Mortgages 101

Balloon Mortgage: A loan that functions like a fixed-rate mortgage for a set number of years (usually five or seven) and then must be paid off in full in a single "balloon" payment. Balloon loans are popular with those expecting to sell or refinance their property within a definite period of time.

Basis Point: One one-hundredth of a percentage point (one percent). For example, if mortgage rates fall from 6% to 5.97%, then they've declined 3 basis points. A full percentage point is 100 basis points.

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

Buyer's Market: An environment when there are more sellers than buyers. A buyer's market is favorable to buyers because it drives home prices down.

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Cash-Out Refi: A refinancing of a mortgage in which the new principal (the borrowed amount) exceeds the outstanding principal of the original loan. In essence, the homeowner is taking the equity out of the home. For example, a homeowner who owes $50,000 on a home valued at $150,000 has $100,000 in equity. That equity can be liquidated with a cash-out refinance loan providing the loan is larger than $50,000 (the amount owed). After paying off the original mortgage, whatever money is left over goes to the homeowner.

Certificate of Title: A title company or attorney's document attesting to the ownership of property. A clean title means the investigation has found no conflicting ownership claims.

Closing Costs: Closing costs are fees paid by the borrower when a property is purchased or refinanced. Costs incurred include a loan origination fee, discount points, appraisal fee, title search, title insurance, survey, taxes, deed recording fee, and credit report charges. All closing costs are separated into "non-recurring," and "pre-paid." Non-recurring charges are any items that are paid only once because a loan was obtained or a property bought, such as a loan origination fee. Pre-paid charges are those that recur over time, like insurance and property taxes. These are summarized in the Good Faith Estimate.

ClearPoint Credit Counseling Service (CCCS): CCCS is the nation's oldest and largest non-profit credit counseling organization. As members of the National Foundation for Credit Counseling (NFCC), CCCS helps consumers with debt management at no cost.

Conforming Mortgage Loan: Any mortgage loan that's at or below the amount that Fannie Mae and Freddie Mac can purchase and/or securitize in the secondary mortgage market. The current loan limit is $417,000 in the continental US, and $729,750 for designated high-cost areas. Alaska, Hawaii, Guam, and the US Virgin Islands' limits are higher.

Conventional Mortgage Loan: Any mortgage loan not guaranteed or insured by the government (typically through FHA or VA programs).

Counteroffer: In real estate, a counteroffer is the rejection of one offer and the substitution of another as part of the negotiation for property.

Credit Appraisal: The process of reviewing personal information, such as savings, debt, income, age, qualifications, current job and job history by a lender. Taking all this information into account, a home lender will determine whether or not you are eligible for a loan and what the loan amount should be.

Credit Report: A report of borrowing and repayment history for an individual or entity. Information regarding late payments, defaults or bankruptcies will appear here. Consumers have the right to view their credit reports once a year from each of the three major credit reporting agencies at annualcreditreport.com.

Credit Reporting Agency: A private firm that collects and provides information on individuals' borrowing and bill-paying habits. Lenders use this information to determine an applicant's credit-worthiness or the ability to pay back a loan. The three nationwide consumer reporting agencies are Equifax, Experian and TransUnion.

Credit Score: A credit score, also known as a FICO score, is a number created through statistical analysis of one's credit report. Usually between 300 and 800, a credit score indicates the credit worthiness of an individual in the eyes of a lender. The higher the number, the less of a risk that person is in handling credit. An average credit score is generally in the 600 range.

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Debt Consolidation: The replacement of multiple loans into a single loan, often with a lower monthly payment and longer repayment period. This loan is often referred to as a consolidation loan.

Debt-to-Income Ratio: A ratio used by lenders to decide whether to offer a loan, and at what rate. It calculates how much of a potential borrower's before-tax earnings are spent to pay loans.

Default: What takes place when you don't pay a loan or lease debt in a timely fashion.

Depreciation: The opposite of appreciation, depreciation is the loss of value over time.

Down Payment: Used in loans with collateral, it is a partial payment in cash for an asset. The loan covers the remainder of the purchase price (the larger the down payment, the smaller the loan). In home loans, the required down payment varies from lender to lender, but most require a 20% down payment to avoid paying private mortgage insurance (PMI).

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Equifax: One of the three largest credit bureaus. Experian and TransUnion are the others.

Experian: One of the three largest credit bureaus. Equifax and TransUnion are the others.

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Fair Market Value: The market at which a piece of property would sell between a reasonably informed buyer and a reasonably informed seller. In real estate markets, comparable recent sales help the buyer and seller decide the fair market value.

