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    From A to Z
    explanation of common mortgage terms.
We have assembled these terms to help you to have a better understanding of mortgage
financing. Please feel free to call on us for more information as well as a competitive array of real
estate financing plans.

ACCELERATION CLAUSE - allows the lender to speed up the rate at which your loan comes due
or even to demand immediate payment of the entire outstanding balance of the loan should you
default on your loan.

ADJUSTABLE RATE MORTGAGE (ARM) - is a mortgage in which the interest rate is adjusted
periodically based on a preselected index. Also sometimes known as the renegotiable rate
mortgage, the variable rate mortgage or the Canadian rollover mortgage.

ADJUSTMENT INTERVAL - on an adjustable rate mortgage, the time between changes in the
interest rate and/or monthly payment, typically one, three or five years, depending on the index.

AMORTIZATION - means loan payment by equal periodic payments calculated to pay off the debt
at the end of a fixed period, including accrued interest on the outstanding balance.

ANNUAL PERCENTAGE RATE (APR) - an interest rate reflecting the cost of a mortgage as a yearly
rate. This rate is likely to be higher than the stated note rate or advertised rate on the mortgage,
because it takes into account points and other credit costs. This APR allows homebuyers to
compare different types of mortgages based on the annual cost for each loan.

APPRAISAL - an estimate of the value of property, made by a qualified professional called an
"appraiser. "

ASSUMPTION - the agreement between buyer and seller where the buyer takes over the
payments on an existing mortgage from the seller. Assuming a loan can usually save the buyer
money since this is an existing mortgage debt, unlike a new mortgage where closing costs and
new, possibly higher, market-rate interest charges will apply.

BALLOON (PAYMENT) MORTGAGE - usually a short-term fixed-rate loan which involves small
payments for a certain period of time and one large payment for the remaining amount of the
principal at a time specified in the contract.

BROKER - an individual in the business of assisting in arranging, funding or negotiating contracts
for a client but who does not loan the money himself. Brokers usually charge a fee or receive a
commission for their services.

BUY-DOWN - when the lender and/or the homebuilder subsidizes the mortgage by lowering the
interest rate during the first few years of the loan. While the payments are initially low, they will
increase when the subsidy expires.

CAPS (INTEREST) - consumer safeguards which limit the amount the interest rate on an
adjustable rate mortgage may change per year and/or the life of the loan.

CAPS (PAYMENT) - consumer safeguards which limit the amount monthly payments on an
adjustable rate mortgage may change.

CLOSING- the meeting between the buyer, seller and lender or their agents where the property
and funds legally change hands. Also called settlement.

CLOSING COSTS - usually include an origination fee, discount points, appraisal fee, title search
and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed
at settlement. The costs of closing usually are about 3 percent to 6 percent of the mortgage
amount.

COMMITMENT- an agreement, often in writing, between a lender and a borrower to loan money at
a future date subject to the completion of paperwork or compliance with stated conditions.

CONSTRUCTION LOAN - a short-term interim loan for financing the cost of construction. The
lender advances funds to the builder at periodic intervals as the work progresses.

CONVENTIONAL LOAN - a mortgage not insured by FHA or guaranteed by the VA or Farmers
Home Administration (FMHA).

CREDIT REPORT - a report documenting the credit history and current status of a borrower's credit
standing.

DEBT-TO-INCOME RATIO - the ratio, expressed as a percentage, which results when a borrower's
monthly payment obligation on long-term debts is divided by his or her net effective income
(FHA/VA loans) or gross monthly income (conventional loans). See housing expenses-to-income
ratio.

DEED OF TRUST - in many states, this document is used in place of a mortgage to secure the
payment of a note.

DEFAULT - failure to meet legal obligations in a contract, specifically, failure to make the monthly
payments on a mortgage.

DEFERRED INTEREST - see negative amortization.

DELINQUENCY - failure to make payments on time. This can lead to foreclosure.

DEPARTMENT OF VETERANS AFFAIRS (VA) - an independent agency of the federal government
which guarantees long-term, low-or no-downpayment mortgages to eligible veterans.

DISCOUNT POINT - see points.

DOWNPAYMENT - money paid to make up the difference between the purchase price and the
mortgage amount. Downpayments usually are 10 percent to 20 percent of the sales price on
conventional loans, and no money down up to 5 percent on FHA and VA loans.

DUE-ON-SALE-CLAUSE - a provision in a mortgage or deed of trust that allows the lender to
demand immediate payment of the balance of the mortgage if the mortgage holder sells the
home.

EARNEST MONEY - money given by a buyer to a seller as part of the purchase price to bind a
transaction or assure payment.

