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Adjustable-Rate Mortgage (ARM)
A mortgage with an interest rate that changes periodically based on an index. Usually starts with a lower rate that can increase or decrease.
A 5/1 ARM has a fixed rate for the first five years, then adjusts annually based on market conditions.
Amortized Loan
A loan repaid in equal periodic payments that include both principal and interest. The loan balance decreases over time until paid off.
A standard 30-year fixed mortgage is fully amortized, with payments covering both principal and interest.
Balloon Payment
A large final payment due at the end of a loan term when the loan has not been fully amortized. Common in short-term or interest-only loans.
A 5-year balloon loan requires the borrower to pay the remaining $180,000 balance in one lump sum at the end of year 5.
Blanket Loan
A single mortgage that covers multiple parcels of real estate. Often used by developers.
A developer takes a blanket loan on five lots and plans to release individual lots as they are sold.
Buydown
A financing technique where the seller or borrower pays points upfront to temporarily or permanently reduce the buyer's interest rate.
The seller pays $6,000 in buydown points to lower the buyer's rate by 1% for the first three years.
Certificate of Reasonable Value (CRV)
A document issued by the VA that states the maximum reasonable value of a property for VA loan purposes. Required for VA loans.
The VA appraiser issues a CRV of $320,000 for the home the veteran wants to purchase.
Community Reinvestment Act (CRA)
Federal law that encourages banks to meet the credit needs of low- and moderate-income neighborhoods in their service areas.
Banks must demonstrate they are lending in underserved communities to comply with CRA requirements.
Construction Loan
A short-term loan used to finance the construction of a building. Funds are usually disbursed in stages as construction progresses.
A builder obtains a construction loan to build a new home, with draws released after each inspection phase.
Conventional Loan
A mortgage not insured or guaranteed by a government agency (FHA, VA, or USDA). The most common type of residential mortgage.
A buyer with good credit and 20% down obtains a conventional loan from a local bank.
Equal Credit Opportunity Act (ECOA)
Federal law that prohibits discrimination in lending based on race, color, religion, national origin, sex, marital status, age, or public assistance income.
A lender cannot deny a loan application solely because the applicant is divorced or receives Social Security income.
Fannie Mae
Federal National Mortgage Association. A government-sponsored enterprise that buys mortgages from lenders to provide liquidity in the secondary market.
Fannie Mae purchases conforming loans from banks, allowing lenders to make more loans to homebuyers.
Federal Reserve System
The central banking system of the United States that influences interest rates and monetary policy, affecting mortgage rates.
When the Fed raises the federal funds rate, mortgage rates typically increase.
FHA Loan
A mortgage insured by the Federal Housing Administration. Requires a lower down payment and has more flexible credit requirements than conventional loans.
A first-time buyer with a 3.5% down payment qualifies for an FHA loan with mortgage insurance.
Freddie Mac
Federal Home Loan Mortgage Corporation. A government-sponsored enterprise that buys mortgages to provide liquidity to the secondary mortgage market.
Freddie Mac buys loans from lenders and packages them into mortgage-backed securities for investors.
Ginnie Mae
Government National Mortgage Association. A government agency that guarantees mortgage-backed securities backed by FHA, VA, and USDA loans.
Ginnie Mae provides the full faith and credit of the U.S. government on securities backed by government-insured loans.
Growing Equity Mortgage (GEM)
A fixed-rate mortgage with increasing payments over time. Extra payments go toward principal reduction, shortening the loan term.
A GEM starts with lower payments that increase 5% each year, paying off the loan faster than a standard 30-year mortgage.
Home Equity Loan
A second mortgage that allows the homeowner to borrow against the equity in their home, usually as a lump sum with fixed payments.
A homeowner takes a $50,000 home equity loan at a fixed rate to pay for a kitchen remodel.
Loan-to-Value (LTV) Ratio
The ratio of the loan amount to the appraised value or purchase price of the property, expressed as a percentage. Higher LTV means less down payment.
