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Adjustable Rate--An interest rate that changes periodically in relation to an index. Payments may increase or decrease accordingly or in some cases the rate will stay the same at the adjustment period. The interest rate can change, monthly, every sixmonths, yearly or every 3 years, etc. depending on the terms of the adjustable rate mortgage.

Amortization--A repayment method in which the amount you borrow is repaid gradually though regular monthly payments of principal and interest. During the first few years, most of each payment is applied toward the interest owed. During the final years of the loan, payment amounts are applied almost exclusively to the remaining principal. The most common amoritization on a mortgage loan is 360 month or 30 years.

Annual Percentage Rate (APR)--The cost of credit on a yearly basis, expressed as a percentage. Required to be disclosed by the lender under the federal Truth in Lending Act, Regulation Z. Includes up-front costs paid to obtain the loan, and is, therefore, usually a higher amount than the interest rate stipulated in the mortgage note.

Application--An initial statement of personal and financial information which is required to approve your loan. Fanniemae and FreddieMac call this form a 1003 form.

Appraisal--A fee charged by an appraiser to render an opinion of market value as of a specific date. Required by most lenders to obtain a loan.

Balloon Payment--A lump sum payment for the unpaid balance of the loan.

Cap--The maximum allowable increase, for either payment or interest rate, for a specified amount of time on an adjustable rate mortgage.

Cash Out--Receiving money back when refinancing your present mortgage. Defined by Fanniemae and Freddiemac as more than $2,000 or 2% of the loan amount back as cash in hand at the closing of your loan. If it’s less than that amount of money it is not considered cash out and interest rate may be lower on No Cash Out refinances. Also called a Rate and Term refinance.

Ceiling--The maximum allowable interest rate over the life of the loan on an adjustable rate mortgage.

Closing Costs--Any fees paid by the borrowers or sellers during the closing of the mortgage loan. This normally includes an origination fee, discount points, escrow fees, title insurance, survey. These include all fees that the lender, escrow, title and broker charge the consumer for loan. These do not include prepaids which includes interest, tax and hazard insurance payments. See Prepaids or Escrow Account.

Conforming Loan Amount--Generally, a mortgage loan under $322,700. Qualifying ratios and underwriting methods are standardized to a large degree. Interest rates are normally higher on loan amounts above $322,700 from a .25%  to .50 % on A paper loans.

Debt Service--The total amount of credit card, auto, mortgage or other debt upon which you must pay. Also referred to as your back end ratio. Lenders like to see this ratio in the 40% range. As in 40% of your income goes toward your monthly debt. Higher debt ratio loans are available.

Deed of Trust—the document you sign at closing in Washington State that secures the lender an interest in your property. This appears as mortgage lien on the property’s title.

Discount Points (or Points)--The amount paid either to maintain or lower the interest rate charged. Each point is equal to one percent (1%) of the loan amount (i.e., two points on a $100,000 mortgage would equal $2,000).

Down Payment--The difference between the purchase price and that portion of the purchase price being financed. Most lenders require the down payment to be paid from the buyer's own funds. Gifts from related parties are sometimes acceptable, and must be disclosed to the lender.

Encumbrance--A claim against a property by another party which usually affects the ability to transfer ownership of the property.

Equity--The difference between the fair market value (appraised value) of your home and your outstanding mortgage balance. For example if you own a home worth $150,000 and owe $120,000 on the mortgage your equity would be 20% or $30,000.

First Mortgage--A mortgage which is in first lien position, taking priority over all other liens (which are financial encumbrances). Most mortgage lenders require that they be in first position before they will lend to you unless you are obtaining a second mortgage.

Fixed Rate--An interest rate which is fixed for the term of the loan. Payments as well are fixed at one amount. There is usually no prepayment penalty.

FHA Loan--More appropriately termed "FHA Insured Loan." A loan for which the Federal Housing Administration insures the lender against losses the lender may incur due to your default. You pay a monthly premimum called mortgage insurance and an upfront premimum based on the loan amount at closing to FHA.