Fannie Mae and Freddie Mac: The nation's two federally chartered and stockholder-owned mortgage finance companies. Forbidden by their charters from originating loans (i.e. from providing mortgage loans on a retail basis), these two Government-Sponsored Enterprises (GSEs) were founded in 1938 during the Great Depression. Their purpose is to purchase and securitize mortgages in order to ensure that funds are consistently available to the institutions that lend money to home buyers. The difference between these two entities often comes down to size (Fannie's larger), business strategy and execution. Fannie Mae and Freddie Mac are both charged with serving low- and moderate-income buyers, and thus have conforming loan limits. Two sets of limits are provided for first mortgages—general conforming loan limits ($417,000), and high-cost area conforming loan limits ($729,750) in designated high-cost areas.

Federal Funds Rate: Also known as the "fed funds rate," this is the interest rate that banks charge each other for loans, usually overnight. These loans are generally made so that banks can cover their daily cash flow and reserve requirements. As the rate rises, banks have an increased incentive to keep more of their own cash on hand—making less money available to lend out to households and businesses. The Fed doesn't actually set the fed funds rate, which is determined by supply and demand of the funds; instead, it sets a target rate and, through its own purchases or sales of securities, affects the supply of funds.

Federal Reserve System: The central banking system for the United States, known as the Fed. The Fed issues US currency and oversees the monetary system.

Federal Trade Commission: This federal agency enforces consumer protection laws regarding lending, credit and debt collection.

Fees: There are a number of fees associated with most mortgage loans. Many loans contain a combination of fees including loan origination, escrow, recording, appraisals, credit report, and title insurance in addition to pre-paid amounts for property taxes and homeowner’s insurance. Other loans offer a single flat fee for these required items. We highly recommend that you receive a Good Faith Estimate, which lenders are required to provide within three days of applying for your loan. This document should clearly state the fees associated with your loan. Be sure you are aware of these fees when weighing your loan options, as the impact on your total loan cost can be significant.

First Lien: Used in mortgages to signify the difference between a mortgage and a home equity loan. In case of default, the first lien—the mortgage—gets paid first. The rate for a first lien (mortgage) will be lower than for a second lien (home equity loan) because there's greater risk that the holder of the second loan won't be paid.

Fixed Installment: An unvarying loan payment.

Foreclosure: The legal process by which borrowers who cannot pay their mortgages may have their homes seized by lenders and sold for the amount owed.

Fixed Rate Mortgage (FRM): A mortgage loan with an interest rate that does not change over the term of the loan. UNIFY Fixed-Rate Mortgages.

Freddie Mac: See entry for Fannie Mae.

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Good Faith Estimate: A good faith estimate must be provided by a mortgage lender or broker in the United States to a borrower, as required by the Real Estate Settlement Procedures Act (RESPA). The estimate must include an itemized list of fees and costs associated with your loan, which may include closing costs, inspections, insurance, and taxes. The estimate must be given within three business days of applying for a loan.

Gross Income: An individual's or company's earnings or income before any deductions. This information is usually required when qualifying for a loan.

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Home Equity: The difference between the current value of the home and the amount of money owed on the mortgage.

Home Equity Line of Credit: A type of home loan that allows you to borrow money as you need it.  UNIFY Home Equity Line of Credit

Home Equity Loan: A loan that is secured by a home and limited by the market value of the home among other factors. UNIFY Home Equity Loans

Home Improvement Loan: Money lent to a property owner for home repairs and remodeling.

Household Income: The total income of all members of a household. This information is used by lenders to evaluate joint applications for credit.

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Indexed Rate: On variable loans, it's the index plus some set margin. If a home equity rate, for example, is prime plus 1 and the prime rate is 5.5 percent, the indexed rate is 6.5 percent.

Interest Rate: The rate charged for the use of money, most often expressed as an annualized figure. In consumer loans, it's the rate charged to consumers who want to borrow. In deposits, it's the rate offered by an institution, such as a bank or credit union, that borrows and lends consumers' money.

Interest Rate Lock: A locked interest rate is one that won't change. Be cautious of lenders who will not lock-in your interest rate, or only offer a short rate-lock period. A locked rate will prevent your rate from increasing before the loan closes.

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Joint Credit: When a couple asks for a loan based on joint credit, both of their assets, incomes, and credit reports are taken into consideration by the lender. It can result in a higher amount being available, but both parties are responsible for repaying the debt.

Joint Liability: With joint credit comes joint responsibility, where both parties to the loan must repay a debt.

Jumbo Mortgage Loan: A mortgage loan for an amount exceeding the Fannie Mae and Freddie Mac loan limit. Because the two agencies can't purchase the loan from the lender, jumbo loans carry higher interest rates.

