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Mortgages key terms | Consumer Financial Protection Bureau

Ability-to-repay rule

The ability-to-repay rule is the reasonable and good faith determination most mortgage lenders are required to make that you are able to pay back the loan. 

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Adjustable Rate Mortgage (ARM)

An adjustable rate mortgage (ARM) is a type of loan for which the interest rate can change, usually in relation to an index interest rate. Your monthly payment will go up or down depending on the loan’s introductory period, rate caps, and the index interest rate. With an ARM, the interest rate and monthly payment may start out lower than for a fixed-rate mortgage, but both the interest rate and monthly payment can increase substantially. 

Learn more about how ARMs work and what to consider.

Amortization

Amortization means paying off a loan with regular payments over time, so that the amount you owe decreases with each payment. Most home loans amortize, but some mortgage loans do not fully amortize, meaning that you would still owe money after making all of your payments.

Some home loans allow payments that cover only the amount of interest due, or an amount less than the interest due. If payments are less than the amount of interest due each month, the mortgage balance will grow rather than decrease.  This is called negative amortization. Other loan programs that do not amortize fully during the loan may require a large, lump sum “balloon” payment at the end of the loan term. Be sure you know what type of loan you are getting.

Learn more about the homebuying process.

Amount financed

It means the amount of money you are borrowing from the lender, minus most of the upfront fees the lender is charging you. 

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Annual income

Annual income is a factor in a mortgage loan application and generally refers to your total earned, pre-tax income over a year. Annual income may include income from full-time or part-time work, self-employment, tips, commissions, overtime, bonuses, or other sources.  A lender will use information about your annual income and your existing monthly debts to determine if you have the ability to repay the loan.

Whether a lender will rely upon a specific income source or amount when considering you for a loan will often depend upon whether you can reasonably expect the income to continue.

Learn more about why your ability to repay is important to lenders.

Annual Percentage Rate (APR)

An annual percentage rate (APR) is a broader measure of the cost of borrowing money than the interest rate. The APR reflects the interest rate, any points, mortgage broker fees, and other charges that you pay to get the loan. For that reason, your APR is usually higher than your interest rate.

Learn how to compare APRs 

Automatic payment

Automatic payments allow you to set up recurring mortgage payments through your bank. Automatic payments can be a convenient way to make sure that you make your payments on time. 

Balloon loan

For mortgages, a balloon loan means that the loan has a larger-than-usual, one-time payment, typically at the end of the loan term. This one-time payment is called a “balloon payment, and it is higher than your other payments, sometimes much higher. If you cannot pay the balloon amount, you might have to refinance, sell your home, or face foreclosure. 

Find out why balloon loans might be risky

Bi-weekly payment

In a bi-weekly payment plan, the mortgage servicer is collecting half of your monthly payment every two weeks,
resulting in 26 payments over the course of the year (totaling one extra
monthly payment per year). By making additional payments and applying your payments to the principal, you may be able to pay off your loan early. Before choosing a bi-weekly payment, be sure to review your loan terms to see if you will be subject to a prepayment penalty if you do so. Check if your servicer charges any fees for a bi-weekly payment plan. You may be able to accomplish the same goal without the fee by making an extra monthly mortgage payment each year.

Construction loan

A construction loan is usually a short-term loan that provides funds to cover the cost of building or rehabilitating a home.

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Conventional loan

A conventional loan is any mortgage loan that is not insured or guaranteed by the government (such as under Federal Housing Administration, Department of Veterans Affairs, or Department of Agriculture loan programs). 

Learn more about conventional loans and other loan types.

Co-signer or co-borrower

A co-signer or co-borrower is someone who agrees to take full responsibility to pay back a mortgage loan with you. This person is obligated to pay any missed payments and even the full amount of the loan if you don’t pay. Some mortgage programs distinguish a co-signer as someone who is not on the title and does not have any ownership interest in the mortgaged home. Having a co-signer or co-borrower on your mortgage loan gives your lender additional assurance that the loan will be repaid. But your co-signer or co-borrower’s credit record and finances are at risk if you don’t repay the loan.

Learn more about the homebuying process.

Credit history

A credit history is a record of your credit accounts and your history of paying on time as shown in your credit report. Consumer reporting companies, also known as credit reporting companies, collect and update information about your credit record and provide it to other businesses, which use it make decisions about you. Credit reports have information about your credit activity and current credit situation such as your loan paying history and the status of your credit accounts.

