
A 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 mortgage not insured by FHA or guaranteed by the VA or Rural Economic Community Development (RECD) (fka. as Farmers Home Administration)

Credit Report
A report documenting the credit history and current status of a borrower's creditstanding.

Debt-To-Income Ratio
The ratio, expressed as a percentage, which results when a borrowers monthly payment obligation on long-term debts is divided by his or her net effective income (FHA/VAloans) or gross monthly income (conventional loans). See housing expenses-to-income ratio.

Deed of Trust
In many states, this document is used in place of a mortgage to secure the payment of a note.

Default
Failure to meet legal obligations in a contract, specifically, failure to make the monthly payments on a mortgage.

Deferred Interest See negative amortization.

Delinquency Failure to make payments on time. This can lead to foreclosure.

Department of Veterans' Affairs (VA)
An independent agency of the federal government which guarantees long-term, low- or no-down payment mortgages to eligible veterans.

Discount Points See points.

Down payment
Money paid to make up the difference between the purchase price and mortgage amount. Down payments usually are 10 percent to 20 percent of the sales price on conventional loans, and no money down up to 5 percent on FHA and VA loans.

The size of the down payment may affect the buyer's commitment to honoring the mortgage contract. The larger the down payment the buyer invests, the stronger his/her motivation to protect the investment. In addition to making the monthly payments, the buyer's commitment to the investment would include a willingness to maintain and upgrade the property, as well as make tax and insurance payments.

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.

Earnest Money
Money given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment.

Equal Credit Opportunity Act (ECOA)
A federal law that requires 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 fair market value and current indebtedness, also referred to as the owner's interest.

Escrow
Refers to a neutral third party who carries out the instructions of both the buyer and seller to handle all the paperwork of settlement or closing . Escrow may also refer to an account held by the lender into which the home buyer pays for tax or insurance payments.

Escrow for Tax and Insurance
Lenders typically require borrowers to pay 1/12 of their annual taxes and insurance costs as an escrow payment due with each mortgage payment. Then, the lender makes the borrower's annual tax and insurance payment. While this adds time and hassle to the seller-financer, it also protects you from the unfortunate situation of having a buyer make his/her mortgage payments but not tax and/or insurance payments.

Expected inflation rate

What you expect for the average long-term inflation rate. This has been calculated by the Consumer Price Index from 1925 to 2002 to be 3.1%. Inflation rate is used to adjust amounts subject to annual increases. These amounts include rent, insurance and tax payments.

Fannie Mae See Federal National Mortgage Association.

Farmers Home Administration (FmHA)
Provides financing to farmers and other qualified borrowers who are unable to obtain loans
elsewhere.

Federal Home Loan Bank Board (FHLBB)
A regulatory and supervisory agency for federally chartered savings institutions.

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.

Federal Housing Administration (FHA)
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 standards for underwriting mortgages.

Federal National Mortgage Association (FNMA)
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.

FHA Loan
A loan insured by the Federal Housing Administration open to all qualified home purchasers. While there are limits to the size of FHA loans, they are generous enough to handle moderate-priced homes almost anywhere in the country.

FHA Mortgage Insurance
Requires a small fee (up to 3.8 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 to either $2,850 at closing or an extra $31 a month for the life of the loan. In additions, FHA mortgage insurance requires an annual fee of 0.5 percent of the current loan amount, paid in monthly installments. The lower the down payment, the more years the fee is paid.

Fixed-Rate Mortgage A mortgage on which the interest rate is set 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 See Federal Home Loan Mortgage Corporation.

Future sales commission

The percent of your home's selling price you expect to pay to a broker or real estate agent when you sell your home.

Ginnie Mae See Government National Mortgage Association.

Government National Mortgage Association (GNMA)
Also known as "Ginnie Mae", provides sources of funds for residential mortgages, insured or guaranteed by FHA or VA.

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 earns per month, before any expenses are deducted.

Guaranty A promise by one party to pay a debt or perform according to a contract.

Hazard Insurance
A form of insurance in which the insurance company protects the insured from losses, such as fire, windstorm and the like.

Home insurance rate (Hazard Insurance Rate)

Your homeowner's insurance rate. 0.5% for a $100,000 home equals $500 per year for homeowner's insurance.

