5/1 Adjustable Rate Mortgage
Also known as a 5-year ARM mortgage, a 5/1 Adjustable Rate Mortgage is a loan with an interest rate that remains fixed for a period of 5 years. Following the initial 5-year period, the loan’s interest rate adjusts once. This is what the “1” refers to in “5/1.” Adjustable rate mortgages can have fixed rate periods of various length.
The ability to repay (ATR) rule, set forth by the Consumer Financial Protection Bureau (CFPB), states that lenders must ensure that a prospective borrower has sufficient income to repay a loan.
Adjustable Rate Mortgage (ARM)
An Adjustable rate mortgage (ARM) is a loan with an interest rate that varies over the course of its term. After an initial fixed rate period, the loan’s interest rate changes based on factors such as the index interest rate or the loan’s specific terms.
“Amount financed” refers to the total loan amount in a transaction.
“A prospective borrower’s annual income is their total, pre-tax income for a given year. Lenders compare this figure with the borrower’s debts to help determine whether they will be able to repay their loan.
Note that one’s annual income can come from multiple sources, such as a full-time job or any combination of part-time or self-employed work.”
Annual Percentage Rate (APR)
“A lender’s Annual Percentage Rate, or APR, is the full amount a lender charges for funding per year. This figure includes the interest rate as well as any additional fees or points.
For this reason, a loan’s APR will typically be higher than its interest rate.”
“Lenders work with independent appraisal companies to arrive at a value for the property a borrower wishes to purchase or refinance. The charge for this service isreferred to as the appraisal fee.
In most cases, the lender will choose the appraisal company from their roster of approved partners.”
Banks typically offer automatic payment capability to borrowers who do not wish to make manual mortgage payments each month. Automating the process ensures that monthly payments are made on time.
“Borrowers can choose to split their monthly payment into 2 half payments per month. Over the course of a year, the borrower will end up making 1 additional payment. This practice makes it possible for a borrower to pay off their loan earlier than they would on a monthly payment plan.
Borrowers who wish to take this course of action should check with their lender or servicer to learn if their bi-weekly payment plan includes additional fees or a prepayment penalty.”
“A Closing Disclosure is a form that lenders are required to provide for prospective borrowers before a transaction is completed. It includes terms, fees, payments, and other important details.
Prospective borrowers should review their Closing Disclosure carefully to make sure all aspects of the transaction match their expectations.”
A construction loan is short-term financing used to fund the construction of real estate. Construction loans are typically replaced with a different type of funding once the construction project is completed.
A conventional loan is any mortgage that is not guaranteed by a government agency.
Co-signer or co-borrower
“A co-signer is someone who joins a borrower in a shared responsibility to pay back a loan. Co-signers, or co-borrowers, may not have any right of ownership, but they are still responsible for ensuring all payments are made.
A borrower may take on a co-signer with strong credit in order to gain approval for a loan. However, co-signers should be aware that their credit is also at risk should the borrower fail to repay the loan.”
A credit history is a record of a borrower’s activity involving their credit accounts. This history is shown on a credit report produced by a credit reporting company and distributed to a lender before they make a financing approval decision.
A credit report reveals a borrower’s loan payment history and current credit account status. It is produced by a creidt reporting company and distributed to a lender to assist in their determination of a borrower’s ability to repay a loan.
“Credit reporting companies use one of several scoring models to review a borrower’s credit history and arrive at a number that serves as a prediction of the borrower’s credit-worthiness. This number is referred to as a credit score.
Since the top credit reporting companies use separate scoring models, a borrower will have more than one credit score. Lenders will review one or more of these scores when determining a borrower’s ability to repay a loan.
As such, lenders will typically publicize the minimum credit score they are willing to accept from a risk perspective.”
“A debt ratio is simply the ratio of someone’s total monthly debt payments and their monthly gross income.Financial institutions use this ratio to help them determine whether a borrower generates enough income to cover their loan payments.”
Deed-in-lieu of foreclosure
“If a homeowner is unable to continue making payments to their lender and wishes to avoid foreclosure proceedings, they may choose to voluntarily turn ownership of the property over to the financial institution. This is known as a deed-in-lieu of foreclosure.
