Our Glossary of banking and financial terms provides the definitions of some very common, but mis-understood terms.

Use this dictionary glossary to make sure you understand what the heck all these bankers are talking about!

A

Adjustable Rate Mortgage (ARM): A mortgage in which the interest rate is adjusted periodically based on a pre-selected index.

Amortization: Loan payment divided into equal periodic payments calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance.

Amortization Term: The length of time required to amortize the mortgage loan expressed as a number of months. For example, 360 months is the amortization term for a 30-year fixed rate mortgage.

Annual Percentage Rate (APR): The measurement of the full cost of a loan including interest and loan fees expressed as a yearly percentage rate. Because all lenders apply the same rules in calculating the annual percentage rate, it provides consumers with a good basis for comparing the cost of different loans.

Appraisal: An estimate of the value of property made by a qualified professional called an “appraiser.

Appraised Value: An opinion of a property’s fair market value, based on an appraiser’s knowledge, experience, and analysis of the property.

Assessment: A local tax levied against a property for a specific purpose, such as a sewer or street lights.

Assignment: The transfer of a mortgage from one person to another.

Assumability: An assumable mortgage can be transferred from the seller to the new buyer. Generally requires a credit review of the new borrower and lenders may charge a fee for the assumption. If a mortgage contains a due on sale clause, it may not be assumed by a new buyer.

Assumption: The agreement between buyer and seller where the buyer takes over the payments on an existing mortgage from the seller. Assuming a loan can usually save the buyer money since this is an existing mortgage debt, unlike a new mortgage where closing cost and new, probably higher, market rate interest charges will apply.

Assumption Fee: The fee paid to a lender (usually by the purchaser of real property) when an assumption takes place.

ACH (Automated Clearing House): Secure electronic network that connects U.S. financial institutions for the electronic transfer of money

APY (Annual Percentage Yield): Rate calculated over a 365-day period taking into account the effect of compounding interest. For an interest-bearing deposit account, such as a savings account, APY is equal to one plus the periodic rate (expressed as a decimal) raised to the number of periods in one year. Due to compounding, the APY will be greater than the periodic interest rate multiplied by the number of periods in the year.

APYE (Annual Percentage Yield Earned): Similar to the APY but takes into account the relationship between the interest actually earned during the statement period and the average daily balance. The APYE might be different than the APY due to changes in interest rates or interest not paid on checks subject to check holds.

Assets: any owned item that has value in an exchange, especially those that can be converted to cash.

Available balance: the total amount in a bank account that may be withdrawn

Average balance: It is calculated by adding together the full principal balance in the account each day and dividing it by the number of days in the period.

B

Balance: in banking it refers to the amount of money in an account or to reconciling your checkbook to your bank statement.

Balloon Mortgage: A loan which is amortized for a longer period than the term of the loan. Usually this refers to a thirty year amortization and a five or seven year term. Sometimes referred to as a 7/23.  At the end of the term of the loan, the remaining outstanding principal on the loan is due. This final payment is known as a balloon payment.

Balloon Payment: The final lump sum paid at the maturity date of a balloon mortgage.

Biweekly Payment Mortgage: A plan to reduce the debt every two weeks (instead of the standard monthly payment schedule). The 26 (or possibly 27) biweekly payments are each equal to one half of the monthly payment required if the loan were a standard 30-year fixed rate mortgage. The result for the borrower is a substantial savings in interest.

Bond: An interest bearing or discounted debt security issued by corporations and governments. Bonds are essentially loans by the investor to the issuer in return for interest payments.

Borrower (Mortgagor): One who applies for and receives a loan in the form of a mortgage with the intention of repaying the loan in full.

Bridge Loan: A second trust that is collateralized by the borrower’s present home allowing the proceeds to be used to close on a new house before the present home is sold. Also known as “swing loan.”

Broker: One who sells financial products. Whether in insurance, real estate, or stocks, most brokers work under compensation structures that are at direct odds with the best interests of their clients. When using a broker, you should always find out how he or she is compensated.

Buy Down: When the lender and/or the home builder subsidized the mortgage by lowering the interest rate during the first few years of the loan. While the payments are initially low, they will increase when the subsidy expires.