Good Faith Estimate--A written estimate of closing costs which a lender must provide you within three days of submitting an application. Minimum loan amounts apply and vary.

Home Equity Loan--A fixed or adjustable rate loan obtained for a variety of purposes, secured by the equity in your home. Interest paid is usually tax -deductible. Often used for home improvement or freeing of equity for investment in other real estate or investment. Recommended by many to replace or substitute for consumer loans whose interest is not tax-deductible, such as auto or boat loans, credit card debt, medical debt, and education loans. You take the full amount of loan at closing and do not draw the money as needed. Minimum loan amounts apply and vary.

Hazard Insurance--A contract between purchaser and an insurer, to compensate the insured for loss of property due to hazards (fire, hail damage, etc.), for a premium.  Required on all first mortgage liens by the lender.

HUD I Settlement Statement--A form utilized at loan closing to itemize the costs associated with purchasing the home. Used universally by mandate of HUD, the Department of Housing and Urban Development. This form will have all costs, fees and prepaid amounts on it and is usually prepared by the closing company, such as the escrow company.

Index--A number, usually a percentage, upon which future interest rates for adjustable rate mortgages are based. Common indexes include the Cost of Funds (COFI) for the Eleventh Federal District of banks or the average rate of a one year Government Treasury Security or the London Interbank Offering Rate (LIBOR).

Interest Rate--The periodic charge, expressed as a percentage, for use of credit.

Jumbo Loan--Mortgage loans over $322,700. Terms and underwriting requirements may vary from conforming loans and interest can be slightly higher.

Loan to Value Ratio (LTV)--A ratio determined by dividing the sales price or appraised value into the loan amount, expressed as a percentage. For example, with a sales price of $100,000 and a mortgage loan of $80,000, your loan to value ratio would be 80%. Loans with an LTV over 80% may require Private Mortgage Insurance, defined below.

Lock or Lock In--A commitment you obtain from a lender assuring you a particular interest rate or feature for a definite time period. Provides protection should interest rates rise between the time you apply for a loan, acquire loan approval, and, subsequently, close the loan and receive the funds you have borrowed. A fee may or may not be charged to “lock in” your interest rate.

Margin--An amount, usually a percentage, which is added to the index to determine the interest rate for adjustable rate mortgages. Your index plus your margin normally deterimines the interest rate you pay on the loan. For example on Home Equity Lines of Credit the index most often used is the prime rate which is currently 4%, then the lender adds a margin of their choosing for instance 2.25% and then they add that together to get 6.25% which is the total rate you are charged. Normally the margin does not adjust over the course of the loan, the index does fluctuate. Index plus margin= rate.

Grace Period--A period of time during which a loan payment may be paid after its due date but not incur a late penalty. Such late payments may be reported on your credit report if they are more than 30 days past due.

Gross Income--For qualifying purposes, the income of the borrower before taxes or expenses are deducted.

Home Equity Line of Credit--A loan providing you with the ability to borrow funds at the time and in the amount you choose, up to a maximum credit limit for which you have qualified. Repayment is secured by the equity in your home. Simple interest (interest-only payments on the outstanding balance) are usually tax-deductible. Often used for home improvements, major purchases or expenses, and debt consolidation. You can normally draw on this line for a period of up to 5, 10 or 15 years depending on the terms of the loan.

Minimum Payment--The minimum amount that you must pay, usually monthly, on a home equity loan or line of credit. In some plans, the minimum payment may be "interest only," (simple interest) on negative amortization (see below). In other plans, the minimum payment may include principal and interest (amortized).

Mortgage Banker--Originates mortgage loans, loaning you their funds and closing the loan in their name.

Mortgage Broker--As do mortgage bankers, takes loan application and processes the necessary paperwork. Unlike a mortgage banker, brokers do not fund the loan with their own money, but work on behalf of several investors, such as mortgage bankers, S and L's, banks, or investment bankers. Usually these types of organizations have several different lending sources whereas a Mortgage Banker may only loan money from their own funds.

