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Terms/Glossary

Adjustable Rate Mortgage (ARM, also called Variable Rate Mortgage)
A mortgage with an interest rate that is adjusted periodically to reflect changes in market conditions. Your mortgage payments are adjusted up or down as the interest rate changes.

Annual Percentage Rate (APR)
An interest rate that reflects the actual cost of a mortgage as a yearly rate. Because APR includes points and other costs, it is usually higher than the advertised rate. The APR allows you to compare different mortgages based on actual annual costs.

Appraisal
An estimate of the value of a home, made by a professional appraiser. The maximum amount of the mortgage is usually based on the appraisal.

Closing Costs (Settlement Costs)
All the charges associated with getting your mortgage, including the origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, charges for credit reports and other costs. Costs of closing usually add up to 3 to 6 percent of the mortgage amount.

Debt Ratio
This ratio is the total monthly obligation to stable gross monthly income. Debts to be included in this ratio include: Monthly Housing Expense (explained below), ALL monthly installment debts with more than 10 monthly payments remaining, child support or alimony, all revolving credit, any negative rental income from all investment properties the borrower owns. The Debt Ratio is calculated as follows:

Total Monthly Obligations Stable Gross Monthly Income

For most conventional loan programs, this ratio should not exceed 36%.

Equity
The value of your home after the outstanding balance of any loans are subtracted.

Escrow
A special third-party account set up by the lender in which your funds are held to pay for taxes and insurance. "Escrow" can also refer to a third party who carries out the instructions of both the buyer and the seller to handle the paperwork at the settlement.

Fannie Mae (FNMA)
Federal National Mortgage Association

Fixed Rate Mortgage
A mortgage with an interest rate that stays the same (fixed) for the life of the mortgage. Monthly payments for a fixed rate mortgage are very stable.

Freddie Mac (FHLMC)
Federal Home Loan Mortgage Corporation

Ginnie Mae (GNMA)
Government National Mortgage Association

Housing Ratio
This ratio is a measure of the percentage of the borrower's stable monthly gross income which is used to pay: Principal & Interest on the mortgage loan, Insurance, and Taxes. (and, when applicable, Mortgage Insurance Premiums, Homeowners Association dues, and payments on any secondary financing arrangements). The Housing Ratio is calculated as follows:

Housing Payment Stable Gross Monthly Income

For most conventional loan programs, this ratio must not exceed 28%.

Interest
The sum paid for borrowing money, which pays the lender's costs of doing business

Loan To Value (LTV)
The ratio of the loan amount to the appraised or the purchase price. For example, if a loan amount is $80,000.00 and the purchase price and the appraised value is $100,000.00, the LTV is 80%. ($80,000 divided by $100,000).

Origination Fee
The fee charged for services performed by the lender handling the initial application and processing of the loan.

Points (Loan Discount Points)
Points are paid to the lender to permanently buy down or lower an interest rate and are paid at closing. Each point is on percent of the loan amount - that is, two points on a $100,000 mortgage would be $2,000.00

Prepaids
The expenses that are put into escrow at closing, usually including real estate taxes, insurance, and interest.

Prepaid Interest
Interim interest that accrues on the mortgage loan from the date of the loan closing to the beginning of the period covered by the first monthly payment.

Principal
The amount of debt, not including interest, left on a loan; also the face amount of the mortgage.

PITI
(Principal-Interest-Taxes-Insurance) - Acronym for the separate parts of a typical monthly mortgage payment.

Private Mortgage Insurance (PMI)
An insurance policy the borrower buys to protect the lender from non-payment of the loan. PMI policies are usually required if you make a down payment that is below 20 percent of the appraised value of the home.

Self-Employed Borrowers
Any borrower who has an ownership interest of 25% or more in a business is considered to be self-employed. In order for self-employed income to be considered stable, a two year history of self employment is required.

Stable Monthly Income
This is the verified gross monthly income for all primary employment for all borrowers. Income from sources such as commissions, bonuses, overtime, and part-time employment may be used if supported by the appropriate verification and such additional income must be reasonably expected to continue.

Title Insurance
An insurance policy which insures you against errors in the title search, essentially guaranteeing you and your lender's financial interest in the property.