C

Cash Flow: The amount of cash derived over a certain period of time from an income producing property. The cash flow should be large enough to pay the expenses of the income producing property (mortgage payment, maintenance, utilities, etc…).

Caps (interest): Consumer safeguards which limit the amount of change to the interest rate for an adjustable rate mortgage.

Caps (payment): Consumer safeguards which limit the amount of change to the monthly payments for an adjustable rate mortgage.

Certificate of deposit (CD): An insured, interest-bearing deposit at a bank, requiring the depositor to keep the money invested for a specific length of time.  A Certificate of Deposit CD generally pays a higher interest rate than a regular savings account in exchange for a commitment to keep the money deposited for a specific period of time.  Read more on Certificate Of Deposit here.

Certificate of Eligibility: The document given to qualified veterans which entitles them to VA guaranteed loans for homes, business and mobile homes. Certificates of eligibility may be obtained by sending form DADA (Separation Paper) to the local VA office with VA form 1880 (Request for Certificate of Eligibility).

Certificate of Reasonable Value (CRV): An appraisal issued by the Veterans Administration showing the property’s current market value.

Certificate of Veteran Status: The document given to veterans or reservists who have served 90 days of continuous active duty (including training time). It may be obtained by sending DD 214 to the local VA office with form 26-8261a (Request for Certificate of Veteran Status). This document enables veterans to obtain lower down payments on certain FHA insured loans.

Chapter 7 Bankruptcy: Chapter of the Bankruptcy Code that provides for court administered liquidation of the assets of a financially troubled individual or business.

Chapter 11 Bankruptcy: Chapter of the Bankruptcy Code that is usually used for the reorganization of a financially troubled business. Used as an alternative to liquidation under Chapter 7. The U.S. Supreme Court has held that an individual may also use Chapter 11.

Chapter 12 Bankruptcy: Chapter of the Bankruptcy Code adopted to address the financial crisis of the nation’s farming community. Cases under this chapter are administered like Chapter 11 cases, but with special protections to meet the special conditions of family farm operations.

Chapter 13 Bankruptcy: Chapter of the Bankruptcy Code in which debtors repay debts according to a plan accepted by the debtor, the creditors and the court. Plan payments usually come from the debtor’s future income and are paid to creditors through the court system and the bankruptcy trustee.

Charge-Off: Action of transferring accounts deemed uncollectible to a category such as bad debt or loss. Collectors will usually continue to solicit payments, but the accounts are no longer considered part of a company’s receivable or profit picture.

Closing: The meeting between the buyer, seller and lender or their agents where the property and funds legally change hands, also called settlement. Closing costs usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement. The cost of closing usually is about 3 percent to 6 percent of the mortgage amount.

Closing Costs: Expenses over and above the price of the property that are incurred by buyers and sellers when transferring ownership of a property. Closing costs normally include an origination fee, property taxes, charges for title insurance and escrow costs, appraisal fees, etc. Closing costs will vary according to the area country and the lenders used.

COFI: An adjustable-rate mortgage with a rate that adjusts based on a cost-of-funds index, often the 11th District Cost of Funds.

Commission: A fee charged by a broker for executing a securities transaction. One of the principal things investors should watch for when selecting a brokerage. “Full-service” brokers can have commissions running as high as $150 per trade or more, while discount brokers average less than $20 per trade.

Common stock: A security representing partial ownership in a public or private corporation.

Compounding: When an investment generates earnings on reinvested earnings.

Compound interest: Interest calculated not just on the original principal but also on the interest already accrued.

Consumer Reporting Agency (or Credit Bureau): An organization that handles the preparation of reports used by lenders to determine a potential borrower’s credit history. The agency gets data for these reports from a credit repository and other sources.

Consumer Credit Counseling Service: A non-profit organization that assists consumers in dealing with their credit problems. Consumer Credit Counseling Service has offices throughout the United States that can be located by calling 800 388 CCCS (2227).

Co signer: Person who pledges in writing as part of a credit contract to repay the debt if the borrower fails to do so. The account displays on both the borrower’s and the co-signer’s credit reports.

