Mortgage Definitions

A home loan in which the interest rate applied to the balance varies throughout the life of the loan. The initial interest rate is set below the market rate for a comparable fixed rate loan for a set period of time (from six months to 10 years). After that initial period has passed, the rate adjusts based on current market rates at a pre-arranged frequency. The amount the interest rate can increase between each adjustment period and is capped at a certain percentage, and the overall interest rate is capped for the lifetime of the loan (often the cap is a 5-6% increase). It is possible the rate of interest can drop between adjustment periods.

Replacing a borrower's current home loan with a loan for more than the balance of their previous mortgage. The difference between the two loans is kept by the borrower in cash and often used to consolidate high-interest debt, fund home improvement projects, or to have cash available for other needs. A cash-out refinance can be a Conventional, FHA or VA mortgage loan.

A type of loan available through a private lender (as example, a mortgage company, bank, or credit union) to be used in the purchase of real estate. The loan must meet the requirements of Fannie Mae or Freddie Mac, two government-sponsored enterprises that purchase mortgages from lenders to sell to investors. Typical requirements are based on the proposed occupancy, borrower's credit score, debt-to-income ratio, maximum loan amount based on where the home is located, and other guidelines.

A calculation of a borrower's monthly reoccurring debts divided by their gross monthly income. The resulting number is represented as a percentage. As example, if a borrower has $1,500 in monthly debts and has a monthly gross income of $4,500 their debt-to-income ratio would be 33%. Generally, home loan lenders like to see percentages of 36% and under.

A commonly used term for the Federal National Mortgage Association (FNMA). It is a government-sponsored enterprise (GSE) founded in 1938 by the United States Congress during the Great Depression as part of the New Deal. Fannie Mae purchases mortgage loans from banks and lenders and sells them to investors. This process allows liquidity in the mortgage industry so lenders can continue to offer home loans.

A government agency established in 1934 to provide mortgage insurance on loans made by FHA-approved lenders throughout the United States. The agency operates from self-generated income. The mortgage insurance premiums it collects from borrowers through lenders are used to operate the program.

A mortgage insured by the Federal Housing Administration (FHA) requiring a lower minimum down payment and credit score to allow borrowers with low-to-moderate income the ability to purchase a home. These loans require the borrower to pay an annual mortgage insurance premium (MIP) which is broken down into 12 payments and applied to the borrower's monthly mortgage bill. The MIP fee remains for 11 years if the borrower has a down payment of more than 10% of the home's price. The MIP fee will need to be paid for the lifetime of the loan if the borrower has a down payment of less than 10% of the home's price

Protection provided by the FHA to certain mortgage lenders in the event a property owner defaults on their mortgage. The FHA will pay a claim to the lender for the unpaid principal balance of the defaulted mortgage.

A home loan which charges a set rate of interest throughout the life of the loan, and to be paid once a month until the loan is completely paid back. The payment made each month does not change though the amount going towards principal increases while the amount going towards interest decreases with each payment.

A legal process by which a lender attempts to recover the amount owed on a loan that has default by taking ownership of the mortgaged property and selling it. Typically, this process happens only after a lender has tried to work with the borrower to help them get caught up with their payments.

A commonly used term for the Federal Home Loan Mortgage Corporation. It is a government-sponsored enterprise (GSE) established by the United States Congress in 1970. It typically buys conventional mortgages from smaller banks and lenders.

A number, calculated by the Fair Isaac Corp., between 300 and 850 that represents how likely a borrower is to pay back a loan based on their credit history. The higher the number, the less of a risk they are to a bank, mortgage company, or credit union issuing a mortgage. The number is calculated using data points such as payment history, amount owed, length of credit history, new credit, and credit mix. A borrower's score will be used by the lending institution to determine whether they are eligible for a loan and, if eligible, what their interest rate will be.

A commonly used term for the Governmental National Mortgage Association. It is a government-sponsored enterprise (GSE) established in 1968 as an extension of the Department of Housing and Urban Development. It serves the needs of individuals seeking non-conventional loans such as FHA loans, VA loans, and USDA loans.

A calculation where the outstanding balance of a home's mortgage is subtracted from the fair market value of the home. The answer to this calculation is the current mortgage loan balance vs the market value of the property. As a borrower pays down their mortgage, they gain equity as the loan balance decreases. As a borrower gains equity, they may be able to borrow additional funds.

Also known as a “reverse mortgage,” it is a special type of mortgage only available to senior citizens and insured by the Federal Housing Administration (FHA). A borrower is issued a cash advance based on the equity value of their home, which acts as collateral for the loan. No monthly payments are required, though certain fees are associated with closing the loan and borrowers will pay mortgage insurance premiums.

A line of credit secured by a home's equity. The amount of credit is replenished as the homeowner repays their outstanding balance. The timeline of the credit is typically divided into two parts, the draw period and repayment period. During the draw period, the homeowner can borrow as much or as little as they need up to the credit limit and is typically only required to pay the monthly interest on the portion of the HELOC in use. At the end of the draw period, the repayment period begins, and the homeowner will not be able to access the line of credit for new credit advances. At that point, they must officially start repaying the outstanding balance.

A type of mortgage offered through the U.S. Department of Veterans Affairs (VA) available to U.S. veterans and their families. It allows homeowners who already have a VA loan to refinance at a lower interest rate, reshorten their loan term, or covert an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. Borrowers do not need a minimum credit score or income, no home or property appraisal is necessary, and there is no restriction on how much money can be borrowed (though the amount borrowable may depend on local county limits). The program may even allow for borrowers to refinance homes they previously lived in but are now investment, rental, or second home properties. Unlike conventional refinances, no monthly mortgage insurance is ever required.