A deed-in-lieu of foreclosure, while less costly and time-consuming than a foreclosure, is still an act of last resort for a borrower. Lenders and borrowers will typically seek to resolve delinquency issues through a loan modification before pursuing this more drastic step.”
“A lender’s Closing Disclosure includes language referring to the existence of a “”demand feature.”” If the loan does have a demand feature (i.e. the box is checked “”yes””), the lender can require the borrower to pay the full remainder of the loan balance at any time.
Note that the lender does not have to state a reason for their demand.”
A mortgage down payment is the initial sum paid by the borrower at the beginning of the loan’s term. A larger upfront payment can help improve the loan’s terms and reduce monthly payments for the remainder of the loan’s term.
Down payment programs or grant
Down payment programs and grants are designed to provide financial assistance to those looking to make a down payment on a residential property. Government agencies, non-profits, or lenders may offer down payment assistance (DPA).
Earnest money is a deposit a homebuyer makes to show good faith to the seller ahead of a purchase transaction. Assuming the buyer acts in good faith throughout the process, the outcome of the transaction will determine whether the deposit is applied to an initial payment or returned to the prospective buyer.
Equity is a property’s monetary value minus the debt currently on said property.
“Escrow” refers to the account set up by a lender or mortgage servicer to collect certain tax and insurance-related payments. A portion of a borrower’s monthly mortgage payment is placed in the escrow account to pay off premiums.
FHA funding fee
The FHA funding fee, which includes the Upfront Mortgage Insurance Premium (UFMIP) and the Mortgage Insurance Premium (MIP), is a charge set forth by Federal Housing Administration (FHA) on their loan programs. This fee can either be financed or paid at closing.
A FHA loan is a type of mortgage insured by the Federal Housing Administration (FHA) and offered by lenders across the country. FHA loans are designed for low-to-moderate income borrowers, with lower down payment and credit requirements.
FHA mortgage limits
FHA mortgage limits describe the financing amounts available for loans insured by the Federal Housing Administration. These limits vary by county and may be adjusted from year to year.
A finance charge is generally used to describe the cost of lending. It refers to the total interest amount and fees charged over the loan’s full term.
First-time buyers (FTHB) loan programs
Government agencies provide specific programs for first-time home buyers (FTHB). These programs are designed to make the homebuying easier for these individuals, with down payment assistance and streamlined approval processes.
A fixed-rate mortgage is a loan with an interest rate that does not change over the course of the loan’s term.
“Mortgage servicers offer forbearance programs to temporarily pause or reduce a borrower’s monthly payments. Personal injury, natural disasters, or economic hardship are common justifications for forbearance relief.
It is important to note that a borrower on a forbearance plan will need to eventually make the loan payments – forbearance is not loan forgiveness.”
A lender or mortgage servicer may place a force-placed insurance policy in instances where a borrower has no insurance or a policy that does not meet the institution’s requirements. Force-placed insurance policies are generally more expensive than standard insurance policies since they are designed to cover all borrowers regardless of the level of risk.
“Foreclosure refers to the proceedings that take place when, following a series of missed mortgage payments, a financial institution takes ownership of a property in an attempt to recover the amount owed. These proceedings can be judicial or non-judicial depending on the state.
Financial institutions will generally attempt to work with homeowners on loan modification strategies so that they may avoid foreclosure. ”
Good Faith Estimate
Government recording charges
Government recording charges are the fees government agencies charge to record all documents related to a borrower’s mortgage. These charges are listed on the Loan Estimate.
Higher-priced mortgage loan
A higher-priced mortgage loan is defined as a mortgage with an annual percentage rate (APR) that exceeds the average prime offer rate (APOR) by a given percentage.
Residential communities typically have a Homeowner’s Association (HOA) that charges each resident for shared services. These charges are packaged as HOA dues.
“Lenders work with an independent appraisal company to arrive at a value for the property a borrower wishes to purchase or refinance. The appraiser will review the property itself as well as comparable homes in the area.