Contract Sale or Deed: A contract between purchaser and a seller of real estate to convey title after certain conditions have been met. It is a form of installment sale.

Conventional Loan: A mortgage not insured by FHA or guaranteed by VA.

Coverdell Education Savings Account (ESA): Coverdell Education Savings Account (ESA) is an account created as an incentive to help parents and students save for education expenses.

The total contributions for the beneficiary of this account cannot be more than $2,000 in any year, no matter how many accounts have been established. A beneficiary is someone who is under age 18 or is a special needs beneficiary.

Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. The beneficiary will not owe tax on the distributions if they are less than a beneficiary’s qualified education expenses at an eligible institution. This benefit applies to qualified higher education expenses as well as to qualified elementary and secondary education expenses.

Conversion Clause: A provision in an ARM allowing the loan to be converted to a fixed-rate at some point during the term. Usually conversion is allowed at the end of the first adjustment period. The conversion feature may cost extra.

Corporate bond: An interest bearing or discounted debt security issued by a corporation.

Cost Basis: The original price paid for an investment (including commissions).

Credit Limit/Line of Credit: In open-end credit, the maximum amount a borrower can draw upon or the maximum that an account can show as outstanding.

Credit items: Information reported by current or past creditors.

Credit Report: A report documenting the credit history and current status of a borrower’s credit standing. This confidential report on a consumer’s payment habits as reported by their creditors to a consumer credit reporting agency. The agency provides the information to credit grantors who have a permissible purpose under the law to review the report.

Credit reports may be viewed by companies issuing credit (credit cards, auto loans, mortgages and so on), and many others including prospective employers, land lords, insurance companies, utility companies and more.

It is vital for consumers to check their credit report regularly and to correct any errors.

Credit Score: A credit risk score is a statistical summary of the information contained in a consumer’s credit report. The most well known type of credit risk score is the Fair Isaac or FICO score. This form of credit scoring is a mathematical summary calculation that assigns numerical values to various pieces of information in the credit report. The overall credit risk score is highly relative in the credit underwriting process for a mortgage loan.  Another popular score is the Beacon score.

Credit Scoring: Tool used by credit grantors to provide an objective means of determining risks in granting credit. Credit scoring increases efficiency and timely response in the credit granting process. Credit scoring criteria is set by the credit grantor.

Creditworthiness: The ability of a consumer to receive favorable consideration and approval for the use of credit from an establishment to which they applied.

Custodial account: a savings account that is owned by a child but controlled by an adult until the child reaches legal age

D

Debt: An amount owed to another.

Debt-to-Income Ratio (DTI): The ratio, expressed as a percentage, which results when a borrower’s monthly payment obligation on long term debts is divided by his or her gross monthly income. See housing expenses-to-income ratio.

Debit: an amount deducted from an account. In banking it can include checks, ATM withdrawals, point of purchase payments, Check Card purchases and more.

Debit card: a plastic card that works like a credit card except purchase amounts are deducted from a checking account. Often it is enhanced with ATM capabilities.

Deed: The legal document conveying title to a property.

Deed in lieu: A deed given by a mortgagor to the mortgagee to satisfy a debt and avoid foreclosure.

Deed of Trust: In many states, this document is used in place of a mortgage to secure the payment of a note.

Default: Failure to meet legal obligations in a contract, specifically, failure to make the monthly payments on a mortgage or other loan.

Deferred Interest: When a mortgage is written with a monthly payment that is less than required to satisfy the note rate, the unpaid interest is deferred by adding it to the loan balance. See negative amortization.

Delinquent: Accounts classified into categories according to the time past due. Common classifications are 30, 60, 90 and 120 days past due. Special classifications also include charge-off, repossession, transferred, etc.

Delinquency: Failure to make payments on time. This can lead to negative marks on a credit report, reduction in credit score (FICO or Beacon), and ultimately in foreclosure.

Department of Veterans Affairs (VA): An independent agency of the federal government which guarantees long term, low-or-no-down payment mortgages to eligible veterans.

