The stated annual rate at which interest is calculated. On an adjustable-rate mortgage
(ARM), the accrual rate is based on a combination of an independent market index, which
fluctuates, plus a margin, which is fixed, and is established by the lender. The accrual
rate is also called the "note rate," the "coupon rate" or the
Adjustable Rate Mortgage:
A general term for any mortgage loan in which the interest rate and, generally, the
payments change over the life of the loan. The interest rate is adjusted to match the rise
or fall of a pre-selected interest rate index and the borrower's regular payments will
increase or decrease accordingly.
On an adjustable rate mortgage the time frame of interest rate adjustment. For example, on
a 1 year ARM, the adjustment interval is 1 year.
The systematic and continuous repayment of an obligation through periodic installments
until the debt has been paid off in full.
That period of time over which a calculated mortgage payment will fully repay a set loan
amount at a set interest rate.
Annual Percentage Rate:
The actual interest rate the borrower pays when all the costs of obtaining credit are
One who applies for a real estate loan (the prospective borrower/mortgagor).
A report made by an appraiser setting forth an opinion or estimate of value.
An estimation of property value made by an appraiser.
An expert qualified by education, training and experience who sets forth an opinion or
estimate of value of a property, based on available facts and an inspection of that
See Annual Percentage Rate.
See Adjustable Rate Mortgage.
Assignment of Rents:
A legal document (sometimes included in the security instrument) that assigns all rents
and income from a property to the mortgagee. If properly invoked after default, the
mortgagee has a right to assume management of the property and collection of the rents
from the subject property.
A means by which the title/mortgage may be transferred to another party with or without
release of liability on the note.
A mortgage with periodic installments of principal and interest that, at the end of such a
period, do not fully amortize the loan. The balance of the mortgage due is usually paid in
a lump sum at a specified date, usually at the end of the term of such periodic
installments. The most common type of balloon mortgage has a term of 30 years
with a balloon payment due in 15 years.
The unpaid, principal amount of a mortgage loan that is due on a specified date, and paid
in a lump sum at the end of the term.
Legal relief from the payment of all debts after the surrender of all assets to a
court-appointed trustee. Assets are distributed to creditors as full satisfaction of
debts, with certain priorities and exemptions. A person, firm or corporation may declare
bankruptcy under one of several chapters of the U.S. Bankruptcy Code: Chapter 7 covers
liquidation of the debtor's assets; Chapter 11 covers reorganization of bankrupt
businesses; Chapter 13 covers payments of debts by individuals through a bankruptcy plan.
The entity or individual designated to receive the income from a trust, insurance policy,
estate or trust deed. In a deed of trust, the lender is referred to as the beneficiary.
A sum of money paid to the lender at closing to reduce the borrower's out-of-pocket
monthly payment. A buydown can be temporary or permanent.
On ARMs, a limit placed on payments, interest rates and/or the balance of a loan. Caps can
limit increases by either a dollar amount (payment cap; balance cap) or a percentage
(interest rate cap)
A refinance loan where the borrower receives cash at the closing.
Certificate of Title:
A document which assures the buyer that the person selling the property is indeed the
legal owner of the property and that no one else has any legal claim to the property. This
certificate does not protect against loss if a hidden claim emerges after purchase of a
property - only a title insurance policy can do that.
Closing (Loan Closing):
The process that brings a loan into legal existence, including the signing of all loan
documents, their delivery to the appropriate parties, and the disbursing of at least some
of the loan funds.
Costs, in addition to the price of the property itself, that are due at closing. These
costs normally include, but are not limited to, origination fees, discount points (see
Points), attorney's fees, costs for title insurance, surveys, recording documents, and
prepayments of real estate taxes and insurance premiums held by the lender.
A statement of the funds received and spent at the closing of a real estate sale. The
closing statement is furnished by the real estate closing agent to the buyer and seller
separately. The standardized federal form, HUD-1, is used in most residential
transactions. Also know as settlement statement.
Cloud on Title:
An outstanding claim/lien or restriction on the property that, if valid, affects the
owner's clear ownership rights to the property. A cloud can be removed from the title by a
court action, a release or a deed.
