A lay person's guide to mortgage terminology and lender jargon

These definitions are excerpted from
 The Cooperative Refinancing Handbook,
The Layperson's Plain English Guide to Refinancing an Underlying Mortgage
 (Fifth Edition) by Patrick B. Niland.
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AMORTIZATION RATE
The ratio (expressed a percentage of the periodic principal repayment that is included in each monthly loan payment to the total principal amount borrowed. It is the difference between the mortgage or loan constant and the nominal or stated interest rate on the loan. In the previous example of a $1 million loan, the nominal or stated interest rate is 10%, the loan constant is 10.9044%, and the amortization rate is 0.9044%

BALLOON
This is the unpaid, unamortized, portion of the loan amount which falls due and must be repaid in one lump sum at the end of the loan term, In the earlier example of a I million five-year loan with a 25-year amortization schedule, a balloon payment of $941,638 would be due at the end of the filth year (unless the loan had been prepaid or refinanced at an earlier date). (See also Bridge Loan and Bullet Loan.)

BASIS POINT
This is a technical term used by people who work in the financial markets. A basis point equals one one-hundredth a percentage Point. Alternatively, 1% contains 100 basis points. (See also Discount Point, Point, Margin, and Spread.)
 

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CAPITALIZATION
A mathematical process which estimates the market value of a property as a multiple of its annual net income based on a certain rate of return. This estimate of market value can be expressed in formula form as:

Market Value = Annual Net Income (in dollars) + Rate of Return (as a decimal)

Example:
A property with an annual net income of $100,000 $1 million to an investor seeking 10% annual rate of return.

Market Value = $ 100,000 / .10 = $1 .000,000

CAPITALIZATION RATE (or Cap Rate) The rate of return that a property's net income generated on its owner's investment in that property (10% in the above example).

DEBT SERVICE The amount of money that a borrower must pay every month in order to meet the requirements of the original requirements and repay the amount borrowed. It usually includes interest, principal and escrow amounts for real estate taxes and hazard insurance.

ENCUMBRANCE
Any claim or lien against a property.

HYPOTHECATE
To place alien or mortgage on a property by pledging its security or collateral for a loan.

INDEX
The basis which many lenders used to set the interest rate on their loans. Most lenders use as their index a financial indicator which is reported regularly in the financial pages of major newspapers. The rate U.S. Treasury securities of the same maturity as the Federal Home Loan Bank "advance rate". and the "prime rate" are commonly used indexes. The lender then adds to the index a spread of a certain number of basis points (fractions of a percentage point) to determine the interest rate for the loan. For example, the interest rate on a five-year loan could be set "priced" at the rate of 5-year U.S. Treasury notes plus 2.50% (i.e., plus 250 basis points.)

LOAN-TO-VALUE (LTV)
The relationship or ratio between (1) the purchase price or appraisal value of a property and (2) the amount of a mortgage loan encumbering that properly. It is usually expressed as a percentage.

   
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