Glossary of Home Equity and Mortgage Terms
Abstract - A historical summary of all recorded transactions that affect the title to a property. Our attorney or a title company reviews the abstracts to determine if there are any problems affecting the title to the property. All such problems must be cleared up before a buyer can be issued a clear and insurable title.
Annual Percentage Rate (APR) - The effective rate of interest for a loan per year. This rate is typically higher that the note rate because it takes into account closing costs. This is one way for our members to compare home equity loans offered by other lenders. However, the APR is sometimes calculated differently by other lenders. It can include interest, mortgage insurance, and certain points or credit costs.
Appraisal - A third party’s opinion of a property’s fair market value, based on an appraiser’s knowledge, experience, and analysis of the property on a specific date.
Appraiser - An individual qualified by education, training, and experience to estimate the value of property.
Appraised Value - An opinion of the property’s fair market value, based on an appraiser’s inspection and analysis of the property.
Appreciation - The increase in the value of the property due to changes in the market conditions, inflation, or other causes. It increases the amount of equity, making more available to be borrowed for the home equity loan.
Assessed Value - The value placed on a property by the local tax assessor for the sole purpose of taxation.
Asset - Anything that has monetary or exchange value that is owned by a member, business or institution. Assets include real estate property, personal property, vehicles, and enforceable claims against others (bank accounts, stocks, mutual funds, etc.). AmeriCU is interested in the amount and value of any assets because they can be used as collateral for loans.
Balloon Loan - A loan that allows borrowers to make interest-only payments, or payments of some combination of interest and principal, until the loan term expires. Then the balance must either be paid off or refinanced at the end of the term.
Bankruptcy - Bankruptcy is a legal status of an insolvent person (one that cannot repay the debts owed to creditors). In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor.Although there are six types of bankruptcy, most people file Chapter 7 (also known as straight bankruptcy) in which the person surrenders non-exempt property to a bankruptcy trustee who then sells it and distributes the funds to creditors. A bankruptcy remains on a person's credit report for seven years.
Bankruptcy Discharged - A court order terminating bankruptcy proceedings on old debts.
Bankruptcy Dismissed - A court order that denied one’s bankruptcy petition making the debtor still liable for all debts.
Cap - A limit on how much a variable interest rate can increase during the life of a HELOC. For example, on a HELOC with the prime rate as its index, no matter how high the Prime rate increases, the rate on the line may never increase above the stated rate cap. AmeriCU's cap currently is 15%.
Closed-End Loan - A home equity loan that has a fixed rate and a specific term.
Closing - The day when all of the home equity documents for the member’s loan are signed, dated, and notarized. Note: After the three-day Right to Rescind period and the recording of the mortgage note are complete, then AmeriCU can disburse the loan proceeds to the member.
Closing Costs - Costs incurred by a borrower in the course of finalizing a home equity loan.
Co-borrower - An additional individual who is both obligated to pay a loan and has title to a property.
Collateral - The pledge of a member’s home to guarantee repayment of the home equity loan.
Credit Score - A number between 300 and 800, that reflects the credit history by a member’s credit report. The Fair Credit Reporting Act (FCRA) requires each of the nationwide consumer reporting companies — Equifax, Experian, and TransUnion — to provide you with a free copy of your credit report, at your request, once every 12 months. Your credit report includes information on where you live, how you pay your bills, and whether you’ve been sued or arrested, or have filed for bankruptcy. Nationwide consumer reporting companies sell the information in your report to creditors, insurers, employers, and other businesses that use it to evaluate your applications for credit, insurance, employment, or renting a home.
Debt Consolidation - A very popular use for the home equity loan or line, in which members move higher interest rate debt (such as credit card balances) to a lower interest rate home equity loan or line. For example, moving credit card debt with an an interest rate of 18% to a home equity line with a 5% or 6% interest rate could save a member thousands of dollars and shorten the pay-back period considerably.
Debt-to-income Ratio - An indicator or guideline used to verify a member’s ability to take on new debt. This ratio is the relationship between a member’s gross (before taxes) monthly income and the amount of monthly debt payments (e.g., credit card balances, car loans, and mortgage/rent payments). AmeriCU Loan Officers use this ratio in the underwriting process to help determine whether a member should be able to borrow, and if so, at what interest rate.
Deed - A formal written instrument by which the title of a real property is transferred from one owner to another. The deed should contain an accurate description of the real property, and it should be signed and witnessed according to State laws. There are two parties to a deed: the grantor and the grantee.