The document stating the appraisers value estimation is reffered to as the home appraisal. ”
Home equity line of credit (HELOC)
A home equity line of credit (HELOC) is a financial instrument that allows homeowners to take equity out of their property. With a HELOC, the borrower is given a draw period where they are able to borrower against the equity in their home. The borrower must make their payments and, once the draw period ends, pay off their remaining balance.
Home equity loan
If a homeowner’s property has sufficient value relative to their current mortgage balance, they can borrow money with that equity serving as collateral. This type of loan is known as a home equity loan and is technically a mortgage as well. That is why home equity loans are sometimes referred to as “second mortgages.”
A prospective buyer can order a home inspection for a professional review of the property’s structure and heating/cooling/electrical systems.
Homeowner’s Association (HOA)
Residential communities typically have a Homeowner’s Association (HOA) that is responsible for maintaining the shared services residents enjoy. The HOA accomplishes this by charging dues to each resident in the community.
Homeowner’s insurance protects homeowners against damage that can occur to a property. This type of insurance is typically required for those looking to secure home financing.
Home purchase price
The amount a property is sold for is referred to as its home purchase price.
HUD-1 Settlement Statement
The HUD-1 Settlement Statement is a standard form that lists all the charges for the buyer and seller in a in a mortgage transaction.
The index is an interest rate that serves as a benchmark for the market’s current standing. Changes to the index impact a borrower’s ARM.
Initial adjustment cap
In an adjustable rate mortgage (ARM), the initial adjustment cap is a set to limit the amount by which an interest rate can increase following the completion of the initial fixed-rate period.
Initial escrow deposit
The first escrow payment into a new escrow account is made at closing and refered to as the initial escrow deposit.
With an interest-only loan, the borrower only makes interest payments for a set period of time. Once the interest-only period expires, the borrower must make both principal and interest payments each month.
Interest rate cap
An interest rate cap is the maximum interest rate percentage increase that can take place
“A jumbo loan is a home loan that exceeds the conforming loan limit set by the Federal Housing Financing Agency (FHFA). For this reason, jumbo loans cannot be purchased by the Federal National Mortgage Association (FNMA) or the Federal Home Loan Mortgage Corporation (FHLMC).
Note that the FHFA’s conforming loan limit varies by county and is subject to change from year to year.”
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Lenders title insurance
Title insurance provides protection for lenders and borrowers against legal claims involving liens or other issues involving the legal ownership of the property.
Lifetime adjustment cap
The lifetime adjustment cap sets a limit for how much the interest rate in an adjustable rate mortgage (ARM) can increase over the loan’s entire term.
A loan estimate is a document provided by a lender that provides loan amount and fee information prior to closing. This estimate is subject to change during the course of the loan transaction and does not constitute an aprpoval for financing.
A loan servicer may work with a borrower on a loan modification to ensure they are able to stay current with their loan payments. A modification typically involves an interest rate adjustment, an extension of the amount of time a borrower has to repay the debt, or other changes to a loan’s initial terms.
“A loan-to-value ratio compares the dollar amount of a loan with the value of the real estate property. It is typically shown as a percentage. Lenders will set a maximum LTV as one of the main parameters of their loan programs. Borrowers can lower their LTV ratio by increasing the size of their down payment.
Loans with a high LTV are generally seen as more risky for lenders since the borrower has contributed less of their own capital at the onset of the loan.”
Loss mitigation refers to a host of tactics loan servicers employ to help borrowers stay current with their mortgage payments and avoid foreclosure. Loan modification, deed-in-lieu of foreclosure, and forbearance are all forms of loss mitigation.
A loan’s margin is the difference between the index and the loan’s interest rate. The margin is set ahead of the loan’s closing and does not change throughout the course of the loan’s term.
Monthly expenses refer to payments one makes in a given month. These payments may inlude large expenses like rents, utilities, and insurance as well as everyday payments made for food and other smaller items.
Mortgage closing checklist
A mortgage closing checklist details the various items a prospective borrower should evaluate before closing on a loan.
Mortgage closing costs
Mortgage closing costs describe all the fees a borrower must pay at the closing of their loan. These charges are detailed in the initial Loan Estimate.
