The mortgage industry is full of terms that are foreign to many people. The following glossary of terms should help you translate the mortgage language into English. If something is unclear, please feel free to contact us.
Adjustable Rate Mortgage (ARM)
Also referred to as a Variable Rate Mortgage - a mortgage in which the interest rate is adjusted periodically based on a pre-selected index. For example, consider a 5/1 ARM at 6.25% with 5/2/5 caps and a margin of 2.75 over the LIBOR index:
- 5/1: the "5" means that the interest rate is fixed for five years. The "1" means that the interest rate adjusts one time every year after the first five years.
- 6.25% means that the interest rate is fixed at 6.25% during the first five years. This is called the "initial start rate".
- 5/2/5 caps:
- The first number - "5" - means that the interest rate can adjust up to 5% over the initial start rate in the first year after the fixed period ends (year 6). This means that if the initial start rate is 6.25%, the interest rate can go up to 11.25% in year six (6.25% initial start rate + 5 = 11.25%).
- The second number - "2" - means that in every year after the first adjustment in year 6, the interest rate can adjust up or down up to 2% annually.
- The third number - "5" - means that the interest rate can never go up more than 5% over the initial start rate during the entire life of the mortgage. In this example, the maximum interest rate over the life of the mortgage would be 11.25% (6.25% initial start rate + 5 = 11.25%).
- 2.75 margin - In this example, the margin of 2.75 over the LIBOR index means that after the first five years, the interest rate would be calculated by adding 2.75 to the LIBOR index at the time of the adjustment. LIBOR stands for "London Interbank Offered Rate". See your CMPS professional for more info on different types of ARMs and which index is better for your situation.
Annual Percentage Rate (APR)
This is not the note rate applied for, but rather is a government mandated formula that shows the cost of the loan in a yearly rate. This rate takes into account any points and fees (closing costs) and is based on the loan going to its full-term. APR can often be manipulated by lenders and it is often inaccurate with Adjustable Rate Mortgages.
See your CMPS professionals for details.
Appraisal
A written report containing an estimate of property value and the data on which the estimate is based. Appraisals are prepared by a licensed appraiser who is independent of the seller, buyer, lender and real estate agent. The appraiser inspects the subject property and compares it with other similar properties that have sold in the area to determine the fair market value. The mortgage lender bases the loan-to-value ratio on the appraised value of a property and not its sales price. If you are refinancing a property, an issue called "seasoning" may come into play. This affects which value the lender allows you to use when determining the mortgage balance.
Assumption
An agreement between buyer and seller in which the buyer assumes responsibility for the seller's existing mortgage. This agreement could potentially save the buyer money because closing costs and the current interest rates, possibly higher, do not apply. In most residential mortgage transactions, this is not an option because the seller's existing mortgage normally has a "due on sale" clause that requires the seller to pay off the mortgage if the house is sold or if the ownership is transferred. This issue often comes into play with real estate investment strategies.
See your CMPS professionals for details.
Buy-down
A method of lowering the buyer's monthly payment for a short period of time. The lender or homebuilder subsidizes the mortgage by lowering the interest rate for the first few years of a loan. This strategy can be very effective in today's market.
See your CMPS professional for details.
Cash to Close
The amount needed from the borrower at closing. Consists of down payment, closing costs and prepaid items such as property taxes, insurance and prepaid interests.
Closing Date
Date stated on the purchase agreement that buyer and seller agree to finalize or close the transaction
Closing Costs
Various costs of setting up and funding the transaction - including closing fee, title insurance, appraisal fees, underwriting fee, etc. Often, a good negotiation strategy for both the buyer and seller is for the seller to pay closing costs on behalf of the buyer.
See your CMPS professional for details.
Condo/Town Home
Property types that usually have the following characteristics: they are attached, have a homeowners association and dues, the outside maintenance is taken care of by the association, and common areas and amenities available to all owners in the association.
Credit Bureaus
Agencies that provide your credit score and your credit report. The three main credit bureaus are Experian, Trans Union, and Equifax.
Credit Report
Report provided by the credit bureaus which shows the history, current status, and credit profile of an individual.
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Credit Scores
The number generated by the credit bureaus which is a numerical representation of the subjects credit profile, range is from 350 on the low side to 900 being the highest score possible.
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