Discharge: granted by the court to release a debtor from most of his debts that were included in a bankruptcy. Any debts not included in the bankruptcy – alimony, child support, liability for willful and malicious conduct and certain student loans – cannot be discharged.

Discount Point: See point

Discount broker: A brokerage that executes orders to buy and sell securities at commission rates lower than a full-service brokerage.

Diversification: Investing in separate asset classes (i.e. stocks, bonds, cash) and/or stocks of different companies in an attempt to lower overall investment risk.

Dividend: A share of a company’s earnings paid to each stockholder. Typically, dividends are paid on a quarterly basis and are determined by the company’s board of directors.

Dollar cost averaging: Investing equal amounts of money at regular intervals. The money deducted from your paycheck if you participate in your company’s 401(k) program is an example of dollar cost averaging. Theoretically, you will buy more shares when the price of your investment has declined, and fewer shares when the price has risen. This may lead to an overall cost basis that is lower than the average price per share.

Down Payment: Money paid to make up the difference between the purchase price and the mortgage amount.

E

Early withdrawal: When the CD is withdrawn before the end of the term.

Earnest Money: Money given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment.

Electronic Funds Transfer (EFT): any transfer of funds initiated electronically. Examples include ATM transactions, POP, direct deposit or withdrawal, phone transfers, and computer transactions

Endorse: To place signature on the back of a document to legally declare transfer ownership.

Equal Credit Opportunity Act (ECOA): A federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status or receipt of income from public assistance programs.

Equity: The difference between the fair market value and current indebtedness also referred to as the owner’s interest. The value an owner has in real estate over and above the obligation against the property.

Escrow: An account held by the lender into which the home buyer pays money for tax or insurance payments. Also earnest deposits held pending loan closing.

Escrow Disbursements: The use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, and other property expenses as they become due.

Escrow Payment: The part of a mortgagor monthly payment that is held by the servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due.

F

Fair Credit Reporting Act (FCRA): A consumer protection law that regulates the disclosure of consumer credit reports by consumer/credit reporting agencies and establishes procedures for correcting mistakes on one’s credit report.

Federal Deposit Insurance Agency (FDIC): . An independent agency of the U.S. government that protects or insures depositors from losses if a bank fails. Deposits at FDIC-insured institutions are insured up to at least $250,000 per depositor until December 31, 2009. On January 1, 2010, FDIC deposit insurance for all deposit accounts-except for certain retirement accounts-will return to at least $100,000 per depositor. Insurance coverage for certain retirement accounts, which include all IRA deposit accounts, was increased permanently to $250,000 per depositor in 2006.

Float: the amount of time it takes for an amount to be withdrawn from your account after presenting a check for payment.

Full-service broker: Full-service brokers earn commissions for each trade made in a customer’s account. They make more money by trading in and out of lots of investments. They are sometimes referred to as “full-price brokers.”

G

Good Faith Estimate (GFE): A good faith estimate must be provided by a mortgage lender or broker to a customer, as required by the Real Estate Settlement Procedures Act (RESPA). The estimate must include an itemized list of fees and costs associated with your loan and must be provided within three business days of applying for a loan.

These mortgage fees, also called settlement costs or closing costs, cover every expense associated with a home loan, including inspections, title insurance, taxes and other charges. A GFE will also generally include your estimated monthly payment (see PITI) based on the information that the lender has a the time.

A good faith estimate is a standard form which is intended to be used to compare different offers (or quotes) from different lenders or brokers.  You should always get a GFE before agreeing to work with a particular lender – never give them a credit card deposit before signing off on a GFE, and understand what your rights are to get out of any deposit in the event the costs vary significantly from the GFE. Remember that the good faith estimate is only an estimate. The final closing costs may be different – sometimes very different.

Government bond: An interest bearing or discounted debt security issued by a unit of government.

I

Identity theft (ID Theft): Identity theft is a crime in which an imposter obtains key pieces of personal information, such as Social Security or driver’s license numbers, in order to impersonate someone else. The information can be used to obtain credit, merchandise, and services in the name of the victim, or to provide the thief with false credentials.

Identity theft has become rampant over the past decade, and is difficult to repair.  Unfortunately, the victim is generally treated as guilty until proven innocent.  Identity theft can be thwarted by careful retention of records and one of several services which monitor for suspicions activity.