A party who signs the mortgage note along with the borrower and who shares the title to,
and the obligation to pay for, the property with the borrower. Also called
Property pledged as security for a debt. For example, real estate securing a mortgage.
Collateral can be repossessed if the loan is not repaid.
An agreement, often in writing, between a lender and a borrower to loan money at a future
date subject to compliance with stated conditions. Also know as a mortgage commitment, or
A form of ownership of real property. The purchaser receives title to a particular unit
and a proportional interest in certain common areas. A condominium generally defines each
unit as a separately owned space limited to the interior surfaces of the perimeter walls,
floors and ceilings. Title to the common areas is in terms of percentages and refers to
the entire project less the separately owned units.
A mortgage loan not insured by the Federal Housing Administration (FHA) or guaranteed by
the Veterans Administration (VA).
A party who signs the mortgage note along with the borrower, but who does not own or have
any interest in the title to the property.
A person to whom a debt is owed by another person who is the "debtor."
A document completed by a credit-reporting agency providing information about the buyer's
credit cards, previous mortgage history, bank loans and public records dealing with
A small excess amount of funds which many lenders may require be kept in an escrow
A sum of money due by certain and express agreement.
Debt to Income Ratio:
Income analysis used by lenders in qualifying a borrower for a loan. It is the
relationship between the borrowers monthly income to the total of all monthly
payments (for example, car, credit card and proposed PITI payments).
The formal written document that transfers the rights of ownership and possession (that
is, the title) from the seller to the buyer.
Deed in Lieu of Foreclosure:
A transfer of title to real property, from a delinquent mortgagor to the mortgagee, given
voluntarily to satisfy the balance due on a defaulted loan and to avoid foreclosure
proceedings. Also called "voluntary conveyance."
Deed of Trust:
A legal document which conveys title to real estate to a disinterested third party
(trustee) who holds the title until the owner of the property has repaid the debt. In
states where it is used, a deed of trust accomplishes essentially the same purpose as a
mortgage. Also called "trust deed" or "trust indenture." Three people
are involved in a deed of trust: the borrower, the lender and the trustee. The borrower
transfers the legal title for the property to the trustee who holds the property as a
security for the debt. If the borrower pays the mortgage as agreed, the trustee gives the
legal title to the owner. If the borrower does not pay the mortgage as agreed, the trustee
can sell the property. (See Security Instrument; Mortgage.)
A breach or non-performance of the terms of a note or the covenants of a mortgage or deed
Applicable to some types of mortgages. If monthly payments do not cover the interest cost,
the interest left unpaid is deferred to later years by adding it to the unpaid principal
balance. In subsequent months, charged interest is added to this unpaid interest.
In the event that the sale of a foreclosed property does not provide an amount of money
sufficient to cover the balance due on the loan, a judgment may be sought against the
borrower, who is personally liable for the difference. If the deficiency is granted by the
court, this judgment can be collected from the borrower from other property, other assets
owned or by garnishment.
A loan payment that has not been received 30 days after its due date.
A notice issued to a borrower, warning of the imminent danger of foreclosure. .
Department of Housing and Urban Development:
An agency of the United States government that is responsible for the implementation and
administration of government housing and urban development programs.
With reference to the sale of real estate, a sum of money given to either bind a sale of
real estate or assure payment or an advance of funds in the processing of a loan. Also
known as "earnest money."
The amount of money, usually stated as a percentage, deducted from the face value of a
note. The borrower receives the net amount after the discount has been deducted. The
discount is computed to give the effective rates of interest agreed upon.
The difference between the sales price of real estate and the amount of the mortgage loan.
A clause allowing the lender to demand payment of the entire loan balance upon sale or
other transfer of title by the borrower to a third party.
A right to the enjoyment or access of land held by another. An easement is a non-ownership
interest in land.
See Equal Credit Opportunity Act.
An improvement that intrudes or invades illegally upon another's property.
A right, lien or claim attached to real property that passes with title. For example,
easements, judgment liens, and mortgages that may reduce the property's market value.
An addition made to a document, such as a title policy, in order to alter or clarify it.
