Mortgage Terms: Not just the Length of a Loan

A Glossy Look at First Choice Loan Service’s Online Glossary

If you’re looking for a mortgage, it’s important to learn the common terminology. Being knowledgeable can help you better understand your loan and find the one that’s best for you. After you’ve gone over the basics, it can be helpful to dig a little deeper, especially if there’s a term you’re uncertain about or unfamiliar with. Here are some loan terms you should be familiar with, courtesy of First Choice Loan Service’s online glossary.

Terms relating to Adjustable Rate Mortgages:

Conventional mortgages tend to be more common, but adjustable rate mortgages (ARMs) are making a comeback! They can be useful in a variety of situations, especially if you’re planning on selling your home after just a few years. They can also be a bit confusing, especially since your rate can change during the life of the loan. Often you can start out with a rate lower than one a conventional mortgage would have, but it can increase after a few years. Understanding the proper terms can help you learn when, how and why your rate may change.

Adjustment Cap - A limit on how much a variable interest rate can rise or fall during a single adjustment period.

Adjustment Date - The scheduled date on which the interest rate is subject to change for an adjustable-rate mortgage (ARM).

Adjustment Period - The period of time between adjustment dates for an adjustable-rate mortgage (ARM).

Annual Cap - The limit on the amount that principal and interest can increase for an adjustable-rate mortgage (ARM) over a twelve-month period. Caps are designed to protect borrowers from sizable payment increases during an adjustment period.

Convertible Mortgage - A type of adjustable-rate mortgage (ARM) that enables the borrower to shift to a fixed-rate mortgage at a specified point in the loan term.

Index - A published interest rate used by lenders to measure the variance between the present interest rate on an adjustable-rate mortgage (ARM) and one earned by other investments, such as the monthly average interest rate on loans closed by saving and loan institutions, the monthly average costs-of-funds incurred by savings and loans, and one-, three- and five-year U.S. Treasury security yields. This is then used to adjust the Annual Percentage Rate up or down at the beginning of each adjustment period. Financial index rates commonly used include LIBOR, T-Bill rate, prime rate, or the 11th District COFI.

Lifetime Cap - A limit on the amount an interest rate can increase and decrease over the term of an adjustable-rate mortgage (ARM).

Margin - The amount of percentage points added to the index to determine the interest rate of an adjustable-rate mortgage (ARM) during an adjustment period.

The most common type of adjustable rate mortgage is known as the Hybrid ARM. Hybrid ARMs are often advertised as 3/1, 5/1, 7/1, or 10/1. They are “hybrid” because they stay fixed with an initial interest rate for a specified number of years, and after that have a variable interest rate. The first number is the number of years that the interest rate would stay the same, while the second number is how often your interest rate adjust after the fixed period. So, if you had a 5/1 ARM, your interest rate would stay the same for the first five years, and after that would adjust annually. While it can be great to enjoy the lower interest rate at first, you have to make sure that you can handle the worst-case scenario – your interest rate increasing to the full cap. While not as common, other ARMs include interest-only ARMs and payment option ARMs.

Banker, Broker, Potato, Po-tah-to?

What’s the difference between a Mortgage Banker and a Mortgage Broker? No, this isn’t the beginning of some finance joke. The fact is, many people aren’t exactly sure what the difference is. All of the terms can sound similar and confusing. We took the definitions of several mortgage professionals and entities and laid them out side-by-side for you below.

Investor - A lender’s source for money.

Mortgage Banker - An entity that originates and services mortgage loans exclusively for resale to other lenders and investors in the secondary market.

Mortgage Broker - A third-party professional or organization that helps match a borrower with a lender for purposes of residential or commercial mortgage loan origination. Typically, these services incur a fee or require a commission.

Mortgagee - The lender or party to receive the repayments of a home loan in a mortgage transaction.

Mortgagor - The borrower or party to submit the repayments of a home loan in a mortgage transaction.

Power of Attorney - One person is authorized to act on behalf of another through this legal document.

Realtor - A real estate broker or associate member in a local real estate board linked with the National Association of Realtors.

Underwriter - The mortgage professional who reviews all verified information collected in loan processing to determine risk based on loan criteria and ultimately approve or deny the loan. This assessment includes credit history, employment history, assets, debts and other factors.

Another common mortgage professional not listed in First Choice’s glossary is the Mortgage Loan Originator (sometimes also known as a Loan Originator, Loan Officer, Mortgage Loan Officer, LO, or MLO). A Mortgage Loan Originator is someone who takes a mortgage application and/or negotiates or offers residential mortgage loan terms. Often, people get confused about the difference between a Mortgage Loan Originator and a Mortgage Broker. A Mortgage Loan Originator always refers to an individual, while a Mortgage Broker can refer to either an individual or an entity. Both Mortgage Loan Originators and Mortgage Brokers work with the borrower to help them secure a mortgage, but a Mortgage Loan Originator only works for one institution, while a Broker is a third-party and can help the borrower compare loans and terms for multiple institutions. Bother brokers and loan originators can be incredibly helpful during the mortgage search – if you’re working with one, be sure to ask them any questions you may have!

Know the Loan and the Home

As if mortgages weren’t already confusing, here are some final additional terms that you might not be familiar with but could come in handy. If there is ever a term you’re not sure about, be sure you have it explained thoroughly before moving forward! Always remember – don’t sign anything if you don’t understand it or haven’t read it!

Assignment - The process of transferring a mortgage from one individual to another person.

Assumption - The agreement between buyer and a seller in which the seller assumes responsibility for repayment of the existing mortgage that is not originally in their name.

Biweekly Mortgage - A loan covering home financing that requires payments every two weeks. Payments are equal to half of what a full monthly payment would be on a typical 30-year fixed mortgage. With more frequent payment periods, a biweekly mortgage amortizes much faster than a loan requiring monthly payments and can facilitate greater savings in interest for the borrower.

Encroachment - A structure or improvement that physical trespasses or intrudes on another’s land.

Float Down Option - A loan feature which allows the borrower the opportunity to reduce the interest rate on the mortgage if the market conditions improve after the rate is locked. With the ability to be used on all conforming loans, both government and conventional, this applies to the interest rate only and is based on the initial lock period.

Secondary Market - The market in which mortgages are bought and sold by primary lenders to investors.

Sweat Equity - Equity created by a purchaser through performing labor towards the construction or the renovation of the property being purchased.

It always pays to be knowledgeable, especially when it comes to finding a mortgage. Be sure to do your research and consult with a mortgage professional or financial advisor! If you’re interested in brushing up on more mortgage terms, or are unsure of what something means, you can find and browse First Choice Loan Service’s online glossary by clicking here! And here are some additional informational articles from RateZip:

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