EQUAL CREDIT OPPORTUNITY ACT (ECOA) - is a federal law that requires lenders and other
creditors to make credit equally available without discrimination based on race, color, religion,
national origin, age, sex, marital status or receipt of income from public assistance programs.

EQUITY - the difference between the fair market value and current indebtedness, also referred to
as the owner's interest.

ESCROW - refers to a neutral third party who carries out the instructions of both the buyer and
seller to handle all the paperwork of settlement or "closing." Escrow may also refer to an account
held by the lender into which the homebuyer pays money for tax or insurance payments.

FANNIE MAE - see Federal National Mortgage Association.

FARMERS HOME ADMINISTRATION (FMHA) - provides financing to farmers and other qualified
borrowers who are unable to obtain loans elsewhere.

FEDERAL HOME LOAN BANK BOARD (FHLBB) - a regulatory and supervisory agency for federally
chartered savings institutions.

FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC) - also called "Freddie Mac," is a
quasi-governmental agency that purchases conventional mortgages from insured depository
institutions and HUD-approved mortgage bankers.

FEDERAL HOUSING ADMINISTRATION (FHA) - a division of the Department of Housing and Urban
Development. Its main activity is the insuring of residential mortgage loans made by private
lenders. FHA also sets standards for underwriting mortgages.

FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) - also known as "Fannie Mae." A
tax-paying corporation created by Congress that purchases and sells conventional residential
mortgages as well as those insured by FHA or guaranteed by VA. This institution, which provides
funds for one in seven mortgages, makes mortgage money more available and more affordable.

FHA LOAN - a loan insured by the Federal Housing Administration open to all qualified home
purchasers. While there are limits to the size of FHA loans, they are generous enough to handle
moderate-priced homes almost anywhere in the country.

FHA MORTGAGE INSURANCE - requires a small fee (up to 3.8 percent of the loan amount) paid at
closing or a portion of this fee added to each monthly payment of an FHA loan to insure the loan
with FHA. On a 9.5 percent $75,000 30-year fixed-rate FHA loan, this fee would amount to either
$2,850 at closing or an extra $31 a month for the life of the loan. In addition, FHA mortgage
insurance requires an annual fee of 0.5 percent of the current loan amount, paid in monthly
installments. The lower the downpayment, the more years the fee must be paid.

FIXED-RATE MORTGAGE - a mortgage on which the interest rate is set for the term of the loan.

FORECLOSURE - a legal procedure in which property securing debt is sold by the lender to pay the
defaulting borrower's debt.

FREDDIE MAC - see Federal Home Loan Mortgage Corporation.

GINNIE MAE - see Government National Mortgage Association.

GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) - also known as "Ginnie Mae,"
provides sources of funds for residential mortgages, insured or guaranteed by FHA or VA.

GRADUATED PAYMENT MORTGAGE (GPM) - a type of flexible payment mortgage where the
payments increase for a specified period of time and then level off. This type of mortgage has
negative amortization built into it.

GROSS MONTHLY INCOME - the total amount the borrower earns per month, before any expenses
are deducted.

GUARANTY - a promise by one party to pay a debt or perform an obligation contracted by another if
the original party fails to pay or perform according to a contract.

HAZARD INSURANCE - a form of insurance in which the insurance company protects the insured
from specified losses, such as fire, windstorm and the like.

HOUSING EXPENSES-TO-INCOME RATIO - the ratio, expressed as a percentage, which results
when a borrower's housing expenses are divided by his/her net effective income (FHA/VA loans)
or gross monthly income (conventional loans). See debt-to-income ratio.

IMPOUND - that portion of a borrower's monthly payments held by the lender or servicer to pay for
taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become
due. Also known as reserves.

INDEX - a published interest rate against which lenders measure the difference between the
current interest rate on an adjustable rate mortgage and that earned by other investments (such
as one- three-, and five-year U.S. Treasury security yields, the monthly average interest rate on
loans closed by savings and loan institutions, and the monthly average cost-of-funds incurred by
savings and loans), which is then used to adjust the interest rate on an adjustable mortgage up
or down.

INVESTOR - a money source for a lender.

JUMBO LOAN - a loan which is larger than the limits set by the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation. Because jumbo loans cannot be
funded by these two agencies, they usually carry a higher interest rate.

LIEN - a claim upon a piece of property for the payment or satisfaction of a debt or obligation.

LOAN-TO-VALUE RATIO - the relationship between the amount of the mortgage loan and the
appraised value of the property expressed as a percentage.

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Mortgage Glossary