Equal Credit Opportunity Act:
Federal legislation that prohibits a creditor from discriminating in mortgage lending on
the basis of race, color, religion, national origin, sex, marital status, age, income
derived from public assistance programs, or previous exercise of Consumer Credit
Protection Act rights.
The difference between the value of the real estate property and all liens against the
An account held by the lending institution to which the borrower pays monthly installments
for property taxes, insurance and special assessments, and from which the lender disburses
these sums as they become due.
An agreement to allocate funds to be set aside in a special account to guarantee payments
that occur after settlement.
The portion of a borrower's monthly payment that is set aside by the lender in an escrow
account to pay the taxes, hazard insurance, mortgage insurance, ground rents and other
special items as they come due.
Federal Housing Administration:
A federal agency within the U.S. Department of Housing and Urban Development (HUD). Using
loan insurance programs to insure mortgages for lenders, the Federal Housing
Administration (FHA) stimulates the availability of housing for low- and moderate-income
The greatest possible interest a person can have in real estate, including the right to
dispose of the property or pass it on to heirs without limitation.
See Federal Housing Administration.
A mortgage with federally sponsored mortgage guaranty insurance provided through the
Federal Housing Administration (FHA).
A loan on real estate that creates a paramount and prior lien against real property.
Fixed Interest Rate:
A mortgage feature that structures the loan so that there will be no increases or
decreases in the interest rate during the life of the loan.
Fixed Rate Mortgage:
The type of loan where the interest rate will not change for the entire term of the loan.
An action to eliminate the interest of a borrower in real estate so as to give the lender
Fully Indexed Accrual Rate:
The base index value of an adjustable-rate mortgage (ARM) plus the highest margin during
the life of the loan.
A legal proceeding in which a person's money or wages are taken for payment of a debt. The
amount that may be taken is set by statute (usually as a percentage) and, in most states,
a judgment is necessary before garnishment.
Good Faith Estimate:
A written document that provides a breakdown of the estimated closing charges.
Graduated Payment Mortgage:
A mortgage in which the monthly payments will generally increase for a set period of time
and then reach an amount that remains constant for the rest of the amortization period.
This increasing payment feature can be incorporated into fixed-rate or floating-rate
loans. For example, the borrower may agree to make initial monthly payments of $700 that
will rise gradually to $900 by the fifth year, where the payment will stay for the
remainder of the loan.
A broad form of casualty insurance coverage for real estate that includes protection
against loss from fire, certain natural causes, vandalism and malicious mischief.
A broad form of insurance coverage for real estate that combines hazard insurance with
personal protection and other items. Also known as a Homeowner's Policy.
A state statutory exemption that protects homestead property, usually to a set amount,
against the attachment rights of creditors. Property tax exemptions for all or part of the
tax are also available in some states. Statutory requirements to establish a homestead may
include a formal declaration to be recorded.
See Department of Housing and Urban Development.
HUD Information Booklet:
Describes the closing process and costs and the loan applicant's rights under the Real
Estate Settlement Procedures Act (RESPA).
Any permanent structures to land such as buildings, fences and driveways, as well as
landscaping, drainage, utilities, etc.
On ARMs, the measurement used by lenders to determine changes in the accrual rate. The
index is used with the margin to determine a new interest rate at the time of adjustment.
If the index increases, the interest rate increases unless an interest rate cap is
reached. Often, the index is based on the interest rates for U.S. Treasury securities.
Initial Interest Rate:
The beginning interest rate at the start of an adjustable-rate mortgage (ARM). It may be
lower than the fully indexed rate or "going market rate" and it will remain
constant until it is adjusted up or down on the adjustment date.
A charge for borrowing money. It is usually expressed on an annual rate, or as a
percentage, of the money still owed. For example, the interest rate might be 10.00%. If a
person borrowed $10,000 and agrees to pay it in full at the end of one year, the interest
will be $1,000.2) A right, share or title in property. 3) A general term meaning partial
or total right to a property. An interest in real estate might be a right, such as an
easement (see Easement), a lease or partial or full ownership.
The percentage of an amount of money which is paid for its use for a specified time;
usually expressed as an annual percentage.