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Late Charge: A fee imposed by lenders on borrowers who don't pay in a timely fashion.

Lien: A legal claim against property for payment of a debt. Liens must be paid or settled before property can be sold because they negatively affect the legal title.

Line of Credit: Up to a certain maximum, consumers may borrow any amount for a specified time under a line of credit. Revolving credit accounts such as credit cards and home equity lines of credit are examples of lines of credit.

Loan Origination Fee: The underwriting charge from a lender. The charge is often expressed in points, and a point is one percent of the loan amount.

Loan Term: The period of time you have to pay back a loan. Home loans are typically 15- and 30-year terms.

Loan-to-Value Ratio (LTV): The loan divided by property value. If the house is valued at $100,000 and the loan is $80,000, the LTV is 80 percent. Borrowing above 80 percent LTV is considered risky by lenders, and they charge some sort of premium for it. In mortgages, borrowing more than 80 percent of the home's value usually triggers the need for private mortgage insurance (PMI). In home equity borrowing, you must pay a higher rate.

Lowball Offer: A bid or offer far below the fair market value.

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Margin: The amount that lenders charge above an index, usually expressed as percentage points.

Mortgage Calculator: An online form that shows how much a borrower will pay each month for a home loan. Visit our Online Mortgage Calculators.

Mortgage Loan: Money lent for the purpose of buying real estate.

Mortgage Quote: An interest rate offered on a home loan.

Mortgage Rate: The amount of interest charged on money lent for the purchase of a home.

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National Credit Union Administration (NCUA): The US federal agency that charters and oversees federal credit unions, and insures savings in federal and most state-chartered credit unions.

Net Income: Income after taxes. A figure required by some lenders during the application process.

Net Worth: The total value of all assets, minus all debts.

Notice of Default: Any official notification that a borrower has failed to pay. In mortgages, it can describe a formal step in the foreclosure process in which the lender notifies the courts of a borrower's failure to pay.

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Origination Fee: What a lender charges to process a loan.

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Points (also called "discount" or "origination" points): A loan with a low rate may also have "points" attached. Each point equals approximately one percent of your mortgage loan amount. Points will lower your mortgage loan rate, but are the equivalent of pre-paid interest and raise closing costs.

Pre-approval: A letter of commitment from a lender stating how much a borrower can borrow. More valuable than a pre-qualification, it requires a credit report and income verification.

"Predatory" Lending: A term used to describe unfair, deceptive or fraudulent practices of some lenders during the loan origination process, which may include hidden fees and costs, deceptive marketing and high interest rates.

Prepayment Penalty: A fee imposed by some lenders if the borrower prepays the entire loan or a substantial portion of it within a certain time period. This time period commonly applies to the first 5 years of the mortgage.

Pre-qualification: A letter of opinion from a lender stating how much a borrower can borrow. Usually free, this document is not supported by a credit report.

Private Mortgage Insurance (PMI): PMI is insurance paid by the borrower that protects lenders from loss due to loan default or foreclosure. Typically, PMI is required if the loan amount exceeds 80% of the property's purchase price.

Prime Rate: Prime rate, or prime lending rate, is a term used to reference an interest rate or index used by financial institutions. Originally, it was the interest rate a bank lent to its most favored or "prime" customers, though this is no longer always the case. Some variable interest rates may be expressed as a percentage above or below prime rate.

Principal: The amount of money borrowed.

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Refinance: The process of acquiring a new loan to pay off an existing loan on the same house.

Resale: This is the term used when you are buying a home from someone who already owns it and is selling it. Hence, it is referred to as a resale. It indicates you are not buying a brand new home straight from the builder or buying one currently under construction.

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Second Mortgage: A mortgage on real estate which has already been pledged as collateral against another mortgage.

Secured Debt: Debt secured by a claim on the borrower's property. Car loans and mortgages are common types of secured debt. Lenders are willing to offer money at lower rates with secured debt because they have an asset they can seize if the borrower doesn't pay as agreed.

Simple Interest: Interest computed only on the principal balance, without compounding.

Subprime Borrower: A borrower with a substantially flawed credit record.

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Truth in Lending Act (TILA): A federal law designed to protect consumers in credit transactions by requiring clear disclosure of key terms and all costs.

TransUnion: One of the three largest credit bureaus. Equifax and Experian are the others.

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Underwriting: The process of evaluating a loan to assess risk a lender would assume if a particular mortgage loan application is approved. Final decisions are made as to the viability of the loan, and conditions are set forth before a loan will be funded.

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Variable Interest Rate: Percentage a borrower pays for the use of money, usually expressed as an annual percentage rate that adjusts in accordance with an index.

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