Individual Retirement Account: A tax-deferred retirement account set up with a financial institution such as a bank, broker, or mutual fund in which contributions may be invested in many types of securities such as stocks, bonds, money market funds, CDs, etc.

Inflation: A rise in the prices of goods and services.

Interest: The return earned on an investment.

Investment: The purchase of a financial product or other item of value with an expectation of favorable future returns. In general terms, investment means the use of money in the hope of making more money.

J

Junk bond: Bonds that are rated as below investment grade. The issuers of these bonds — which are judged to be at a higher risk of default — have to pay an attractive dividend to compensate investors for the additional risk. Also called a high-yield bond.

L

Large cap stock: Large caps are stocks of companies whose market value is above a designated minimum, usually in the neighborhood of $10 billion.

Liquidity: A measure of how quickly an investment can be sold at a fair price and converted to cash.

Minimum to avoid fees: If the balance is lower than a certain threshold, monthly fees are charged to the account.

Minimum to earn interest: If the balance on the account is less than the minimum, the funds are not earning any interest.

Money order: financial instrument that orders a sum of money to be paid to another person. It must be prepaid by the payer so it is considered a safe method of payment.

Money market deposit account: A savings account which is insured by the Federal government and offers many of the same services as checking accounts although transactions may be somewhat more limited. They are very safe and highly liquid investments, but offer a lower interest rate than most other investments.

Money market mutual fund: A mutual fund that invests in very short-term, high-liquidity investments.  Similar to a savings account without the Federal government insurance, though usually offering better interest rates.

Mortgage: A legal document that pledges a property to the lender as security for payment of a debt.

Municipal bond: A debt instrument issued by a state or local government. The advantage of investing in municipal bonds (or “munis”) is their exemption from federal, and sometimes state and local, taxes.

Mutual fund: The pooled cash of many shareholders that is invested according to a stated objective, as defined by the fund’s prospectus.

N

Negative Amortization: Negative Amortization, or “deferred interest,” occurs when the mortgage payment is less than a loan’s accruing interest. This causes a loan’s balance to grow instead of reduce or “amortize.”  These loans are also known as “pay-option” loans because the borrower had the option of making one of several payments (minimum payment based on a low “payment rate”, an interest only payment, or a fully amortizing payment, or anything in between).

These loans, also known as “neg-am” loans, could allow the borrower to add up to 15% of the original loan balance to the note (10% in New York State) in deferred interest.  Generally, this meant that if the borrower made only the minimum payment each month, the loan would then be “recast” at a fully amortizing rate for the new balance at around the 53^rd month into the loan.  It is at this point that many homeowners saw their monthly mortgage payments triple as they moved from a low payment rate of around 1% to a fully amortizing principal and Interest payment at a rate of 6% or higher on a loan balance that had grown by 15%.

As property values declined in 2008, many homeowners found themselves owing significantly more that they had originally borrowed against a home that was now worth less (making them “upside down” or “under water”).  This led to many deciding to walk away from their homes and allow the banks to foreclose on the property.

No load fund: A mutual fund that does not charge a sales commission.

Non-conforming loan: Also called a jumbo loan. Conventional home mortgages not eligible for sale and delivery to either Fannie Mae (FNMA) or Freddie Mac (FHLMC) because of various reasons, including loan amount, loan characteristics or underwriting guidelines. Non-conforming loans usually incur a rate and origination fee premium.

Note: A written agreement containing a promise of the signer to pay to a named person, or order, or bearer, a definite sum of money at a specified date or on demand.

NSF/Insufficient Funds: Short for non-sufficient funds. When withdrawals from an account exceed the amount in account creating a negative balance.

O

Office of Thrift Supervision (OTS): The regulatory and supervisory agency for federally chartered savings institutions. Formally known as Federal Home Loan Bank Board

One Year Adjustable Rate Mortgage: Mortgage where the annual rate changes yearly. The rate is usually based on movements of a published index plus a specified margin, chosen by the lender.

