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Glossary

ADJUSTABLE RATE MORTGAGE (ARM) - is a mortgage in which the interest rate is adjusted periodically based on a preselected index. Also sometimes known as the renegotiable rate mortgage, the variable rate mortgage or the Canadian rollover mortgage.

AMORTIZATION - means loan payment by equal periodic payments calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance.

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

ANNUAL PERCENTAGE RATE (APR) - an interest rate reflecting the cost of a mortgage as a yearly rate. This rate is likely to be higher than the stated note rate or advertised rate on the mortgage, because it takes into account points and other credit costs. This APR allows homebuyers to compare different types of mortgages based on the annual cost for each loan.

APPRAISAL - an estimate of the value of property, made by a qualified professional called an "appraiser. "

APPRAISER - A person qualified by education, training, and experience to estimate the value of real property and personal property.

APPRECIATION - An increase in the value of a property due to changes in market conditions or other causes. The opposite of depreciation.

ASSET - Anything of monetary value that is owned by a person. Assets include real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, and so on).

BALLOON (PAYMENT) MORTGAGE - usually a short-term fixed-rate loan which involves small payments for a certain period of time and one large payment for the remaining amount of the principal at a time specified in the contract.

BANKRUPT - A person, firm, or corporation that, through a court proceeding, is relieved from the payment of all debts after the surrender of all assets to a court.

BASIS POINT - A basis point is 1/100th of a percentage point. For example, a fee calculated as 50 basis points of a loan amount of $100,000 would be 0.50% or $500.

BINDER - A preliminary agreement, secured by the payment of an earnest money deposit, under which a buyer offers to purchase real estate.

BI WEEKLY PAYMENT MORTGAGE - A mortgage that requires payments 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 that would be required if the loan were a standard 30-year fixed-rate mortgage, and they are usually drafted from the borrower's bank account. The result for the borrower is a substantial savings in interest.

BRIDGE LOAN - A form of second trust that is collateralized by the borrower's present home (which is usually for sale) in a manner that allows the proceeds to be used for closing on a new house before the present home is sold. Also known as "swing loan."

BROKER - an individual in the business of assisting in arranging, funding or negotiating contracts for a client but who does not loan the money himself. Brokers usually charge a fee or receive a commission for their services.

BUY-DOWN - when the lender and/or the homebuilder subsidizes 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.

CAPS (INTEREST) - consumer safeguards which limit the amount the interest rate on an adjustable rate mortgage may change per year and/or the life of the loan

CAPITAL IMPROVEMENT - Any structure or component erected as a permanent improvement to real property that adds to its value and useful life.

CASH-OUT REFINANCE - A refinance transaction in which the amount of money received from the new loan exceeds the total of the money needed to repay the existing first mortgage, closing costs, points, and the amount required to satisfy any outstanding subordinate mortgage liens. In other words, a refinance transaction in which the borrower receives additional cash that can be used for any purpose.

CERTIFICATE OF ELIGIBILITY - A document issued by the federal government certifying a veteran's eligibility for a Department of Veterans Affairs (VA) mortgage.

CERTIFICATE OF REASONABLE VALUE (CRV) - A document issued by the Department of Veterans Affairs (VA) that establishes the maximum value and loan amount for a VA mortgage.

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 costs of closing usually are about 3 percent to 6 percent of the mortgage amount.

CONSTRUCTION LOAN - a short-term interim loan for financing the cost of construction. The lender advances funds to the builder at periodic intervals as the work progresses.

DEBT-TO-INCOME RATIO - 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 net effective income (FHA/VA loans) or gross monthly income (conventional loans). See housing expenses-to-income ratio.

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 - The document used in some states instead of a mortgage; title is conveyed to a trustee.

DELINQUENCY - failure to make payments on time. This can lead to foreclosure.

DEPARTMENT OF VETERANS AFFAIRS (VA) - an independent agency of the federal government which guarantees long-term, low-or no-downpayment mortgages to eligible veterans.

