GLOSSARY

Hazard Insurance Insurance purchased by the borrower, and required by the lender, to protect the property against loss from fire and other hazards. It is the second "I" in PITI.
Historical Scenario The assumption that the index value to which the rate on an ARM is tied follows the same pattern as in some prior historical period.
Housing Expense The sum of mortgage payment, hazard insurance, property taxes, and homeowner association fees.
Housing
   Expenses-to-Income Ratio The ratio of the monthly housing payment in total (PITI – Principal, Interest, Taxes, and Insurance) divided by the gross monthly income. This ratio is sometimes referred to as the top ratio or front end ratio.
HUD The U.S. Department of Housing and Urban Development.
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 costs-of-funds incurred by savings and loans), which is then used to adjust the interest rate on an adjustable mortgage up or down. Some commonly used indeces include the 1 Year Treasury Bill, 6 Month LIBOR, and the 11th District Cost of Funds (COFI).
Initial Interest Rate The interest rate that is fixed for some specified number of months at the beginning of the life of a mortgage. On an ARM, the initial rate is sometimes referred to as a "teaser" because it is below the fully indexed interest rate.
Initial Rate Period The number of months for which the initial rate holds. On ARMs this period can range from 3 months to 10 years, but on an FRM the initial rate holds for the life of the loan.
Interest Due The portion of the mortgage payment which goes toward interest on the loan, expressed in dollars. It is computed by multiplying the loan balance at the end of the preceding period times the annual interest rate divided by 12 (on a biweekly mortgage it is divided by 26). It is the same as interest payment except when the total mortgage payment is less than the interest due, in which case the difference is added to the balance and constitutes negative amortization.
Interest Payment The dollar amount of interest paid each month. It is the same as interest due except when the total mortgage payment is less than the interest due, in which case the interest payment is less than the interest due; the difference is added to the balance and constitutes negative amortization.
Interest Rate The rate charged the borrower each period, by custom quoted on an annual basis. A rate of 6%, for example, means a rate of 1/2% per month. For a monthly payment mortgage the rate divided by 12 is multiplied by the balance at the end of the preceding month to determine the monthly interest due.
Interest Rate
   Adjustment Period The frequency of rate adjustments on an ARM after the initial rate period is over. The rate adjustment period is sometimes but not always the same as the initial rate period. As an example, using common terminology, a 3/3 ARM is one in which both periods are 3 years while a 3/1 ARM has an initial rate period of 3 years after which the rate adjusts every year.
Interest Rate Ceiling The highest interest rate possible under an ARM contract; same as "lifetime cap". It is often expressed as a specified number of percentage points above the initial interest rate.
Interest Rate Decrease Cap The maximum allowable decrease in the interest rate on an ARM each time the rate is adjusted. It is usually 1 or 2 percentage points.
Interest Rate Floor The lowest interest rate possible under an ARM contract. Floors are less common than ceilings.
Interest Rate Increase Cap The maximum allowable increase in the interest rate on an ARM each time the rate is adjusted. It is usually 1 or 2 percentage points.
Interest Rate Index The specific interest rate series to which the interest rate on an ARM is tied, such as "Treasury Constant Maturities", "1-Year", or "Eleventh District Cost of Funds". All the indices are published regularly in readily available sources.
Interim Financing A construction loan made during completion of a building or a project. A permanent loan usually replaces this loan after completion.
Investor A borrower who owns or purchases a property as an investment rather than as a primary residence.
Jumbo Mortgage A mortgage larger than the maximum eligible for purchase by the two Federal agencies, Fannie Mae and Freddie Mac (see Non-conforming mortgage). However, some lenders use the term to refer to programs for even larger loans, such as greater than $500,000. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.
Junk Fees Fees charged the borrower by the lender for a wide variety of services, actual and hypothetical, expressed in dollars rather than as a percent of the loan amount. Read the Good Faith Estimate carefully.
Lien An encumbrance against property for money due, either voluntary or involuntary. It is the lender’s right to claim the borrower’s property in the event the borrower defaults. If there is more than one lien, the claim of the lender holding the first lien will be satisfied before the claim of the lender holding the second lien, which in turn will be satisfied before the claim of a lender holding a third lien, etc.
Lifetime Cap A provision of an ARM that limits the highest rate that can occur over the life of the loan.
Loan Amount The amount the borrower(s) promise to repay, as set forth in the mortgage contract. It differs from the amount of cash disbursed by the lender by the amount of points and other credit charges.
Loan to Value Ratio (LTV) The ratio of the amount of your loan to the appraised value of the home. Loan amount is divided by the lesser of the selling price or the appraised value and expressed as a percentage. The LTV will affect programs available to the borrower and generally, the lower the LTV the more favorable the terms of the programs offered by lenders.
Lock An option exercised by the borrower, at the time of the loan application or later, to "lock in" the rates and points prevailing in the market at that time. The lender and borrower are committed to those terms, regardless of what happens between that point and the closing date.
Lock Period The number of days for which any lock or cap holds.
Lock-in A written agreement guaranteeing the home buyer a specified interest rate provided the loan is closed within a set period of time. The lock-in also usually specifies the number of points to be paid at closing.