Origination Fee: The fee charged by a lender to prepare loan documents, make credit checks, inspect and sometimes appraise a property; usually computed as a percentage of the face value of the loan.  Shop around – origination fees generally fall into a category known as “junk fees” and you should not have to pay the lender or broker for the privilege of writing your loan.  The origination fee is generally pure profit for a lender on a mortgage loan.

Overdraft: when withdrawals exceed deposits.

Overdraft protection: service offered by a bank that provides cash to an account that is overdrawn for a fee to eliminate NSFs

Owner Financing: A property purchase transaction in which the party selling the property provides all or part of the financing.

P

PIN: Personal Identification Number. Secret number used by accountholder that permit accountholders to access their bank accounts and protect against unauthorized intruders.

Payee: one who receives a payment

Penalty for early withdrawal: The Bank charges a penalty if a customer wants to withdraw money from a CD (certificate of deposit) before the term.

Payment Change Date: The date when a new monthly payment amount takes effect on an adjustable rate mortgage (ARM). Generally, the payment change date occurs in the month immediately after the adjustment date.

Periodic Payment Cap: A limit on the amount that payments can increase or decrease during any one adjustment period.

Periodic Rate Cap: A limit on the amount that the interest rate can increase or decrease during any one adjustment period, regardless of how high or low the index might be.

PITI: The four components of a monthly mortgage payment – Principal, interest, taxes and insurance. Also called monthly housing expense.  Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the monthly cost of property taxes and homeowners insurance, whether these amounts are paid into an escrow account each month or not.

When getting a payment quote from a mortgage lender, be sure to clarify if the monthly payment being quoted is for P&I (Principal and Interest), or for PITI.  Even if you or the lender don’t know exactly how much money you need to include in your monthly payment for taxes and Insurance,  you can make an estimate to make sure you budget the right amount for your monthly mortgage.

Points (Loan Discount Points): Prepaid interest assessed at closing by the lender. Each point is equal to 1 percent of the loan amount (e.g., two points on a $100,000 mortgage would cost $2,000).  In exchange for paying points, you will receive a lower interest rate.  It is easy to calculate the breakeven point for when you should or should not pay points.  It really depends on how long you plan to stay in the home.  If you are buying a home, often times you can negotiate for the seller to pay one or two points on the mortgage – saving you thousands of dollars up front and over the time you own the home.

Postdate: to put a future date on a legal document to delay payment.

Potentially Negative Items: Any potentially negative credit items or public records that may have an effect on your creditworthiness as viewed by creditors.  These will show up on your credit report and will impact your credit score.

Power of Attorney: A legal document authorizing one person to act on behalf of another.

Preapproval: The process of determining how much money you will be eligible to borrow before you apply for a loan.

Prepaid Expenses: Necessary to create an escrow account or to adjust the seller’s existing escrow account. Can include taxes, hazard insurance, private mortgage insurance and special assessments.

Prepayment: A privilege in a mortgage permitting the borrower to make payments in advance of their due date.

Prepayment Penalty: Money charged for an early repayment of debt, generally three years.  In our opinion, you should never agree to a pre-payment penalty.  These are generally required by mortgage brokers  and not banks or other large lending institutions.   A pre-payment penalty protects the broker from having to buy back the loan or repay commissions in the event the borrower refinances the loan before the pre-payment penalty expires.

Principal: The original cash put into an investment.

Private Mortgage Insurance (PMI): In the event that you do not have a 20 percent down payment, lenders will allow a smaller down payment – as low as 3 percent in some cases. With the smaller down payment loans, however, borrowers are usually required to carry private mortgage insurance. Private mortgage insurance will usually require an initial premium payment and may require an additional monthly fee depending on your loan’s structure.  Be aware that PMI protects the lender, not the borrower, in the event of default.  So if you are paying PMI, you are paying to protect your lender in the event that you don’t repay the mortgage.

PMI can often be eliminated once the homeowner has paid down the mortgage so  that they have 20% or more equity in the home.  In some areas of the country this is also referred to as MIP – Mortgage Insurance Protection, or as MI for Mortgage Insurance.

Public Record Data: Included as part of the credit report, this information is limited to tax liens, lawsuits and judgments that relate to the consumer’s debt obligations.