Mortgage Insurance (MIP or PMI)--Insurance purchased by the borrower to insure the lender or the government against loss should you default. MIP, or Mortgage Insurance Premium, is paid on government-insured loans (FHA or VA loans) regardless of your LTV (loan-to-value). Should you pay off a government-insured loan in advance of maturity, you may be entitled to a small refund of MIP. PMI, or Private Mortgage Insurance, is paid on those loans which are not government-insured and whose LTV is greater than 80%. When you have accumulated 20% of your home's value as equity, your lender may waive PMI at your request. Please note that such insurance does not constitute a form of life insurance which pays off the loan in case of death.

Mortgage Loan--A loan which utilizes real estate as security or collateral to provide for repayment should you default on the terms of your loan. The mortgage or Deed of Trust is your agreement to pledge your home or other real estate as security.

Mortgagee--The lender in a mortgage loan transaction.

Mortgagor--The borrower in a mortgage loan transaction.

Negative Amortization--Amortization in which the payment made is insufficient to fund complete repayment of the loan at its termination or end. Usually occurs when the increase in the monthly payment is limited by a ceiling. The portion of the payment which should be paid is added to the remaining balance owed. The balance owed may increase, rather than decrease over the life of the loan because only interest is being paid, and no money is applied to the principal balance.

PITI--Principal, interest, taxes and insurance, which comprise your monthly mortgage payment.

Points--The amount paid either to maintain or lower the interest rate charged. Each point is equal to one percent (1%) of the loan amount (i.e., two points on a $100,000 mortgage would equal $2,000).

Prepaids--Also known as an Escrow account or Reserves. This includes the prepaid interest you pay when your mortgage closes and the amount of property tax, mortgage insurance, condominium dues and hazard insurance that is “held" for you in an escrow account to be paid when due to the appropriate party. The amount of the prepaids will vary depending on what time of year the loan closes and when the payments are due. These are not fees charged to the borrower; they are amounts paid on behalf of the borrower. Sometimes this requirement may be waived for a fee and the borrower would be responsible for paying their own property tax and insurance when it is due.

Prepayment Penalty--A fee paid to the lending institution for paying a loan off prior to the scheduled maturity date. Most common on Adjustable Rate Mortgages and 2nd mortgages.

Qualifying Ratios--Comparisons of a borrower's debts and gross monthly income. Underwriters like to see no more than 40% of a borrower's income being used on a mortgage and other monthly revolving debt. However there are always exceptions to this rule.

Refinance- the process of paying off an existing mortgage on a property to replace it with a new loan or to pay off all existing loans on the property entirely. This is normally done to acheive a better interest rate or to take equity out of the property to either do home improvements, pay off debt or to pay for big ticket purchases such as college educations or cars.

Right to Rescission--The legal right to void or cancel your mortgage contract in such a way as to treat the contract as if it never existed. Right of rescission is not applicable to mortgages made to purchase a home, but may be applicable to other mortgages, such as refinances. The term of the rescission period is 3 days from the day you sign your mortgage closing documents. You may still owe amounts due for services that were completed on your loan such as the appraisal, credit report, or verification fees even if you choose to rescind on the transaction before it closes. This is a document that must be signed with all other documents at closing.

Security Interest--An interest that a lender takes in the borrower's property to assure repayment of a debt.

Servicing a Loan--The ongoing process of collecting your monthly mortgage payment, including accounting for and payment of your yearly tax and/or homeowners insurance bills.

Title--The written evidence that proves the right of ownership of a specific piece of property.

Title Insurance--Protection for lenders or homeowners against financial loss resulting from legal defects in the title. This is a requirement to lend for nearly all lenders.

Transaction Fee--A fee which may be charged each time you draw on a home equity credit line.

Underwriting--The process of verifying data and approving a loan.

Variable Rate--An interest rate that changes periodically in relation to an index. Payments may increase or decrease accordingly.

VA Loan--More appropriately termed "VA Insured Loan." A loan for which the Veteran's Administration insures the lender against losses the lender may incur due to your default. Available only to veterans possessing a Certificate of Eligibility.

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