ARM (Adjustable  Rate Mortgage): Most commonly a 30-year mortgage with interest rates that usually are fixed for a set period of time and after that period of time can fluctuate according to a particular index rate such as the LIBOR. Common adjustable rate mortgages are 3/1, 5/1, 7/1, and 10/1 ARMs (having a fixed rate for the first 3, 5, 7, or 10 years, respectively). The “1” designates that after the initial fixed period, rates may adjust once per year.

Amortization: Part of each payment is applied to the interest and part to the balance. The newer the loan, the greater the amount applied to interest. Over time, the more interest you have paid, the greater the payment applied to the balance each time.

APR (Annual Percentage Rate): This is not the actual note rate. It is higher than the note rate because it takes into account certain of your closing costs associated with the loan. If you are paying high closing costs, your APR will be much higher than if your closing costs are low.

Appraisal: Unlike a general home inspection, that evaluates overall condition of the property, an appraisal is usually required by the lender and is a written estimate of the value of the home, using recent comparable sales as the primary basis in most residential real estate transactions.

Assessed Value: The value that the tax assessor places on the home for tax purposes. This value often has little correlation with the appraised value.

Broker: Realtors who work under a broker are considered agents. Sometimes agents are also brokers who work for themselves or another broker. A broker in the mortgage industry is someone who brokers (or matches up) a loan to a lender or investor.

Certificate of Eligibility: From the Veterans Administration (VA), used to certify eligibility for a VA loan.

Closing: In Texas, a loan is closed when the paperwork has been signed by all parties and funds distributed.

CLTV (Combined Loan to Value): The ratio of the combination of all balances of all liens against the property divided by the lower of the appraised value or the purchase price.

Collateral: Your home is considered collateral, or security, for the mortgage. You could lose it if the loan isn’t repaid.

Conforming Loan: A loan which is intended and which meets the criteria for sale to Fannie Mae or Freddie Mac.

Conventional Mortgage: A non-government backed loan.

Default: When a payment on a first mortgage is more than 30 days late.

Down Payment: Portion of the purchase price paid in cash. FHA loans allow as little as 3.5% of the purchase price in down payment, while conventional loans allow as little as 5% down. Jumbo loans usually require 20-30% down.

DTI (or DI): Debt-to-Income ratio. This is the total minimum obligation of all your monthly liabilities (including PITI on the new mortgage) divided by your gross monthly income.

Due-on-Sale Provision: The lender can demand repayment in full if you sell the property or transfer ownership of the property on which the mortgage is based.

Earnest Money: Money put down as a deposit on the home, usually held by the title company (or builder on new construction). After a particular date, if you back out of the sale of the home, you could forfeit this deposit to the seller.

Equity: The current market value of your home minus your current loan balance.

Escrow: This word can have several meanings, all having to do with a third party handling funds.

Escrow Agent: In Texas, the title company usually serves as an escrow agent, handling all the funds and distributing them to the appropriate parties.

Escrow Fee: The amount an escrow agent charges for their services.

Escrow Account: This is an account maintained by the lender in which they collect from you the monthly share of taxes and insurance due each month, then pay them to the appropriate parties as they come due. Escrow accounts are required for any loan amount exceeding 80% of the value/purchase price.

Escrow Waiver Fee: A loan is considered to have less risk when tax and insurance escrows are collected. Additionally, the lender is able to earn any interest on the tax and insurance reserves until they are paid. For this reason, sometimes there is a higher rate if you choose to pay your taxes and insurance separately. Or in lieu of a higher rate, there sometimes there is an upfront fee at closing called an escrow waiver fee.

Fannie Mae: Short for Federal National Mortgage Association, (FNMA).  This is a private corporation sponsored by the government that supplies funds for mortgages. The FNMA loan limit is $417,000.

Freddie Mac: Short for Federal Home Loan Mortgage Corporation (FHLMC). This is a private corporation sponsored by the government that supplies funds for mortgages. The FHLMC loan limit is $417,000.

FHA Loan (Federal Housing Administration):  These loans are insured by the government and made available to those who qualify. The maximum FHA loan amount in Texas is $371,050.