Home appreciates at

Annual appreciation you expect in the home you are purchasing.

House payment

Total of principal, interest, taxes and insurance (PITI) paid per month for your home. Insurance includes Principal Mortgage Insurance (PMI) and homeowner's insurance.

Housing Expenses-To-Income Ratio
The ratio, expressed as a percentage, which results when a borrower's housing expenses are divided by his/her net effective income(FHA/VA loans) or gross monthly income (conventional loans). See debt-to-income ratio.

Impound
That portion of a borrower's monthly payments held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also known as reserves or escrow.

Income tax rate

Your current marginal income tax rate.

Index
A published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments (such as one-, three-, and five-year U.S. Treasury security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average costs-of-funds incurred by savings and loans), which is then used to adjust the interest rate on an adjustable mortgage up or down.

Interest rate

The current interest rate you can receive on your mortgage.

The interest rate you are charged should match current interest rates traditional mortgage lenders are offering for loans of the same term. You may be charged an additional percentage point as compensation for the work involved with servicing the loan.

Investment return

The rate of return you could receive if you invested your closing costs and down payment instead of purchasing a home.

The actual rate of return is largely dependant on the type of investments you select. From January 1970 to December 2003, the average compounded rate of return for the S&P 500, including reinvestment of dividends, was approximately 11.7% per year. During this period, the highest 12-month return was 64%, and the lowest was -39%. Savings accounts at a bank pay as little as 1% or less. It is important to remember that future rates of return can't be predicted with certainty and that investments that pay higher rates of return are subject to higher risk and volatility. The actual rate of return on investments can vary widely over time, especially for long-term investments. This includes the potential loss of principal on your investment.

Investor A money source for a lender.

Jumbo Loan
A loan which is larger than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Because Jumbo loans can not be funded by these two agencies, they usually carry a higher interest rate.

Lender's Title Insurance
A smart investment is a lender's title insurance policy. The policy protects your lien on the property from being defeated by a prior lien or other interest in the property, which, if exercised, would wipe out your security. Things that can affect your rights as the seller-financer include marriage, divorce, death, forgery, a judgment for money damages, a failure to pay state or federal taxes, and more. Be sure to include the cost for your lender's title insurance as one of the buyer's closing costs.

Lien
A claim upon a piece of property for the payment or satisfaction of a debt or obligation

Loan-To-Value Ratio
The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage.

Loan origination rate

The percentage the lending institution charges for its origination fee. 1% for a $100,000 home equals $1,000.

Margin
The amount a lender adds to the index on an adjustable rate mortgage 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.

Monthly PI

Monthly principal and interest payment.

Monthly PMI

Monthly cost of Private Mortgage Insurance (PMI). For loans secured with less than 20% down, PMI is estimated at 0.5% of your loan balance each year.

Monthly rent payment

Amount you currently pay for rent per month.

Mortgage amount

Total amount of loan.

Mortgage Insurance
Money paid to insure the mortgage when the down payment is less than 20 percent. See private mortgage insurance, FHA mortgage insurance.

Mortgagee The lender.

Mortgagor The borrower or homeowner.

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. The danger of negative amortization is that the home buyer ends up owing more than the original amount of the loan.

Net Effective Income The borrower's gross income minus federal income tax.

Net home price

Net selling price of your home after subtracting any sales commissions.

Net house payment

Your house payment minus the value of the tax deduction and principal payment.

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

Origination Fee
The fee charged by a lender to prepare loan documents, make credit checks, inspect and sometimes appraise a property; usually computed as a percentage of the face value of the
loan.

Other closing costs

Estimate of all other closing costs for this loan. This should include filing fees, appraiser fees and any other miscellaneous fees paid.

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 (e.g. two points on a $100,000 mortgage would cost $2,000).

Points paid

The total number of points paid to reduce the interest rate of your mortgage. Each point costs 1% of your mortgage balance.

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 the seller's existing escrow account. Can include taxes, hazard insurance, private mortgage insurance and special assessments.

Prepayment
A privilege in a mortgage permitting the borrower to make payments in advance of their due date.

Prepayment Penalty
Money charged for an early repayment of debt. Prepayment penalties are allowed in some form (but not necessarily imposed) in 36 states and the District of Columbia.