DUE-ON-SALE-CLAUSE - a provision in a mortgage or deed of trust that allows the lender to demand immediate payment of the balance of the mortgage if the mortgage holder sells the home.

EASEMENT - A right of way giving persons other than the owner access to or over a property.

EFFECTIVE AGE - An appraiser's estimate of the physical condition of a building. The actual age of a building may be shorter or longer than its effective age.

EFFECTIVE GROSS INCOME - Normal annual income including overtime that is regular or guaranteed. The income may be from more than one source. Salary is generally the principal source, but other income may qualify if it is significant and stable.

EQUAL CREDIT OPPORTUNITY ACT (ECOA) - is 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.

ESCROW - refers to a neutral third party who carries out the instructions of both the buyer and seller to handle all the paperwork of settlement or "closing." Escrow may also refer to an account held by the lender into which the homebuyer pays money for tax or insurance payments.

FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC) - also called "Freddie Mac," is a quasi-governmental agency that purchases conventional mortgages from insured depository institutions and HUD-approved mortgage bankers.

FEDERAL HOUSING ADMINISTRATION (FHA) - a division of the Department of Housing and Urban Development. Its main activity is the insuring of residential mortgage loans made by private lenders. FHA also sets standards for underwriting mortgages.

FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) - also known as "Fannie Mae." A tax-paying corporation created by Congress that purchases and sells conventional residential mortgages as well as those insured by FHA or guaranteed by VA. This institution, which provides funds for one in seven mortgages, makes mortgage money more available and more affordable.

FHA LOAN - a loan insured by the Federal Housing Administration open to all qualified home purchasers. While there are limits to the size of FHA loans, they are generous enough to handle moderate-priced homes almost anywhere in the country.

FHA MORTGAGE INSURANCE - requires a small fee (up to 3.8 percent of the loan amount) paid at closing or a portion of this fee added to each monthly payment of an FHA loan to insure the loan with FHA. On a 9.5 percent $75,000 30-year fixed-rate FHA loan, this fee would amount to either $2,850 at closing or an extra $31 a month for the life of the loan. In addition, FHA mortgage insurance requires an annual fee of 0.5 percent of the current loan amount, paid in monthly installments. The lower the downpayment, the more years the fee must be paid.

FINDER'S FEE - A fee or commission paid to a mortgage broker for finding a mortgage loan for a prospective borrower.

FIRST ADJUSTMENT - When you can expect the first rate adjustment in your ARM loan.

FIRST MORTGAGE - A mortgage that is the primary lien against a property.

FIXED-RATE MORTGAGE (FRM) - A mortgage in which the interest rate does not change during the entire term of the loan.

GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) - also known as "Ginnie Mae," provides sources of funds for residential mortgages, insured or guaranteed by FHA or VA.

GRADUATED PAYMENT MORTGAGE (GPM) - a type of flexible payment mortgage where the payments increase for a specified period of time and then level off. This type of mortgage has negative amortization built into it.

GUARANTY - a promise by one party to pay a debt or perform an obligation contracted by another if the original party fails to pay or perform according to a contract.

HOUSING EXPENSES-TO-INCOME RATIO - the ratio, expressed as a percentage, which results when a borrower's housing expenses are divided by his/her net effective income (FHA/VA loans) or gross monthly income (conventional loans). See debt-to-income ratio.

IMPOUND - that portion of a borrower's monthly payments held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also known as reserves.

INDEX - a published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments (such as one- three-, and five-year U.S. Treasury security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average cost-of-funds incurred by savings and loans), which is then used to adjust the interest rate on an adjustable mortgage up or down.

LIEN - a claim upon a piece of property for the payment or satisfaction of a debt or obligation.

LOAN-TO-VALUE RATIO - the relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage.

MARGIN - the amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate.

MARKET VALUE - the highest price that a buyer would pay and the lowest price a seller would accept on a property. Market value may be different from the price a property could actually be sold for at a given time.