Mortgage insurance is a form of insurance that financial institutions require in certain lending situations to protect themselves from delinquencies. The type of insurance required depends on the type of loan program and the specific terms secured by the borrower.
Mortgage loan modification
“A mortgage refinance occurs when a borrower takes out a new loan to replace their existing mortgage. Borrowers may refinance for a lower interest rate/mortgage payment or to increase the loan amount.
Borrowers should consult with their lender to better understand the benefits and drawbacks of a mortgage refinance.”
A mortgage term refers to the full loan repayment period, or the number of years a borrower has to repay the loan.
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Owner’s title insurance
Owner’s title insurance is used to protect a homeowner from an outside claim against the home that predates the homeowner’s purchase.
Property Assisted Clean Energy financing refers to financing that gives a homeowner the opportunity to make upgrades to their property to improve energy efficiency.
The payoff amount is the full amount a borrower must pay to satisfy their debt obligation. The payoff amount includes the mortgage payments plus any additional fees the borrower has yet to pay.
“Active duty servicemembers may receive a permanent change of station (PCS) order that requires that they move locations. Depending on the market or the status of their mortgage, they may have difficulty selling the property.
For this reason, financial institutions may offer programs to servicemembers to assist them during the process.”
PITI stands for principal, interest, taxes, and insurance. These elements comprise a borrower’s monthly mortgage payment.
Private Mortgage Insurance (PMI) is a type of mortgage insurance that may be required based on a borrower’s down payment.
Prepaid interest charges
Prepaid interest charges refer to the interest that accrues from the loan’s closing date to the first month’s mortgage payment.
Some lenders charge a prepayment penalty if a borrower pays off their loan before the full term is completed. This penalty is disclosed on the mortgage contract.
Property taxes taxes charged by the government on real estate. Property taxes are typically paid annually by homeowners.
A Qualified Mortgage is the term used to describe loans that meet a certain criteria set forth by the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010.
Qualified Written Request (QWR)
A Qualified Written Request (QWR) is a type of communication a borrowrer can deliver their loan servicer.
A repayment plan is a loss mitigation strategy that gives borrowers a structured repayment schedule set over an extended period of time.
Right of rescission
The right of rescission describes the right a borrower has to cancel their transaction until midnight of the third day following their signing of the promissory note. The right of rescission is available for refinances but not purchases.
A second mortgage refers to the second loan a borrower takes out using their home as collateral. The new mortgage, or lien, takes second position behind the initial loan.
A security interest is the legal right a financial institution has to take ownership of a property if the borrower cannot repay their loan.
Seller financing describes the process in which the buyer of a residential property secures mortgage financing through the seller of the property.
Shared appreciation mortgage
With a shared appreciation mortgage, the lender receives a percentage of the appreciation in value of the borrower’s home. Borrowers may choose to secure this type of mortgage because it comes with a lower interest rate.
A short sale is a loss mitigation strategy where a homeowner sells their property for less than the balance remaining on their mortgage. For a short sale to be successful, the lender must agree to accept less than what the borrower still owes on the property. All proceeds from the sale go to the lender.
A subprime mortgage is a loan designed for borrowers whose credit issues may prevent them from securing a low-interest loan. Subprime mortgages tend to carry higher interest rates since they represent greater risk for lenders.
A survey is a report used to detail all aspects of a home, including the building itself and surrounding structures that make up the property. Lenders use the survey to gain a better understanding of a property before they decide to approve a financing request.
Title service fees
Title service fees are costs associated with insuring the transfer of title from the previous owner of a property to the new buyer.
Total interest percentage (TIP)
Total Interest Percentage (TIP) is a calculation showing the total amount of interest a borrower will pay on a loan over the full course of its term.
Total of payments
Total of payments is a calculation showing the full amount a borrower will pay over the course of their mortgage. The calculation covers all loan costs, including principal, interest, insurance fees, and other charges.
A USDA Loan is a loan offered by the U.S. Department of Agriculture (USDA) to homebuyers in rural areas. These loans offer zero down payment and are generally designed to assist rural property owners.
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