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Glossary

Housing Ratio

A calculation your lender uses to determine if you can afford a particular monthly payment: The total monthly housing payment (PITI - Principal, Interest, Taxes, and Insurance) is divided by your gross monthly income, and shown as a percentage. For example: PITI = $1,500 divided by gross monthly income = $6000, Housing ratio = 25%. This example shows an ideal housing ratio, one well below typically acceptable ratios of 28%-33% for conventional loans and 29%-31% for FHA loans. Also known as a front-end, or qualifying ratio.

HUD (U.S. Department of Housing and Urban Development)

A government agency responsible for creating and operating federal housing and community development programs. It also oversees the Federal Housing Administration.

HUD-1 Uniform Settlement Statement

See Closing Statement.

Impound Account

An account set up and operated by your mortgage lender that holds a portion of your monthly mortgage payments for payment of property taxes and insurance costs. Also known as Escrow Account.

Income

The sum of money from your sources of revenue, including salary, bonuses, interest and investment income. Income is an important piece of financial information that lenders review during the mortgage approval process.

Index

A published interest rate lenders used to determine the cost of borrowing money, including the changing rates on adjustable rate mortgages (ARMs). Some commonly used indices include the One-Year Treasury Index, the London Interbank Offered Rate (LIBOR), and the 11th District Cost of Funds (COFI).

Initial Monthly Payment

Upon closing, you will be provided with the monthly mortgage payment for your loan. An escrow analysis is completed after closing and based on the findings (i.e., changes to property taxes and homeowners insurance), the monthly payment could be subject to change. Ask your mortgage representative for an estimate of your PITI before closing.

Interest Only Mortgage

A loan program that generally features lower monthly payments than a conventional fixed rate loan. Payments only consist of the interest due, no principal is charged for a specified period of time—usually five to 10 years. After the interest only period, payments include both principal and interest.

Interest Rate

The amount you pay to borrow money from a lender, calculated as a percentage of the amount borrowed.

Investment-Related Savings

The amount of your estimated total savings from buying instead of renting, invested at a rate of 8% for the number of years you plan to own your home. See our Rent vs. Buy Calculator to compute your estimated savings.

Jumbo Loan

A mortgage loan exceeding the price limit of the conforming loans that Fannie Mae and Freddie Mac can purchase. Lenders who offer jumbo loans usually charge a higher interest rate.

LIBOR (London Interbank Offered Rate)

The interest rate at which banks in the foreign market can borrow money from each other. Frequently used for setting adjustable rate mortgage interest rates.

Lien

A legal claim against a property. All liens must be satisfied before the title is transferred at closing.

Lifetime Cap

A provision of an adjustable rate mortgage (ARM) that limits the highest interest rate allowed over the life of the loan. For example, a 6% interest rate with a 5% lifetime cap cannot exceed an 11% interest rate for the life of the loan. ARM lifetime caps vary and can be used for comparison when shopping for a loan.

Liquid Assets

Cash, or assets that can be quickly converted to cash.