NEGATIVE AMORTIZATION - occurs when your monthly payments are not large enough to pay all the interest due on the loan. This unpaid interest is added to the unpaid balance of the loan. The danger of negative amortization is that the homebuyer ends up owing more than the original amount of the loan.

NET EFFECTIVE INCOME - the borrower's gross income minus federal income tax.

NONASSUMPTION CLAUSE - a statement in a mortgage contract forbidding the assumption of the mortgage with out the prior approval of the lender.

ORIGINATION FEE - the fee charged by the 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.

PREPAYMENT PENALTY - money charged for an early repayment of debt. Prepayment penalties are allowed in some form (but not necessarily imposed) in 36 states and the District of Columbia.

PRINCIPAL - the amount of debt, not counting interest, left on a loan.

PRIVATE MORTGAGE INSURANCE (PMI) - in the event that you do not have a 20 percent downpayment, lenders will allow a smaller downpayment - as low as 5 percent in some cases. With the smaller downpayment loans, however, borrowers are usually required to carry private mortgage insurance. Private mortgage insurance will require an initial premium payment of 1.0 percent to 5.0 percent of your mortgage amount and may require an additional monthly fee depending on your loan's structure. On a $75,000 house with a 10 percent downpayment, this would mean either an initial premium payment of $2,025 to $3,375, or an initial premium of $675 to $1,130 combined with a monthly payment of $25 to $30.

QUALIFYING RATIOS - The ratio of your fixed monthly expenses to your gross monthly income, used to determine how much you can afford to borrow. The fixed monthly expenses would include PITI along with other obligations such as student loans, car loans, or credit card payments.

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.

REVERSE ANNUlTY MORTGAGE (RAM) - a form of mortgage in which the lender makes periodic payments to the borrower using the borrower's equity in the home as security.

SHARED APPRECIATION MORTGAGE (SAM) - a mortgage in which a borrower receives a below-market interest rate in return for which the lender (or another investor such as a family member or other partner) receives a portion of the future appreciation in the value of the properly. May also apply to mortgages where the borrower shares the monthly principal and interest payments with another party in exchange for a part of the appreciation.

SELLER CARRY BACK - An agreement in which the owner of a property provides financing, often in combination with an assumed mortgage.

STATED/DOCUMENTED INCOME - Some loan products require only that applicants "state" the source of their income without providing supporting documentation such as tax returns.

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.

TITLE INSURANCE - a policy, usually issued by a title insurance company, which insures a homebuyer against errors in the title search. The cost of the policy is usually based on the value of the property, and is often borne by the purchaser and/or seller.

TITLE SEARCH - An investigation into the history of ownership of a property to check for liens, unpaid claims, restrictions or problems, to prove that the seller can transfer free and clear ownership.

TOTAL DEBT RATIO - Monthly debt and housing payments divided by gross monthly income. Also known as Obligations-to-Income Ratio or Back-End Ratio.

TRUTH-IN-LENDING - a federal law requiring disclosure of the Annual Percentage Rate to homebuyers shortly after they apply for the loan.

TWO-STEP MORTGAGE - a mortgage in which the borrower receives a below-market interest rate for a specified number of years (most often seven or 10), and then receives a new interest rate adjusted (within certain limits) to market conditions at that time. The lender sometimes has the option to call the loan due with 30 days notice at the end of seven or 10 years. Also called "Super Seven" or "Premier mortgage."

VA LOAN - a long-term, low- or no downpayment loan guaranteed by the Department of Veterans Affairs. Restricted to individuals qualified by military service or other entitlements.

VA MORTGAGE FlNDING FEE - a premium of up to 1 7/8 percent (depending on the size of the downpayment) paid on a VA-backed loan. On a $75,000 30-year fixed-rate mortgage with no downpayment, 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.

WRAPAROUND - results when an existing assumable loan is combined with a new loan, resulting in an interest rate somewhere between the old rate and the current market rate. The payments are made to a second lender or the previous homeowner, who then forwards the payments to the first lender after taking the additional amount off the top.