TERM

DEFINITION

FEATURES

Amortization

Gradual repayment of the principal and interest on a loan

For fixed rate loans, the longer you keep the loan, more of the payment is applied towards the principal balance. Early in the loan term, most of the monthly payment goes towards paying interest

APR

Annual Percentage Rate

The interest rate that includes interest, points and lender fees. Useful tool in comparing one loan rate to another.

ARM

Adjustable Rate Mortgage

A mortgage where the interest rate changes (and consequently, so does your monthly payment), either monthly, every six months or annually, according to an economic index

Balloon payment

Partially amortized loan

After set number of equal payments, usually not more than 10 years into the loan term, the entire loan balance is due

Closing costs

Fees and charges to buyer at closing

Additional costs associated with closing a home loan

COFI

11th District Cost of Fund Index

Economic index used for some ARM loans

Conforming loan

Meets Fannie Mae/Freddie Mac guidelines

Available in fixed and adjustable rate loans

EEM

Energy-Efficient-Mortgage

Allows financing of energy-efficient features in new home

FHA loan

Insured by Federal Housing Administration

May allow for more lenient qualifying

Fixed rate loan

Same interest rate for life of loan

Stable monthly payments for principal and interest

GFE

Good Faith Estimate

Estimate of all closing costs, provided by lender

Homeowners Insurance

Insurance policy

Protects against both hazards and personal liability

HUD

Dept. of Housing and Urban Development

Administers FHA, enforces Fair Housing & RESPA regulations, oversees Fannie Mae/Freddie Mac

HUD-1

Uniform Settlement Sheet showing debits and credits to buyer/seller

Provided to the borrower at closing. Used in most closings

Interest-only loan

Pay only interest portion of monthly payment for the first few years of the loan

After set number of years, the loan is reamortized, resulting in a larger monthly payment

LIBOR

London Interbank Offering Rate

Used as an index for some ARM loans

Loan term

Number of years of loan

Period over which repayment to be made

Lock-in

Guarantees interest rate

Time limits apply, vary by loan and lender, and a fee may apply

Mortgage

The legal document that pledges a property (the home being purchased) to the lender as security for payment of the loan

In some states, a Deed of Trust is used instead of a mortgage. Used interchangeably with “home loan”

MTA

Monthly Treasury Average

Used as index on some ARM loans

Negative amortization

Payment not adequate to cover interest charges

Results in owing more than originally borrowed

PMI

Private mortgage insurance

Required by lenders when buyer has less than 20% down payment

Point

1% of loan amount

The more points buyer pays in advance, the lower the interest rate

Prepayment Penalty (PPP) Mortgage

Charge for paying off loan before stated term or prior to agreed-upon PPP period; may have lower interest rate

Borrower may choose a pre-payment penalty option that may result in a lower interest rate in exchange for an obligation to pay a penalty if the loan is paid off before the agreed-upon time period

RESPA

Real Estate Settlement Procedures Act

Requires disclosure of all costs of closing on mortgage loan and property and other consumer protections

Stated income loan

Income and assets are stated but not verified

Little or no income documentation required for loan process

TILA Statement

Truth-in-Lending Statement discloses all costs of credit, including APR

Required to be given to borrower after application

VA loan

Guaranteed by Dept. of Veterans Affairs

Limited to veterans and active duty military