Delinquency - The member’s failure to make their payments on time. This can lead to default and foreclosure.
Depreciation - The decline in the value of a property due to wear and tear, adverse changes in the neighborhood, or any other reason.
Disclosures - Information that must be given to our members regarding their financial dealings with AmeriCU. The Home Equity booklet should be given to any member applying for a home equity loan. For a HELOC, the disclosure entitled "When Your Home is On the Line" should be given during the application meeting.
Draw Period - On a home equity line of credit (HELOC), the draw period is a fixed time when a member can make withdrawals from the line . Once the draw period expires (e.g., 10 years), the home equity line will be converted to a 15-year repayment period.
Drive-by Appraisal - AmeriCU uses this method to assess the fair market value of a member’s home in which an appraiser literally drives by the property, but does not enter it. The member would be approved for a home equity loan contingent on a satisfactory appraisal. The appraiser will look at a number of factors to estimate the "market value" of a house, including:
- How does the house compare to other houses in the neighborhood (number of rooms, size, type of construction etc…)?
- What have other houses sold for recently in the neighborhood?
- What is happening to the overall neighborhood? Is it depreciating or appreciating?
- What is the overall appearance of the house?
- Has the house been kept in good repair?
- What is the quality of schools in the neighborhood?
- What would it cost to construct this house today?
Encumbrance - Anything that affects or limits the fee simple title to a property, such as mortgages, zoning ordinances, claims, liens, a pending legal action, leases, easement rights, unpaid taxes or restrictions.
Equal Credit Opportunity Act (ECOA) - A federal law that requires AmeriCU and other creditors to make credit equally available to all members without discrimination based on race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs.
Equity - Equity is the difference between the home’s fair market value and the unpaid principal balance of the mortgage and any liens. Equity increases as the mortgage is paid down or as the property appreciates in value.
Escrow Analysis - One a year, AmeriCU and all mortgage lenders perform an "escrow analysis" on the mortgage loan to ensure that we are collecting the correct amount of money from the member’s monthly payment to cover anticipated expenses, such as homeowner’s insurance and taxes.
Fair Market Value - The likely selling price of a home. In a mortgage or a home equity loan, fair market value is often determined by an appraisal.
Federal Truth in Lending Act - This law requires lenders to inform a borrower about the terms of a loan, including a home equity loan, at the time a borrower is given an application. Lenders must disclose the annual percentage rate, payment terms, and what they will be charged to open the loan.
First Lien Position - Primary claim by a lender for satisfaction of outstanding debt. A first mortgage creates a first lien. Therefore, if a person defaults on their mortgage and home equity loans, the lender listed in the 1st lien position on the mortgage would get paid the balance, and whatever dollar amount is leftover would go to the home equity lender.
First Mortgage - A mortgage is in the first lien position, which takes priority over all other liens, such as a home equity loan or line.
Flood Insurance - Insurance that compensates for any physical property damage due to flooding. AmeriCU requires members to attain flood insurance if their property is located in a federally designated flood area.
Foreclosure - The legal process by which a borrower in default of their mortgage is deprived of his or her interest in the mortgaged property. This usually involves a forced sale of the property at public auction with the proceeds of the sale being applied to the mortgage debt.
Good Faith Estimate - A federally mandated notice that needs to be provided to our members at the time of application which shows the estimated closing costs, and interest charges. This notice is provided under provisions of the Federal Truth in Lending Law, commonly known as Regulation Z (Reg. Z).
Grantee - The party in the deed who is the buyer or recipient.
Grantor - The party who is the seller or the giver.
Hazard Insurance - Insurance on a property against fire and other risks. A homeowner’s policy may have additional coverage for theft, liability etc…that a fire insurance policy may not cover.
HUD-1 settlement statement - A form used at the home equity closing that provides an itemized listing of the funds that were paid at closing. Items include fees such as the appraisal, stub search, recording fees etc…
Index - A published measure of the cost of money that lenders use to calculate the home equity line of credit rate. AmeriCU uses the Prime rate.
Interest Tax Deduction - One of the main advantages of home equity loans is that the interest paid on the loan, within IRS limits, may be tax deductible. The IRS determines the eligible debt by subtracting the amount borrowed to acquire the property (the first mortgage) from the fair market value of the home. However, if the borrowed amount is used entirely to improve a home, and therefore its value, then it may be completely tax-deductible. A member should always be referred to his or her tax advisor.