Q

Qualifying Ratios: Calculations used to determine if a borrower can qualify for a mortgage. They consist of two separate calculations: a housing expense as a percent of income ratio and total debt obligations as a percent of income ratio.

R

Rate Lock: A commitment issued by a lender to a borrower or another mortgage originator guaranteeing a specified interest rate and lender costs for a specified period of time, generally 30-45 days.  There is often a fee to “lock” a rate.  If you choose not to lock your rate (because you expect rates to decline, or you don’t wish to pay the fee), then you have chosen to let your rate “float”.

RateNerd: independent web site that finds the best CD rates, mortgage rates and bank deals every day.  RateNerd.com posts a “Daily Deal” on its home page and also delivers these deals via email, RSS, or Twitter.   The site shows money market rates, high yield savings, certificates of deposit, mortgage refinance and other bank rate offers. RateNerd.com’s credit section explains how credit reports, credit scores, credit repair and charge off’s work.

Realtor®: A real estate broker or an associate holding active membership in a local real estate board affiliated with the National Association of Realtors.

Real Estate Agent: A person licensed to negotiate and transact the sale of real estate on behalf of the property owner.

Reconciliation: adjusting the difference between the balance in your checkbook and your bank statement.

Recording Fees: Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records.

Refinance: Obtaining a new mortgage loan on a property already owned often to replace existing loans on the property.

Rescission: The cancellation of a contract. With respect to mortgage refinancing, the law that gives the homeowner three days to cancel a contract in some cases once it is signed if the transaction uses equity in the home as security.

RESPA: Short for the Real Estate Settlement Procedures Act. RESPA is a federal law that allows consumers to review information on known or estimated settlement costs once after application and once prior to or at settlement. The law requires lenders to furnish the information after application only.

Return: The annual return on an investment, expressed as a percentage of the total amount invested. Also called rate of return.

Risk: The quantifiable likelihood of loss or less-than-expected returns.

Risk tolerance: The measurement of an investor’s willingness to suffer a decline (or repeated declines) in the value of investments while waiting and hoping for them to increase in value.

Roth IRA: An individual retirement account to which contributions are not tax-deductible. Withdrawals from the account are tax-free.

Rule of 72: The estimation of doubling time on an investment, for which the compounded annual rate of return times the number of years must equal roughly 72 for the investment to double in value.

S

Satisfaction of Mortgage: The document issued by the mortgagee when the mortgage loan is paid in full.  Also called a “release of mortgage.”

Savings account: A deposit account at a bank or savings and loan which pays interest, but cannot be withdrawn by check writing.

Savings bond: A registered, non-callable, non-transferable bond issued by the U.S. Government, and backed by its full faith and credit.

Second Mortgage: A mortgage made subsequent to another mortgage and subordinate to the first one.  Generally this is a Home Equity Loan or a Home Equity Line of Credit.

Secondary Mortgage Market: The place where primary mortgage lenders sell the mortgages they make to obtain more funds to originate more new loans. It provides liquidity for the lenders.  This is where your loan is “sold” after you have closed on the mortgage loan.

Securities: Shares of stock, bonds, or any kind of financial asset that can be traded.

Seller Carry Back: An agreement in which the owner of a property provides financing, often in combination with an assumable mortgage. See owner financing.

Servicer: An organization that collects principal and interest payments from borrowers and manages borrower escrow accounts. The servicer often services mortgages that have been purchased by an investor in the secondary mortgage market.  If your loan is “sold”, then the company who purchased your loan becomes your new servicer.

Many homeowners become upset when their loan is sold – they often take it personally and feel betrayed, or that something is wrong with their loans since the originating lender decided to sell them off.   There is nothing personal in the decision to sell a mortgage to another investor – and unless you are working with a bank this is a generally accepted practice in the mortgage industry.  The inconvenience for the borrower is in having to keep up with who you need to make payments to, and to ensure your escrows are handled correctly.

Servicing: All the steps and operations a lender performs to keep a loan in good standing, such as collection of payments, payment of taxes, insurance, property inspections and the like.