A $240,000 loan on a $300,000 home has an 80% LTV ratio.
Mortgage Insurance
Insurance that protects the lender if the borrower defaults. Required on conventional loans with less than 20% down payment.
Private mortgage insurance (PMI) is required on a conventional loan with only 10% down.
Mortgage Loan Originator (MLO)
An individual who takes mortgage loan applications and arranges financing. Must be licensed under the SAFE Act.
The loan officer who helps the buyer complete the mortgage application is a licensed mortgage loan originator.
Open-End Loan
A mortgage that allows the borrower to obtain additional advances up to a maximum amount, similar to a home equity line of credit.
An open-end mortgage lets the homeowner draw additional funds as needed up to the credit limit.
Package Loan
A loan that finances both real property and personal property (such as appliances or furniture) as part of the purchase.
A buyer finances the house plus the washer, dryer, and refrigerator in one package loan.
Primary Mortgage Market
The market where borrowers obtain loans directly from lenders (banks, credit unions, mortgage companies).
When a homebuyer applies for a mortgage at their local bank, they are participating in the primary mortgage market.
Private Mortgage Insurance (PMI)
Insurance provided by private companies that protects conventional lenders against borrower default when the down payment is less than 20%.
A borrower with 15% down pays PMI until the loan balance drops below 80% of the home's value.
Purchase Money Mortgage (PMM)
A mortgage given by the seller to the buyer as part of the purchase price. The seller acts as the lender.
The seller finances $80,000 of the purchase price and takes back a purchase money mortgage from the buyer.
RESPA
Real Estate Settlement Procedures Act — federal law that requires disclosure of closing costs and prohibits kickbacks in mortgage transactions. Requires the Closing Disclosure form.
RESPA requires lenders to provide the Closing Disclosure at least three business days before closing.
Reverse Mortgage
A loan that allows homeowners age 62 and older to convert home equity into cash without monthly payments. The loan is repaid when the home is sold or the borrower dies.
A 70-year-old homeowner takes a reverse mortgage to receive monthly payments while continuing to live in the home.
Secondary Mortgage Market
The market where existing mortgages are bought and sold by investors (Fannie Mae, Freddie Mac, etc.). Provides liquidity to primary lenders.
Banks sell mortgages to Fannie Mae and Freddie Mac in the secondary market so they can make new loans.
SAFE Act
Secure and Fair Enforcement for Mortgage Licensing Act of 2008 — federal law that sets minimum standards for licensing and registration of mortgage loan originators.
All mortgage loan originators must be licensed under the SAFE Act and pass background checks and education requirements.
Straight Loan
An interest-only loan where the borrower pays only interest during the term, with the full principal due at maturity.
A straight loan requires interest-only payments for 5 years, then the entire principal is due in one balloon payment.
Trigger Terms
Specific loan terms (such as payment amount, interest rate, or down payment) that, when advertised, require additional disclosures under TILA.
Advertising 'only $999 per month' triggers additional required disclosures about the loan terms.
TRID
TILA-RESPA Integrated Disclosure Rule — federal rule that combines TILA and RESPA disclosures into the Loan Estimate and Closing Disclosure forms.
TRID requires lenders to provide the Loan Estimate within three business days of receiving a loan application.
Truth in Lending Act (TILA)
Federal law that requires lenders to disclose the true cost of credit, including the APR, to help consumers compare loan offers.
TILA requires lenders to disclose the Annual Percentage Rate (APR) so borrowers can compare the true cost of different loans.
VA Loan
A mortgage guaranteed by the U.S. Department of Veterans Affairs. Available to eligible veterans and service members with no down payment required.
A veteran with VA eligibility purchases a home with a VA loan and no down payment.
Wraparound Loan
A new mortgage that includes the existing mortgage balance. The borrower makes one payment to the wraparound lender, who pays the underlying mortgage.
A seller with a low-interest assumable mortgage offers a wraparound loan to a buyer at a higher rate, keeping the difference.