Read about:   What is a Mortgage Company?

Learn more about checking your credit history before buying a home.

Forbearance

Forbearance is when your servicer allows you temporarily to pay your mortgage at a lower rate or temporarily to stop paying your mortgage. Your servicer may grant you forbearance if, for example, you recently lost your job, suffered from a disaster, or from an illness or injury that increased your health care costs. Forbearance is a type of loss mitigation.

Learn more about mortgage forbearance

Depending on the kind of loan you have, there may be different forbearance options. You must contact your loan servicer to request forbearance. Remember that you will have to make up these missed or reduced payments when your forbearance period is over.

If you are impacted by the coronavirus

Get more information about mortgage relief options.

Home equity line of credit (HELOC)

A home equity line of credit (HELOC) is a line of credit that allows you to borrow against your home equity. Equity is the amount your property is currently worth, minus the amount of any mortgage on your property. Unlike a home equity loan, HELOCs usually have adjustable interest rates. For most HELOCs, you will receive special checks or a credit card, and you can borrow money for a specified time from when you open your account. This time period is known as the “draw period.” During the “draw period,” you can borrow money, and you must make minimum payments. When the “draw period” ends, you will no longer be able to borrow money from your line of credit. After the “draw period” ends you may be required to pay off your balance all at once or you may be allowed to repay over a certain period of time. If you cannot pay back the HELOC, the lender could foreclose on your home. 

Interest rate

An interest rate on a mortgage loan is the cost you will pay each year to borrow the money, expressed as a percentage rate. It does not reflect fees or any other charges you may have to pay for the loan. For example, if the mortgage loan is for $100,000 at an interest rate of 4 percent, that consumer has agreed to pay $4,000 each year he or she borrows or owes that full amount.

Explore interest rates in your area.

Loss mitigation

Loss mitigation refers to the steps mortgage servicers take to work with a mortgage borrower to avoid foreclosure. Loss mitigation refers to a servicer’s responsibility to reduce or “mitigate” the loss to the investor that can come from a foreclosure. Certain loss-mitigation options may help you stay in your home. Other options may help you leave your home without going through foreclosure. Loss mitigation options may include deed-in-lieu of foreclosure, forbearance, repayment plan, short sale, or a loan modification. 

Read about:   Heloc Products to Launch Its New Website Soon to Help Customers : pressrelease

If you are having trouble making your mortgage payments, or if you have been offered and are considering various loss mitigation options, reach out to a Department of Housing and Urban Development (HUD)-approved housing counselor.  

You can use the CFPB’s “Find a Counselor” tool to get a list of housing counseling agencies in your area that are approved by HUD. You can also call the HOPE™ Hotline, open 24 hours a day, seven days a week, at (888) 995-HOPE (4673).

If you are impacted by the coronavirus

Get more information about mortgage relief options.

Property taxes

Property taxes are taxes charged by local jurisdictions, typically at the county level, based upon the value of the property being taxed. Often, property taxes are collected within the homeowner’s monthly mortgage payment, and then paid to the relevant jurisdiction one or more times each year. This is called an escrow account. If the loan does not have an escrow account, then the homeowner will pay the property taxes directly.

Learn more about the homebuying process.

Servicer

Your mortgage servicer is the company that sends you your mortgage statements. Your servicer also handles the day-to-day tasks of managing your loan.

Your loan servicer typically processes your loan payments, responds to borrower inquiries, keeps track of principal and interest paid, and manages your escrow account (if you have one). The loan servicer may initiate foreclosure under certain circumstances. Your servicer may or may not be the same company that originally gave you your loan.

Short sale

A short sale is a sale of your home for less than what you owe on your mortgage. A short sale is an alternative to foreclosure, but because it is a sale, you will have to leave your home. If your lender or servicer agrees to a short sale, you may be able to sell your home to pay off your mortgage, even if the sale price or proceeds turn out to be less than the balance remaining on your mortgage. A short sale is a type of loss mitigation. If you live in a state in which you are responsible for any deficiency, which is the difference between the value of your property and the amount you still owe on your mortgage loan, you will want to ask your lender to waive the deficiency. If the lender waives the deficiency, get the waiver in writing and keep it for your records.

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