Fixed Rate Mortgage: The interest rate remains the same for the life of the mortgage.

Foreclosure: The lender forces the sale of a property because the borrower hasn’t met the financial obligation.

Ginnie Mae: Short for Government National Mortgage Association (GNMA). In 1970, Ginnie Mae created and issued the first mortgage-backed security (MBS) in the U.S. as a financial tool to help bring funds from worldwide investors to the U.S. housing market. The securities are collateralized by the cash flows from loans insured or guaranteed by the Federal Housing Administration (FHA), Department of Veterans Affairs Home Loan Program for Veterans (VA), Office of Public and Indian Housing (PIH), and the U.S. Department of Agriculture Rural Development.

Government Loan: Any loan backed by the federal government. Most common are VA and FHA loans.

Guaranty: One party promises to pay a debt that was contracted by another party if that other party fails to meet its financial obligations.

Hazard Insurance: Another name for a fire policy or homeowners insurance.

HUD-1 Settlement Statement: Standard form used to itemize services and fees charged to the borrower for the purpose of purchasing or refinancing real estate. HUD refers to the US Department of Housing and Urban Development.

Interim Financing: A construction loan you can obtain while your new home is being built.

Jumbo Loan: A loan in which the loan amount exceeds the Fannie Mae/Freddie Mac loan limit of $417,000 and therefore cannot be sold to Fannie Mae or Freddie Mac. This is also known as a non-conforming loan and usually carries higher interest rates.

LTV (Loan to Value): Ratio of the loan amount divided by the purchase price or the appraised value (whichever is lower).

PMI (Private Mortgage Insurance) or MI (Mortgage Insurance): If you loan amount is 80% or less of the value/purchase price, the lender is in a more secure position to be able to sell the asset and cover their expenses without harm. Loans at greater than 80% of the value of the property carry greater risk and therefore require insurance (paid by the borrower) to protect the lender in the event of default by borrower.

Negative Amortization: When your monthly payments are actually less than the interest due on the loan, the difference is added to the overall unpaid balance on the loan, causing your loan balance to increase.

Non-Conforming Loan: A non-government loan not meeting the criteria to be purchased by Fannie Mae or Freddie Mac.

One-Time Close: This is a construction loan taken in the Borrower’s name that converts to a regular, permanent mortgage upon completion of the home. Because the fees are shared, avoiding duplicate costs for title policy and loan origination, this type of loan is much less expensive for the Borrower than if they had done a separate interim loan or if they had been handed down the builder’s costs from a construction loan in builder’s name.

Origination Fee: The fee you pay the lender to prepare documents, process and underwrite the loan.

PITI: Principal, Interest, Taxes and Insurance (homeowners), as a monthly figure. Mortgage insurance, if any, is also included in PITI.

Points (also called origination points or discounts points): This is prepaid interest expressed as 1% of the loan amount. If origination points are charged, they are not optional. By choosing to pay discount points or partial discount points at closing, you can often buy down to a lower interest rate for the life of the loan. One point equals 1% of the loan amount.

Portfolio Loan: This is a loan that a bank will keep on its books and not sell to Fannie Mae or Freddie Mac, usually because it does not meet Fannie and Freddie guidelines.

Prepayment Penalty: This is a charge imposed on you if you pay down or pay off a loan early.

Principal: The amount of debt on a loan that does not include the interest.

Refinance: A new mortgage on a home that already has a mortgage.

Texas Cash-Out Refinance or Texas Equity Loan: Texas law limits the total loan balance on ALL liens to 80% of the value on cash-out mortgages taken on primary residences located in Texas.

Title Policy: This is an insurance policy issued by a title company that insures the past, rather than the future. There are two kinds of title policies: an owner’s policy and a lender’s policy. The owner’s policy insures you against unknown liens and against someone else claiming a right of ownership in your property. The lender’s policy insures the lender against unknown liens or claims against the property.

Truth in Lending (TIL): This is a regulation (and also the name for the form which fulfills the regulation) by the federal government to notify buyers of the Annual Percentage Rate (APR) before they close on the home.

VA Loan: This loan is restricted to individuals who have served in the armed services. It often allows a zero down payment.