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Adjustable-Rate Mortgage (ARM): A mortgage whose interest rate fluctuates throughout the life of the loan in correlation with a specified current index. The index is added to a preconceived margin to calculate the interest rate. ARMs generally have a lower initial rate than a comparable fixed-rate mortgage' yet they result in variable monthly payments since ARMs are tied to shifting interest rates. Periodic and life caps limit the volatility associated with such a loan.
Amortization: Refers to the process of paying off a debt by a specific date through an installed (generally monthly) payment plan.
Annual Percentage Rate (APR): A figure that expresses the total cost of credit on a yearly basis.
Appraisal: A professional's estimated opinion about the market value of the property the borrower wishes to buy or refinance.
Balloon Mortgage: A mortgage that offers level payments over a specified term yet calls for a lump-sum payment, the remaining balance of the loan, to be paid off at a particular time before the loans maturity date.
Cash Reserve: The amount of liquid assets the borrower has following the closure of the mortgage loan.
Closing Costs: These are fees incurred by the borrower and seller throughout the process of executing the loan. They commonly include an origination fee, appraisal fee, credit report fee, discount fees, and title search and insurance - generally costing about 2-5% of the total purchase price of the property.
Combined Loan-to-Value (CLTV): This is the ratio determined by dividing the total mortgage liens on the subject property by either its sales price or appraised value, whichever is less.
Conforming Loans: Loans that fall within Fannie Mae and Freedie Mac's amount limits - mortgages that do not are called non-conforming or jumbo loans.
Convertible ARM: A form of adjustable-rate mortgage that gives the mortgagor the opportunity to convert to a fixed-rate mortgage during a specified interval of time.
Credit Report: A report that details an individual's credit history and standing. This is the main statement used to determine how one has repaid debt in the past and gauge his/her ability to pay off loans in the future.
Debt-to-Income Ratio: This is the ratio determined by dividing the sum of the borrower's total monthly expenses (including the proposed mortgage payment, property tax, insurance, and all other related housing expenses) by his/her monthly income. It is an integral component of the mortgage process because it denotes the qualifying ratio - the borrower's ability to take on and pay back debt.
Default: The status that results from failing to make monthly mortgage payments - the borrower is officially in default once two or more payments have been missed.
Delinquency: The status that results from failing to make monthly mortgage payments on time - thus, a borrower will first be delinquent and later in default.
Down Payment: The money paid by the borrower, in cash and up front, that is not financed with a mortgage.
Equity: This is the figure determined by subtracting the amount the borrower owes on the property from its fair market value. Therefore, equity increases as the borrower pays down the mortgage and/or the value of the property appreciates.
Escrow: The holding of documents and funds associated with the sale of real estate by a neutral third party, the escrow officer, until the deal is completed (escrow closed).
Fannie Mae / Federal National Mortgage Association (FNMA): A corporation created by Congress to support the secondary mortgage market and make funds for the purchase of houses more readily available. Fannie Mae buys conventional residential mortgages from banks and mortgage-lending institutions and then sells them to investors.
Fixed-Rate Mortgage: A mortgage whose interest rate is locked for the entire length of the loan. This allows for predictability in monthly payments since they are the same every month for the full term of the loan.
Foreclosure: The legal procedure by which a borrower in default loses all rights and claim to a mortgaged property. The lender takes possession of the property and sells it in an attempt to fulfill the remaining mortgage indebtedness.
Freddie Mac / Federal Home Loan Mortgage Corporation (FHLMC): A corporation created by Congress to support the secondary mortgage market and make funds for the purchase of houses more readily available. Freddie Mac buys conventional residential mortgages from banks and mortgage-lending institutions and then sells them to investors.
Home Equity Loan: A form of second mortgage that allows one to borrow against the equity in his/her property. The funds from such a loan are generally utilized for home maintenance, debt consolidation, or other major expenses.
Index: A common published interest rate that lenders use to compare with other investments. Lenders use these indices (11th District Cost of Funds, LIBOR, T-Bill rate, certificates of deposit, etc.) to modify adjustable rate-mortgages - adding the index to a predetermined margin to calculate the interest rate.
Jumbo Loans: Also called a non-conforming loan, any loan that exceeds Fannie Mae and Freedie Mac's amount limits - mortgages that do not are called conforming loans.
Lien: A legal claim against a property to ensure repayment of the loan.
Life Cap: This limits the maximum amount that an adjustable-rate mortgage's interest rate and monthly payment can swing up or down throughout the duration of the loan's life.
Lock-in: A written assurance from the mortgage lender to guarantee a particular interest rate contingent on the loan closing before a specified date.
Margin: The constant amount that is added to the index to produce the interest rate for an adjustable-rate mortgage.
Maturity: The date when a loan becomes due and payable.
Mortgage: A note of real property that is guaranteed as collateral to obtain a loan.
Mortgagee: The lending institution that funds the loan.
Mortgagor: The borrower that obtains the loan.
Negative Amortization: An increase in the amount of outstanding mortgage debt that occurs when the monthly mortgage payment fails to cover the full amount of interest due - subsequently causing the remaining interest to be added to the loan balance.
Nonconforming Loan: Also called a jumbo loan, any loan that exceeds Fannie Mae and Freedie Mac's amount limits - mortgages that do not are called conforming loans.
Origination Fee: A fee charged by the lender to prepare loan documents and cover other expenses such as appraisal and credit check costs.
Periodic Cap: This limits the maximum amount that an adjustable-rate mortgage's interest rate can swing up or down for one adjustment period.
Preapproval: A process by which mortgage lenders thoroughly review a borrower's financial situation and ascertain the amount of money that they will lend. Preapproval status is far more formal and in-depth than a prequalification.
Prequalification: A process by which mortgage lenders, through simple calculations based on financial information provided by the borrower, give an estimation on the amount of money for which a borrower would be eligible.
Private Mortgage Insurance (PMI): Insurance that protects the lender in the event that a borrower defaults on a mortgage. Traditionally, any property with less than a 20% down payment will need to purchase PMI.
Principal: The outstanding balance owed on a loan minus interest. Monthly mortgage payments are comprised of a portion of the amount originally borrowed, the principal, and a fee for being fronted the money, the interest.
Real Property: Land including any structures permanently attached to it.
Refinance: The process of replacing an existing mortgage loan with new one. A borrower would generally refinance to benefit from lower interest rates, better terms, or to get cash.
Second Mortgage: A lien in addition and subordinate to the original first mortgage.
Term: The duration of the loan - amount of time a borrower has to repay it.
Title: A legal document that verifies ownership of property.
Title Insurance: A policy, traditionally issued by a title company, which covers the borrower from any faults/deficiencies made in the title search or claims made against the veracity of ownership.
Truth-in-Lending: A federal statute that obligates lenders to disclose the annual percentage rate, payment schedule, finance charges, and other figures to the borrower following the application submission process.
Underwriting: The manner by which lenders decide whether or not to approve a loan to a buyer and if so for what amount. Involves a thorough assessment of the prospective borrower's income, employment history, credit record, assets, and liabilities.
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Stephen Shintani
Real Estate Broker
CalDRE #01134414
NMLS ID#299624
CalDRE Corporation #01791873
NMLS ID#329171
10866 Wilshire Blvd. Suite 1625
Los Angeles, CA 90024
Hawaii Branch Office NMLS ID #2471772
Tel: 310.481.0669
Fax: 310.481.0675
California Funding Group
NMLS Branch Office ID #935676
810 Silver Spur Road, Suite E
Rolling Hills Estates, CA 90274
Tel: 310.377.5552
Fax: 310.544.8233
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