Joint ownership by two or more persons giving each person equal interest and equal rights
in the property, including the right of survivorship.
Final determination by a court of the rights and claims of the parties to an action.
A loan secured by a mortgage that does not stand in a first lien position. Also called
"junior mortgage" or "subordinate lien" or "subordinate
mortgage". A second mortgage is a junior lien.
An individual or entity owning a junior lien.
An additional charge a borrower is required to pay as a penalty for failure to pay a
regular mortgage loan installment when due; a penalty for a delinquent payment.
A written agreement stating the conditions for the possession and use of real estate
(and/or personal property) given by the owner (landlord) to another person (the tenant)
for a specified rent and period of time.
Letter of Demand (Payoff Statement):
A prepared, formal statement showing the current status of the loan account, all sums due
on a date certain to fully pay the loan balance, and the daily rate of interest.
A legal encumbrance or claim of one person on the property of another as security for a
debt or charge.
Any person or organization who holds a legal claim over the specific property of another
as security for debt.
The letting out or renting of money by a lender to a borrower, to be repaid with or
The amount of principal that a borrower owes.
Loan Balance Cap:
Only applicable to adjustable-rate mortgages (ARMs) with deferred interest or negative
amortization (see Deferred Interest). Because the loan balance may increase with some
types ARMs, many lenders place limits on how much deferred interest may be added to the
original loan balance. If, during the life of the loan, the unpaid principal owed exceeds
this limit, the borrower can no longer defer interest. The monthly payment must be
increased to pay all monthly interest due and enough of the monthly principal to fully pay
off the loan within its remaining life.
A meeting between borrower and lender in which transfer of ownership is accomplished,
funds and deed are exchanged, and all loan documents, including the promissory note and
mortgage, are signed.
Loan to Value:
Mathematical computation that compares the loan amount to the value of the property.
The ratio, expressed as a percentage, of the amount of a loan (numerator) to the lesser of
the appraised value or selling price of real property (denominator). For example, if the
loan amount is 75,000 and the appraised value is 102,000, and the selling price is
100,000, the loan to value ratio is 75.00%.
If a borrower owns the land and is seeking a mortgage for a home under construction, the
value of the land may be recognized as a down payment equivalent to cash.
See Loan to Value and Loan-to-Value Ratio.
Under the terms of an adjustable-rate mortgage, the margin is a premium that a lender
charges which is added to the index. This premium is typically two or three percentage
points. Once the lender specifies the margin, it remains fixed. The index plus the margin
equals the interest rate on an ARM, subject to any interest rate caps.
A claim created by law for the purpose of securing priority payment for work performed and
material furnished by a mechanic or other person who has done construction or repair of a
building. Such a claim attaches to the land as well as buildings and improvements erected
Any agreement between the lender and the borrower that permanently alters any of the terms
of the original mortgage or note.
A pledge or security for the payment of a debt.
The institution, group or individual that lends money on the security of pledged real
estate; the lender.
Mortgage Guaranty Insurance:
Insurance that protects the mortgage lender against loss incurred by a mortgage default,
thus enabling the lender to lend a higher percentage of the sales price. The federal
government writes this form of insurance through the Federal Housing Administration. On
conventional loans, the insurance is provided by private companies and is called private
mortgage insurance (PMI).
Mortgage Guaranty Insurance Premium:
The amount paid by a mortgagor for mortgage guaranty insurance either to the FHA or a
private mortgage guaranty insurance company.
A written promise to pay a sum of money at a stated interest rate during a specified term.
It is usually secured by a mortgage. Also know as a "Note".
The owner of real estate who pledges his property as security for the repayment of a debt;
The gradual increase in the balance of a loan, caused by adding unpaid interest to the
loan balance. The unpaid interest is a result of monthly payments being less than the
amount required to pay the interest. Negative amortization can occur on a potential or
scheduled basis. (a) Potential negative amortization: Negative amortization that results
from borrower optional payment caps.(b) Scheduled negative amortization: Negative
amortization that is scheduled to occur during the life of the loan.
Non Owner-Occupied Property:
Property purchased by a borrower not for a primary residence.