Settlement/Settlement Costs: See closing/closing costs

Simple Interest: Interest which is computed only on the principle balance.

Small cap stock: Companies with a market capitalization of $1 billion or less.

Stock: An ownership share in a corporation. Each share of stock is a proportional stake in the corporation’s assets and profits, and purchasing a stock should be thought of as owning a proportional share of the successes and failures of that business.

Stop payment: an order by a depositor to a bank to refuse payment of a check that has already been presented to another party but has not yet cleared

Subordination: If you are refinancing your first mortgage and have an existing second or home equity line, one option is to “subordinate” the second mortgage: request that your second mortgage holder go back into the second lien position when you replace your existing first mortgage with the new refinance loan.

Survey: A measurement of land, prepared by a registered land surveyor, showing the location of the land with reference to known points, its dimensions, and the location and dimensions of any buildings.

Sweat Equity: Equity created by a purchaser performing work on a property being purchased.

T

Third Party Origination: When a lender uses another party to completely or partially originate, process, underwrite, close, fund, or package the mortgages it plans to deliver to the secondary mortgage market.

Time horizon: The length of time a sum of money is expected to be invested.

Title: A document that gives evidence of an individual’s ownership of property.

Title Insurance: A policy, usually issued by a title insurance company, which insures a home buyer against errors in the title search. The cost of the policy is usually a function of the value of the property, and is often borne by the purchaser and/or seller. Policies are also available to protect the lender’s interests.

Title Search: An examination of municipal records to determine the legal ownership of property. Usually is performed by a title company.

Total Expense Ratio: Total obligations as a percentage of gross monthly income including monthly housing expenses plus other monthly debts.

Trade line: Industry term for an entry by a credit grantor to a consumer’s credit history maintained by a credit reporting agency. A trade line describes the consumer’s account status and activity. Trade line information includes names of companies where the applicant has accounts, dates accounts were opened, credit limits, types of accounts, balances owed and payment histories.   These will appear on your credit report and impact your credit score.

Treasury bill: A short-term discounted security issued by the U.S. government, with a maturity of one year or less.

Treasury bond: A long-term security issued by the U.S. government, with a maturity of 10 years or more.

Treasury note: An intermediate-term security issued by the U.S. government, having a maturity of 1 to 10 years.

Truth in Lending (TIL): A federal law requiring disclosure of the Annual Percentage Rate (APR) to home buyers shortly after they apply for the loan. Also known as Regulation Z.

U

Underwriting: The decision whether to make a loan to a potential home buyer based on credit, employment, assets, and other factors and the matching of this risk to an appropriate rate and term or loan amount.  In the case of insurance underwriting, risk factors include health history, age, and other statistical data.

Usury: Interest charged in excess of the legal rate established by law.

V

VA Loan: A long term, low-or-no down payment loan guaranteed by the Department of Veterans Affairs. Restricted to individuals qualified by military service or other entitlements.

VA Mortgage Funding Fee: A premium of up to 1-7/8 percent (depending on the size of the down payment) paid on a fixed rate loan. On a $75,000 fixed-rate mortgage with no down payment, this would amount to $1,406 either paid at closing or added to the amount financed.

Verification of Deposit (VOD): A document signed by the borrower’s financial institution verifying the status and balance of his/her financial accounts.

Verification of Employment (VOE): A document signed by the borrower’s employer verifying his/her position and salary.

Victim Statement: A statement that can be added to a consumer’s credit report to alert credit grantors that a consumer’s identification has been used fraudulently to obtain credit. The statement requests the credit grantor to contact the consumer by telephone before issuing credit. It remains on file for 7 years unless the consumer requests that it be removed.

W

Warehouse Fee: Many mortgage firms must borrow funds on a short term basis in order to originate loans which are to be sold later in the secondary mortgage market (or to investors). When the prime rate of interest is higher on short term loans than on mortgage loans, the mortgage firm has an economic loss which is offset by charging a warehouse fee.

Withdrawal: money that is removed from a bank account.

Wire Transfer: Electronic transfer of money.

Y

Yield: The income relative to the current share price that a company will pay out to the shareholders on a regular basis, usually expressed in percentage terms.