Terms you should know

This glossary is proved to help you become more acquainted with terms involved with a mortgage loan and/or a purchase of a home. There are hundreds of terms that could not be included in this short glossary . If there is a term that you would need help with or further Ðinformation on the ones listed, please feel free to contact us.

Adjustable Rate Mortgage (ARM): A loan on which the interest rate, and therefore, the monthly payment, is adjusted periodically based on changes in a specified financial index. I.E. T-Bill, Prime Rate, LIBOR, COFI, etc.
Adjustment Period: The period of time between changes in either your interest rate and/or monthly payment with and adjustable rate mortgage. These periods will vary depending on the type of loan you apply for; however most adjustment periods or semiannual or annual.
Amortization: The reduction of the loan balance through installment payment. First mortgage loan are typically amortized over 15 or 30 years. Advanced Funding offer several different amortizations that also include 7, 10, 15, 20, 25, or 30 year repayment programs.
Application Fee: A fee, often non-refundable, changed by some lenders to cover cost of processing a loan application. Advanced Funding does not charge a application fee on any mortgage loan.
Appraisal: A formal, written estimate of the current value of the home. The cost for a appraisal is normally paid at the time of application for purchases . For Home Equity Loans and Refinances talk to your Advanced Funding Mortgage Specialist.
APR (Annual Percentage Rate): The cost of your loan expressed as a yearly rate. The APR takes into account certain financing costs such as the interest rate, discount points, loan origination fee, etc.
Assumable: A feature of the loan which permits you to transfer your mortgage to someone purchasing your home. Since assumption of a loan usually involved lower cost for the new borrower, and assumable loan could make it easier for you to sell your home in the future.
Bi-weekly Mortgage: Typically, a fixed rate mortgage on which payments are due and payable every two weeks. Since a total of 26 bi-weekly payments (equivalent to 13 monthly payments) are made annually, loans of this type are paid off faster than loans requiring 12 monthly payments per year.
Closing: A meeting of the paries (buyer, seller, lender, agents) involved with a mortgage loan or purchase of a home.
Closing Agents/Escrow Agent: A neutral third party who is appointed to see that all terms and conditions of the agreement between buyer, seller and lender met at the time the property is transferred. The closing or escrow agent also acts as custodian of the documents and funds.
Closing Costs: One-time costs that must be paid before the loan can be closed. These costs may include such items as the origination fee, credit report, appraisal, title insurance premium, recording fees, discount points, etc. Shortly after or at the time of origination of a mortgage loan, Advanced Funding will give you a Good Faith Estimate that will estimate those costs on a mortgage loan.
Conversion Option: An option found with some adjustable rate loans which allows you to convert an adjustable rate mortgage to a fixed rate mortgage for the remaining term.
Conventional Financing: A mortgage loan made without government insurance or guarantee. Depending upon the amount of your down payment, the lender may require that you purchase private mortgage insurance (MI) which helps insure the lender against loss.
Discount Points: Funds paid at closing as a form of prepaid interest to obtain a particular interest rate. One discount is equal to one percent of the loan amount (e.g. one points charted on a $100,000 loan would equal $1,000). Points are payable at the loan closing and may be paid by the buyer or seller or split between them. (The seller must pay the points on VA loans.) Under some lending programs, you may be able to include these points as part of your loan amount.
Ernest Money: A deposit of part of the purchase price which is paid to seller by the buyer as evidence of serious interest in buying the home. The deposit may be non-refundable. Talk with your real estate professional.
Escrow, -Impound or Reserve Amounts: A portion of your monthly payment designated for payment of property taxes, homeowners insurance, assessments, etc. The monthly collection of these items is required on certain programs or with certain types of financing. As your Advanced Funding Mortgage Professional to see if the loan program you are applying for requires escrow, impound, or reserves.
FHA (Federal Housing Administration): A government agency which insures repayment of a loan to the lender; this enables the borrower to obtain a home loan with a smaller down payment. All FHA loans require mortgage insurance premium .
Fixed Rate Loan: A loan which has an interest rate that remains constant throughout the life of the loan. Because the interest rate does not change, the principal and interest remain the same.
