Definitions for a few of the mortgage terms used on this website.
A 5-year ARM, also known as a 5/1 ARM, is a loan with a fixed rate for the first five years. After that, it has an adjustable rate that changes once each year for the remaining life of the loan. Because the interest rate can change after the first five years, the monthly payment may also change.
A conforming loan is a mortgage that is equal to or less than the dollar amount established by the limit set by the Federal Housing Finance Agency (FHFA) and meets the funding criteria of Freddie Mac and Fannie Mae. For borrowers with excellent credit, conforming loans are advantageous due to the low-interest rates affixed to them.
Conventional loans are often confused with conforming loans but, although the two types overlap, they are not the same. A conventional home loan is a mortgage that is not insured or guaranteed by the government (such as FHA or VA loans). In short, while all conforming loans are conventional, not all conventional loans qualify as conforming.
Federal Housing Administration (FHA) loans are insured by the U.S. Government through the U.S. Department of Housing and Urban Development, also called HUD. FHA loans offer an excellent start to first-time home buyers, with options such as a low down payment or low closing costs.
The Federal Housing Finance Agency (FHFA) is an independent federal agency established under the Housing and Economic Recovery Act (HERA) of 2008. The FHFA’s responsibilities include overseeing Fannie Mae and Freddie Mac, as well as the 11 Federal Home Loan (FHL) banks.
A fixed-rate mortgage (FRM) is a fully amortizing mortgage loan where the interest rate on the note remains the same through the term of the loan, as opposed to loans where the interest rate may adjust or “float.” As a result, payment amounts and the duration of the loan are fixed.
The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a United States government-sponsored enterprise (GSE) and, since 1968, a publicly traded company.
Founded in 1938 during the Great Depression as part of the New Deal, the corporation’s purpose is to expand the secondary mortgage market by securitizing mortgages in the form of mortgage-backed securities.
This allows lenders to reinvest their assets into more lending and in effect increasing the number of lenders in the mortgage market by reducing the reliance on locally based savings and loan associations.
Its brother organization is the Federal Home Loan Mortgage Corporation (FHLMC), better known as Freddie Mac.
fees and points
Origination fees and discount points charged by the lender at settlement. One point equals one percent of the loan amount.
The Federal Home Loan Mortgage Corporation (FHLMC), known as Freddie Mac, is a public government-sponsored enterprise (GSE), headquartered in Tysons Corner, Virginia. Freddie Mac makes homeownership and rental housing more accessible and affordable.
Operating in the secondary mortgage market, Freddie Mac keeps mortgage capital flowing by purchasing mortgage loans from lenders so they in turn can provide more loans to qualified borrowers. Their mission is to provide liquidity, stability, and affordability to the U.S. housing market.
Government loans are mortgages that are insured or backed by the federal government. These types of loans protect the lender if you don’t pay back the money you borrow. This makes it a lot easier for lenders to offer potential borrowers lower interest rates. Some types of government-insured loans include those offered by:
- Federal Housing Administration (FHA)
- U.S. Department of Agriculture (USDA)
- Department of Veterans Affairs (VA)
The only reverse mortgage insured by the U.S. Federal Government is called a Home Equity Conversion Mortgage (HECM), and is only available through a lender approved by the Federal Housing Administration (FHA).
Offered by Fannie Mae, the HomeReady mortgage is designed to help lenders confidently serve today’s market of creditworthy low- to moderate-income borrowers.
The interest rate a lender would charge to lend mortgage money to a qualified borrower exclusive of the fees and points required by the lender.
Mortgages that exceed the conforming loan limit are classified as nonconforming or jumbo loans. The terms and conditions of nonconforming mortgages can vary widely from lender to lender, but the interest rates and minimum down payment for jumbo loans are typically higher because they carry greater risk for a lender.
A reverse mortgage, also called a home equity conversion mortgage (HECM), is a loan available to homeowners, 62 years or older, that allows them to convert part of their home equity into cash. It’s called a “reverse mortgage” because instead of making monthly payments to a lender — like with a traditional mortgage — the lender makes payments to the borrower.
The United States Department of Agriculture (USDA) Rural Development program helps lenders work with low and moderate income families living in eligible rural areas to make homeownership a reality.
The Veteran’s Administration (VA) loan program is guaranteed by the U.S. Government’s Department of Veteran’s Affairs. VA loans may be available to the following individuals:
- Honorably discharged veteran
- Active duty service member
- Un-remarried surviving spouse of a military service member
- National Guardsperson