Introductory (Intro) Rate - Also know as a "teaser" rate, this is a low, fixed rate – often below the Prime rate - charged for a specific length of time during the initial period of the home equity line of credit. It is offered to attract more business. The rate adjusts to the indexed rate (Prime) plus a margin (currently 0.00% or 0.25%) after the introductory period.
Judgement - The formal decision of a court upon the respective rights and claims of the parties to an action or suit. After a judgment has been entered and recorded with the county recorder, it usually becomes a general lien on the homeowner’s property. (Also spelled "Judgment".)
Legal description - A property’s description recognized by law as sufficient to locate and identify said property.
Lien - A monetary legal claim against a property that must be paid off.
Loan-to-Value (LTV) Ratio - The amount of the new loan or line of credit added to the balance of any existing loans and then divided by the fair market value of your home. For example, if a home is worth $100,000 and the first mortgage amount is $80,000, the home has an 80% LTV.
Minimum Draw - AmeriCU requires that each subsequent "draw" (withdrawal) on the HELOC be no less than $250.00. We currently do not require any minimum advance (draw).
Minimum Payment - The minimum amount a member must pay on his or her Home Equity Line of Credit. During the first five years, a member pays interest-only payments (plus insurance if applicable) with the option of paying additional to principal. Between six to ten years, a member pays interest due or 1% of the balance (plus insurance if applicable), whichever is higher (however, the minimum payment will be $100). Then the draw period ends and the member begins their repayment period during the 11th – 25th years.
Mortgage Note - A legal document that obligates our member to repay a loan at a stated interest rate during a specific period of time.
Note - A written agreement that acknowledges the loan debt and promises to pay.
Open-End Loan - A home equity line of credit that has an introductory (intro) rate for a specific period of time, followed by a variable rate (based the Prime rate) plus a margin. The member may draw against the line of credit for ten years with a 15-year repayment period.
Prepayment Penalty - If a member pays off a Home Equity Loan or pays off and closes a Home Equity Line of Credit within the first three years of the date of closing, the member will be responsible for full payment (prepayment penalty) of the closing costs incurred by AmeriCU. (See the Member’s Closing Cost Disclosure)
Principal Balance - The outstanding balance on a loan, which doesn’t include interest and other charges.
Quitclaim Deed - A deed that transfers the interest amount that the maker of the deed may have in the property. A quitclaim deed is often to clear the title when the grantor’s interest in a property is questionable. By accepting such a deed, the buyer assumes all the risks. Such a deed doesn’t make a warranty as to the title, but simply transfers to the buyer whatever interest the grantor has.
Recording Fees - Recording fees are charged by the County recorders office for the filing of the Mortgage Note to make it a matter of public record.
Refinancing - The process whereby a member pays off one loan with the proceeds of another loan.
Repayment period - In a home equity line of credit, after the ten-year draw period, the next 15 years is considered the repayment period. During the repayment period, a member cannot draw from the home equity line of credit.
Right to Rescission Period - Under provisions of the Truth in Lending Act, a member has a right to cancel the loan with three business days of signing the note. Saturdays are included, Sundays & holidays are excluded.
Schedule A - A one-page document that includes a property’s legal description.
Second Mortgage - Most often referred to as a home equity. When a member takes out a second mortgage or a "home equity loan," they will have two active mortgages. The Credit Union is listed in the second lien position, and therefore would collect the amount owed on the loan behind the first mortgage in the event of a default.
Tax Deduction - See interest rate deduction.
Teaser Rate - See introductory (intro) rate.
Truth in Lending Act - Requires lenders to disclose the terms and costs of all loan plans, including the annual percentage rate, points and fees, miscellaneous fees, the total of the principal amount being financed; payment due date and terms, late payment fees; features of variable-rate loans, including the highest rate the lender would charge, how it is calculated and the resulting monthly payment; total finance charges; whether the loan is assumable; application fee; annual or one-time service fees; pre-payment penalties; to the member. In general, neither the lender nor anyone else may charge a fee until you have received this information. Disclosures need to be given to the member at the initial meeting and completed during the closing prior to the loan being opened. Also this act gives the member three days from the day the closing to cancel the transaction. See Right to Rescission Period.
Variable Rate - Most home equity lines of credit have a rate that fluctuates based on the Prime rate changes.
Wall Street Journal Prime Rate - AmeriCU uses the fluctuating Prime rate as published in the Wall Street Journal, which surveys several banks to arrive at its number. We take the rate and add a margin to it (currently 0.00% or 0.25%). In general, this rate may be adjusted quarterly.