Homeowner's Insurance: Property insurance that combines hazard insurance with personal liability insurance. The coverage provides protection against loss due to fire, wind damage, theft and personal injury. As part of the service that Advanced Funding offers clients, we will find you the best insurance rates for home buyers.
Index: A published measure used by lenders to calculate the interest adjustment on an adjustable rate mortgage. The Cost of Funds (Calculated by the Federal Home Loan Bank) or the 1-year average Treasury Index are the most often used indexes. Because these indexes reflect the general movement of interest rates, they tend to keep the rate on your loan in line with the economy and market conditions.
Initial Rates: A fixed interest rate charge for the first six, twelve or thirty-six months of an adjustable rate mortgage. This rate will generally be lower than prevailing market rates.
Interest Rate Cap: A safety feature built into an adjustable rate mortgage that protects the borrower against substantial increases in the rate of interest and, therefore, in the monthly payment. For example, an adjustable rate mortgage may have a two percent limit per year on the amount of interest rate increase, as well as a five or six percent limit over the life of the loan.
Loan to Value Ratio (LTV): The loan amount expressed as a percentage of the value of the property (house and land). Value in this instance is the lesser of the sales price or appraised value. The larger the down payment you make, the lower your loan to value ratio will be.
Margin: A fixed percent age which is added to an index to determine the interest rate on a adjustable rate mortgage (e.g. index rate + margin = interest rate on loan). Different programs use different margins and indexes. The margin does not change once it is established at loan closing.
MI (Mortgage Insurance): Depending on the amount of your down payment, you may be required to purchase MI on a conventional loan. This insurance protects the lender against loss in the event of foreclosure. Mortgage Insurance is required on all FHA loans.
Mortgage Life Insurance: An optional policy which protects your family and estate by paying off your loan in the event of your death.
Negative Amortization: A situation which may occur on a adjustable rate mortgage which has a payment cap (SeeÐPayment Cap). Because your monthly payment is capped, your adjusted payment amount may, at times, be insufficient to pay the actual amount of interest due. The unpaid (deferred) interest is then added to your loan balance. This increase in your loan balance is known as negativeÐÐamortization. A borrower usually has the option of increasing his monthly payment or making a lump sum payment to avoid negative amortization.
Origination Fee: A fee or charge for work involved in the preparation and evaluation of a mortgage loan.
Payment Cap: The maximum amount the payment on a adjust able rate mortgage can increase or decrease at each adjustment period (typically six months or one year). A payment cap ensures that payment changes occur at a gradual pace. If, due to the payment cap, your adjusted payment is not sufficient to cover the amount of interest due on the loan, the unpaid (deferred) interest is added to your loan balance. This is know as negative amortization. (See Negative Amortization.)
PITI (Principal-Interest-Taxes-Insurance): A term used to describe the total of your monthly payment, including amounts collected for property taxes and homeowners insurance.
Prepayment Penalty: A fee which the lender may charge if the loan is paid off early.
Refinance: A refinance involves that repayment of the original home loan or loans from the proceeds of a new loan. Borrowers usually refinance in order to (a) take advantage of lower interest rates, (b) chance from one loan type to another (e.g. from an adjustable rate mortgage to fixed), or (c) to turn their home equity into cash. Refinancing involves new loan costs, to these must be compared to the dollar benefits to be gained.
Serving: All the services rendered to maintain your loan from the time it is made until it is paid in full. It includes collecting your payment, applying the proper amounts to principal and interest, making certain that your home is properly insured and your property taxes paid. It involves maintainting a history of your payments, notifying you annually of the interest paid, adjusting your payments to reflect changes in taxes and insurance, answering any questions you may have over the life of the loan, etx. A lender may elect ot retain or sell the servicing.
Term: The number of years in which your laon is scheduled to be paid off. The most common terms are 15 and 30 years.
Title Insurance: A policy issued by a title company which insures that there are no recorded claims against the title to the property at the time the new loan is closed.
Underwriting: The evaluation of a loan to determine whether a borrower qualifies. The evaluation is made using standards set by the lender and insuring agencies. (FHA, VA, Mis).
VA Veterans Administration: A government agency which provides guarantees to lenders against loss on approved loans made to qualifying veterans.

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