The interest rate on the mortgage loan.
Notice of Default:
A notice recorded after the occurrence of a default under a deed of trust or mortgage.
Typically required by an interested third party that has insured or guaranteed the loan.
Offer to Purchase:
A document completed by a home buyer specifying the terms and conditions under which real
estate will be purchased.
Open End Mortgage:
A mortgage with a provision that the outstanding loan amount may be increased upon mutual
agreement of the lender and the borrower. A Home Equity Line of Credit is an open end
The fee that the lender charges the borrower to cover the cost of originating a mortgage
loan. It pays for processing the loan which includes collecting information about the
borrower's creditworthiness and the property. The fee is usually computed as a percentage
(for example, 1%) of the mortgage loan.
The borrower or a member of the immediate family lives in the property as a primary
The process of eliminating any and all claims, other than the owner's, to the title of a
property. (See Title.)
See Principal Interest Tax Insurance.
Compares the amount of the borrowers monthly income to the amount the borrower will
owe each month in principal, interest, real estate tax and insurance on a mortgage. It is
commonly used by lenders in determining whether or not to grant the borrower a loan. (see
Qualifying Ratios.) Also called "housing to income ratio".
Planned Unit Development:
A project that may consist of any combination of one- to four-family homes, condominiums
and other styles of residential housing. The individual unit and often the real estate
under it are owned by the individual owner. The common facilities are owned and maintained
by a homeowner's association.
Funds put into an account to cover the difference in monthly payments of a graduated
payment mortgage loan. Money is withdrawn to supplement the lower monthly principal and
interest payment to bring it up to the necessary amount needed to amortize the loan within
the contracted term.
Pledged Account Loan:
A loan partially secured by the buyer or third party depositing funds into a savings
account as collateral security for the loan. A portion of the monthly payment may be drawn
from the account over the certain initial years of the loan.
An amount equal to one percent of the principal amount of a note. Loan discount points are
a one-time charge assessed at closing by the lender to increase the yield on the mortgage
Interest that the borrower pays the lender before it becomes due.
A loan repayment made in advance of its contractual due date.
A penalty under a note, mortgage or deed of trust imposed when the loan is paid before its
The outstanding balance of a mortgage, exclusive of interest and any other charges.
Principal Interest Tax Insurance:
The total mortgage payment, which includes principal, interest, taxes and insurance.
Private Mortgage Insurance:
Mortgage guaranty insurance provided by a private company (not an agency of the federal
Gathering the loan application and all of the required supporting documents (including the
property appraisal, credit report, credit history, and income and expenses) so that a
lender can consider the borrower for a loan.
A document in which the borrower promises to pay a stated amount on a specific date. The
note normally states the name of the lender, the terms for payment and any interest rate.
See Planned Unit Development.
Refers to a loan for the purpose of purchasing a home, rather than a loan refinance or
home improvement loan.
Income analysis used by lenders in qualifying a borrower for a loan. There are two types
of qualifying ratios: Debt to Income Ratio and PITI Ratio.
Rate and Term Refinance:
The borrower replaces a mortgage loan on the subject property with another mortgage loan
for the purpose of getting a lower interest rate and/or shorter loan term.
Real Estate Settlement Procedures Act:
Federal legislation designed to help home buyers compare settlement costs among lenders
and to eliminate kickbacks.
Land and anything permanently affixed to the land, such as fences, buildings and those
things attached to the buildings, such as light fixtures or plumbing. May refer to rights
in real property as well as the property itself.
The payment of a debt from the proceeds of a new loan, using the same property as
To avoid or cancel in such a way as to treat the contract or other object of the
rescission as if it never existed.
See Real Estate Settlement Procedures Act.
Reverse Annuity Mortgage:
A type of mortgage loan in which someone who owns their home free and clear (that is, has
paid off all mortgages on the property) receives monthly payments from a lender for a
short period of time, usually less than 10 years. At the end of the mortgage, the owner
agrees to refinance the loan or sell the property to pay off the loan. Such payments from
the lender are often beneficial for retired people, who know they won't be in a house for
more than five or 10 years, because the payments can help them make tax and insurance
A written agreement between competent parties stating all terms and conditions of a sale.