Price of home

Purchase price of the home you wish to buy.

Principal The amount of debt, not counting interest, left on a loan.

Principal payment

Total of principal paid per month on your mortgage.

Private Mortgage Insurance (PMI)
In the event that you do not have a 20 percent down payment, lenders will allow a smaller down payment - as low as 5 percent in some cases. With the smaller down payment loans, however, borrowers are usually required to carry private mortgage insurance. Private mortgage insurance will require an initial premium payment of 1.0 percent to 5.0 percent of your mortgage amount and may require an additional monthly fee depending on your loans structure. On a $75,000 house with a 10 percent down payment, this would mean either an initial premium payment of $2,025 to $3,375, or an initial premium of $675 to $1,130 combined with a monthly payment of $25 to $30.

Property tax rate

Your property tax rate. 1% for a $100,000 home equals $1,000 per year in property taxes.

Purchase Price
The seller and buyer's mutually agreed upon purchase price for the property. As the seller, you should know up-front that the buyer would like you to finance the deal. Knowing that you will be financing the deal may affect your willingness to make adjustments to the sales price.

Realtor
A real estate broker or an associate holding active membership in a local real estate board affiliated with the National Association of Realtors.

Recision
The cancellation of a contract. With respect to mortgage refinancing, the law that gives the homeowner three days to cancel a contract in some cases once it is signed if the transaction used equity in the home as security.

Recording Fees
Money paid to the lender for recording a home sale with the local authorities, 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
Short for the Real Estate Settlement Procedures Act. RESPA is a federal law that allows consumers to review information on known or estimated settlement costs once after application and once prior to or at settlement.

Reverse Annuity Mortgage (RAM)
A form of mortgage in which the lender makes periodic payments to the borrower using the borrower's equity in the home as security.

Seller Financing
As the seller, you have the option of financing the buyer's purchase with the equity you have in the property. You can finance part or the entire mortgage for the buyer. Before setting-up a private mortgage, it is wise to consult with your attorney.

Servicing
All the steps and operations a lender performs to keep a loan in good standing, such as collection of payments, payment of taxes, insurance, property inspections and the like.

Settlement/ Settlement Costs See closing/closing costs.

Shared Appreciation Mortgage (SAM)
A mortgage in which a borrower receives a below-market interest rate in return for which the 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 the location of the land with reference to known points, its dimensions, and the location and dimensions of any buildings.

Tax savings

The value of the tax deduction you receive on your mortgage's interest and home's property taxes. For example, if you have $900 in interest and $100 property taxes per month, the value of the tax deduction would be $280. (At a tax rate of 28%).

Term in years

The number of years over which you will repay this loan.

Term Mortgage See balloon payment mortgage.

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 home buyer against errors in the title search. The cost of the policy is usually a function of the value of the property, and is often borne by the purchaser and/or seller.

Title Search
An examination of municipal records to determine the legal ownership of property. Usually is performed by a title company

Total closing costs

Total upfront costs to close your loan. This is the sum of the loan origination fee, amount paid for points and other closing costs.

Total for down payment

Total funds remaining for down payment.

Truth-In-Lending
A federal law requiring disclosure of the Annual Percentage Rate to home buyers shortly after they apply for a loan.

Two-Step Mortgage
A mortgage in which the borrower receives a below-market interest rate for a specified number of years (most often seven or ten), and then receives a new interest rate adjusted (within certain limits) to market conditions at that time. The lender sometimes has the option to call the loan due with 30 days notice at the end of seven or ten years. Also called "Super Seven" or Premier mortgage.

Underwriting
The decision whether to make a loan to a potential home buyer based on credit, employment, assets, and other factors and the matching of this risk to an appropriate rate and term or loan amount.

VA Loan
A long-term, low- or no-down payment loan guaranteed by the Department of Veterans Affairs. Restricted to individuals qualified by military service or other entitlements.

Variable Rate Mortgage (VRM) See adjustable rate mortgage.

Verification of Deposit (VOD)
A document signed by the borrower's financial institution verifying the status and balance of his/her financial accounts.

Verification of Employment (VOE)
A document signed by the borrower's employer verifying his/her position and salary.

Wraparound
Results when an existing assumable loan is combined with a new loan, resulting in an interest rate some where 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.