A calculation of the amount borrowed for a home's purchase or refinance divided by the home's appraised value. As example, if a loan of $90,000 is requested for a house valued at $95,000, the LTV would be 94.7. This calculation is used by lending institutions to determine the amount of risk associated with a loan. A higher LTV indicates there is less equity built up within a home, and the loan is at a higher risk of default. An LTV calculation greater than 80 often requires private mortgage insurance (PMI) to be paid by the borrower until the LTV is calculated at less than 80.

A debt secured through a bank, mortgage company, or credit union for the purchase of a specific piece of real estate whereby the borrower is obligated to pay back the loan with a predetermined set of payments. This loan allows an individual or business to make a large real estate purchase without having to pay for the entire purchase up front. The terms of the loan include a rate of interest the borrower must pay in return for receiving the loan. If the borrower stops making their payments, the lender can foreclose on the loan.

An insurance policy used in FHA loans when a borrower has a down payment that is less than 20% of the home's appraised value. It can be paid either upfront when the loan closes (called an upfront mortgage insurance premium) or paid annually in 12 installments for a predetermined number of years. The length of time a borrower pays MIP for an FHA loan depends on the original loan-to-value (LTV) of the mortgage. Those with original LTV calculations of 79.9 - 90.0 will pay MIP for 11 years. Those with an original LTV greater than 90.0 will pay MIP throughout the life of the loan. The annual rate paid is calculated based on the length of the loan and the original LTV value. If the borrower defaults on their mortgage, the MIP lender will pay whoever holds the mortgage the remaining amount due.

A practice of providing mortgages or loans to borrowers with medium to high credit scores. Due to the borrower's medium or high credit (traditionally those with a FICO credit score above 600), they may not have difficulty maintaining the repayment schedule. Therefore, there is lower risk to the bank or mortgage lender, so interest rates may be lower.

An insurance policy used in conventional loans when a borrower has a down payment that is less than 20% of the home's appraised value. Commonly, this insurance is paid through an added fee to the borrower's monthly mortgage payment. Occasionally, it is paid with a one-time upfront premium paid at the closing of the loan or through a combination of an upfront premium and monthly payments. The amount paid for PMI will vary based on many factors. Once the borrower's LTV value has reached 78 and their account is in good standing. The lender is required to stop charging PMI. If the borrower defaults on their mortgage, the PMI lender will pay whoever holds the mortgage the remaining amount due.

A type of reverse mortgage (sometimes referred to a jumbo reverse mortgage) available to homeowners whose homes are valued above the limit set by the Federal Housing Administration (FHA). For these loans, a borrower asks for more money than the federally-insured reverse mortgage can supply, and their home is valued at more than the limit set by the government. Once the loan is secured, the homeowner will receive a line of credit equal to their equity in the home. They can take the funds as a lump sum, set up a monthly annuity for life, or choose a series of monthly payments for a set number of years. The amount withdrawn is repaid when the homeowner, or the homeowner's heirs, sell the home. Because they are not regulated as a home equity conversion mortgage (HECM), lenders of proprietary reverse mortgages can establish their own terms outside the restrictions set by the FHA.

The process of replacing the terms of an existing mortgage. Typically, a borrower will decide to refinance in order to receive a more favorable interest rate, payment schedule, or other term. When the refinance is approved, it replaces the original agreement.

A type of mortgage loan, which allows for additional funds to be used to renovate or repair a home that has been purchased. The money is placed in escrow and used to pay contractors.

A loan available to homeowners 62 years and older in which a homeowner borrows money from a bank, mortgage company, or credit union using the equity in their home as security for the loan. The amount the borrower can receive through the loan typically cannot exceed 80% of the home's equity based on its appraised value. After the loan is granted, the home's title remains in the homeowner's name. Instead of making payments for the loan or home mortgage, the borrower can either receive a line of credit, monthly payout, or lump sum. Each payout option requires that interest and fees be paid to the lending institution. When the last surviving borrower of the reverse mortgage dies, sells the home, or no longer lives in the home as a primary residence, the loan must be repaid.

A practice of providing mortgages or loans to borrowers with low credit scores. Due to the borrower's low credit (traditionally those with a FICO credit score below 600), they may have difficulty maintaining the repayment schedule. Therefore, there is a larger risk to the bank or mortgage lender, so interest rates may be higher.

A home loan for which the first seven years the interest rate is unchanged, but on the eighth year it can increase a maximum of five percentage points above the initial interest rate. After that year, it can increase a maximum of two percentage points. The interest rate for the loan can never increase more than 5 percentage points over its lifetime.

A home loan that gives the borrower 30 years to pay back the money at a set rate and payment throughout the life of the loan. Typically, monthly payments for this type of mortgage are lower than those for mortgages with shorter terms. However, the combined total of all payments may be higher.

A home loan that gives the borrower 30 years to pay back the money. Typically, monthly payments for this type of mortgage are lower than those for mortgages with shorter terms. However, the combined total of all payments may be higher.

A home loan for which the first three years the interest rate is unchanged. From the fourth year on, the interest rate will adjust once a year for the lifetime of the loan.

A type of mortgage available through the USDA for individuals looking to purchase or repair a home in an area defined as rural by the USDA. No down payment is required, the borrower must meet income restrictions for the county in which they are buying or repairing a home, and the loan may not be used for investment properties.

An insurance premium, usually paid on Federal Housing Administration (FHA) loans, of a set percent of the loan's value. This amount is paid by the borrower in cash at the close of the loan or it can be rolled into the monthly mortgage payments.

A type of mortgage backed by the United States Department of Veterans Affairs to assist active service members, veterans, and surviving spouses in buying, building, and retaining a home. No down payment or private mortgage insurance is required although the Veteran is typically charged a Guaranty fee which is financed.