Satisfaction of Mortgage:
The legal document, usually recorded, that proves that the borrower completely paid off
the mortgage loan. It is given to the borrower by the lender.
Usually the lender who holds the security interest in, or lien on, a property. Also known
as "mortgagee." (See Security Interest, Lien.)
The collateral or property given, deposited or pledged to ensure the fulfillment of an
obligation or payment of a debt.
A recorded legal document given by the borrower to the lender. It pledges the title of the
property as insurance to the lender for the full payment of the mortgage. Mortgages, deeds
of trust, and deeds to secure debt are considered security instruments. (See Mortgage,
Deed of Trust.) The security instrument contains the description of the property.
The legal right or share that the mortgage lender holds to the property.
The complete breakdown of costs involved in the real estate transaction for both the
seller and buyer.
A claim against a property, which arises when a major improvement (ie, a sewer line,
street paving,street lighting) is made by the local/state government. The total cost is
distributed among the benefited properties. Failure to pay any installment of a special
assessment may result in foreclosure by the political entity which is responsible for the
See "Junior Lien".
A measurement of land, prepared by a registered land surveyor, showing the location of the
land with reference to known points, its dimensions and the location and dimensions of any
improvements. It is useful in determining if boundary violations (encroachments) exist.
A lien on a property by local, state or federal government for the amount of due and
Tenancy in Common:
In law, the type of tenancy or estate created when real or personal property is granted,
devised or bequeathed to two or more persons in the absence of express words creating a
joint tenancy. There is no right of survivorship.
See Truth-in-Lending Act.
The evidence of the right to or ownership in property. In the case of real estate, the
documentary evidence of ownership is the title deed, which specifies in whom the legal
state is vested and the history of ownership and transfers. Title may be acquired through
purchase, inheritance, devise, gift or through the foreclosure of a mortgage.
Title Insurance Binder:
A report issued by a title insurance company stating the condition of title to certain
property as of a certain date and also stating conditions which, if satisfied, will cause
a policy of title insurance to be issued. Also called "commitment."
Title Insurance Policy:
A contract by which the insurer, usually a title insurance company, indicates who has
legal title and agrees to pay the insured a specific amount of any loss caused by clouds,
claims or defects of title to real estate. (a) Owner's Title Policy: Usually issued
to the landowner. The owner's title insurance policy is bought and paid for only once and
then continues in force without any further payment. Owner's Title Insurance policies are
not assignable. (b) Mortgagee's Title Policy: Issued to the mortgagee and
terminates when the mortgage debt is paid. In the event of foreclosure, or if the
mortgagee acquires title from the mortgagor in lieu of foreclosure, the policy continues
in force, giving continued protection against any defects of title which existed at, or
prior to, the date of the policy.
1) Someone who holds the legal title to another's property, usually as security for a debt
that person owes a lender. 2) A fiduciary who holds or controls something for the benefit
of another. 3) A third party to whom property is legally committed in trust.
In a deed of trust, the borrower is referred to as the trustor.
Federal legislation that provides borrowers with specific information on the cost of
In mortgage lending, the process of approving or denying a loan based on an evaluation of
the property and the applicant's creditworthiness and ability to repay the loan.
See Veterans Administration.
Variable Rate Mortgage:
See "adjustable-rate mortgage."
Verification of Deposit:
A form sent to each depository listed on the loan application to verify the funds of the
borrower at such institution.
Verification of Employment:
A form sent to the borrower's employer to verify the borrower's employment and employment
An agency of the federal government which helps veterans obtain long-term, low down
payment mortgages. The agency normally does this by guaranteeing a portion of a lender's
loans against loss. In return for this guarantee, lenders must follow prescribed
procedures for loans established by the Veterans Administration (VA).
See Verification of Deposit.
See Verification of Employment.
A deed used in many states to convey good fee simple title to real property.
Work to be completed by a borrower on a home under construction that may be applied as
part of a down payment. Sometimes referred to as "sweat equity".
© 1999 Reed Mortgage Corporation. All rights reserved.