Glossary

Here are the most common home refinancing definitions.

AAA Rating:

This is a security rating, in terms of how secure a company, share or bond is. A triple A rating is the most secure rating that can be achieved.

Accrued Interest:

Interest that has been calculated, since the last interest payment, and is owed but is yet to be paid.

Additional Repayments:

This is any extra payment you make on top of the minimum monthly payment are required to make to service your loan.

Adjustable Interest Rate:

A loan that has an interest rate that changes through the term of the loan. It usually varies in accordance with the official market interest rate.

Amortization:

The repayments of a loan that cover both principal and interest. These repayments are scheduled in installments over a period of time.

Application Fee:

This is the fee charged by lenders to set up and process a loan application. Paid up front, it is usually refunded if the loan is declined. Also know as establishment fee.

Appraised Value:

The estimated value of the property, however not necessarily an accurate market value of your property. This is needed by lenders, offered to them as security for your new home loan.

Arrears:

When behind on your repayments this is the total of unpaid loan repayments.

Assets:

Real estate, a car, securities, cash and other items of economic value owned by an individual or corporation.

Basis Point:

One hundredth of a percentage point (0.01%) Used to measure the rate of interest.

Break Cost:

The fee charged for switching from a fixed rate home loan to a adjustable rate home loan before the fix rate period has expired.

Bridging Finance:

A short term loan that enables you to purchase a new property whilst you await the sale of your existing property.

Capital Gain

: The profit from the sale of a property. It being profitable when the sale price is higher then the purchase price.

Capped Rate Loan:

Like an adjustable rate loan but, the interest cannot exceed a specified rate for a set period of time.

Certificate of Compliance:

A certificate that confirms Council building regulations have been followed in regards to a specific property. This can be obtained from Councils for a fee.

Certificate of Title:

A certificate issued by a government body that proves ownership of a property and details dimensions and encumbrances on it e.g. mortgages.

Community Title:

A property title establishing ownership of a club house, swimming pool and other communal dwellings to be shared among all dwellers of a particular estate.

Company Title:

A property title where a company owns the whole of the property, and by purchasing shares in the company, the purchaser gets authority to reside in a particular area of the real estate.

Compound Interest:

Interest that is added to the principal before it is next calculated. Funds earning compound interest grow at an exponential rate.

Consumer Credit Code:

A law that was passed to protects individual that are borrowing money from the lenders. It gives the individuals certain rights and make the consequences of the loan more transparent by requiring lenders to provide certain information about their loan.

Contract:

A legal agreement made between to or more parties.

Contract for sale:

A contract that lists the details and conditions of a sale/purchase.

Conveyancing:

The legal process where ownership of a property is transferred from the old owner, the seller, to the new owner, the buyer.

Covenant:

An agreement in regards to the usage or nature of property on specific lands.

Credit Bureau:

An organization that records people’s credit history and is authorized to issue credit reports, on individuals, to lenders.

Credit Limit:

The maximum amount a lender sets, on a loan, for the borrower to borrow up to.

Credit Reference or Credit Report:

This is a report detailing an individual’s credit history. Used by a lender to assess the risk of lending to people, it can only be obtained with permission and from authorized credit reporting agencies.

Daily Interest:

Interest that is calculated daily.

Debt Service Ratio (DSR):

This is a measure of ones ability to service a debt. Usually expressed as a percentage of ones income in comparison to the individuals expenses.

Default:

When you fail to make a loan repayment by a specific date.

Disbursements:

Expenditure incurred by the services of third parties in relation to finalizing your mortgage e.g. solicitor and government fee’s for title searches and registration.

Early Repayment Penalty:

This a fee charged by lenders if you pay off your home loan early. Not all lenders charge this fee.

Equity:

The amount of the property value that you own. Every bit of principal you pay from your home loan becomes your equity. Any rise in the value of your property becomes your equity. To work out how much equity you have in your property take the current market value of the property and subtract the outstanding home loan balance.

Establishment Fee:

(See Application Fee definition)

Exchange of contracts:

When the buyer and the seller exchange contracts this locks them into the stated course of action. The buyer must buy and the seller must sell. However some states allow a cooling off period after the exchange of contracts.

Exit Fee:

This is a fee charged by lenders when the borrower wishes to refinance their loan with another lender, within a specific time period from the start of the loan. Not all lenders charge this fee.

Facility:

Another name for your loan account.

Fixed Interest rate:

A home loan that has its interest rate locked to a specific rate for a set period of time. Fees may apply in relation to early repayment or switching to variable rate loan.

Garnished:

Having money diverted from your income, to another party, before you receive it.

Gearing:

The ratio of property income to repayments needed to service the loan.

Government or statutory charges:

These are charges payable by an individual that have been incurred only due to various government laws, that are in place. E.g. Stamp duty and mortgage duty. The charges vary from state to state.

Guarantee:

Where a third party promises to repay the home loan if the borrower defaults. This is a form of security for the lender.

Guarantor:

The person giving the guarantee to the financial institute.

Interest:

In reference to a loan, interest is the fee charged by a lender to a borrower for the use of borrowed money. This is usually expressed as an annual percentage of the principal; the interest rate.

Interest Only Loan:

This a loan where your minimum repayments over the term of the loan only cover the interest. You are not obliged to pay any principal until the end of the loan term, where the principal is due in full.

Joint and Several Liability:

Where a loan is taken out jointly, by two or more people, all parties are responsible for the loan and must make repayments. In joint loans if one party defaults, all parties are held responsible.

Joint Tenants:

Where two or more people own a property. In the case of death to one or more parties involved the title reverts to the remaining survivors.

Lease:

A contract that allows residence of a property for a set amount of time.

Lenders Mortgage Insurance:

This is insurance that protects the lender against the borrower defaulting. The insurance premium is usually paid by the borrower, however it does not offer them any security at all. It only gives the lender some security.

Liabilities:

A person’s financial obligations or debts.

Loan Agreement:

The contract between the borrower and the lender. This document will outline all the conditions that apply to the loan.

Loan Security Duty:

Charged by the government for the registration of a mortgage. Also know as Loan Stamp Duty or Mortgage Stamp Duty.

Loan to Valuation Ratio (LVR):

This is a comparison of your loan amount to the value of your property. It is usually expressed as a percentage. For example, if you have borrowed $90,000 and your property is valued at $100,000, the LVR would be 90%

Lump Sum Payment:

These payments are additional and serve the purpose of reducing the loan amount. (See Additional Payments)

Mortgage:

A form of security for a loan over property. The lender has the right to the property if the borrower defaults on the loan repayments.

Mortgage:

The person or institute lending you the money and taking security over the property.

Mortgagor:

The person borrowing the money and providing the property as security.

Negative Gearing:

Where the income derived from the property is less then the costs involved with obtaining and maintaining the investment. The difference can be used as a tax deduction.

Overdraft:

Where a borrower can exceeds the account balance limit, to a predetermined amount, assigned to them by the lender.

Power of attorney:

Where authorization is given to another to act as ones legal representative.

Principal:

The amount borrowed, or the amount borrowed which remains unpaid. In reference to your monthly home loan payments it is the part of the monthly payment that reduces the outstanding balance of a home loan.

Principal & Interest Loan:

A loan where the interest and the principal are repaid together through the repayments.

Private Sale:

A property sale that does not go through a real estate agent.

Redraw Facility:

A facility that come with some loans where by if you have made any lump sum payments/additional repayments you can then access and use that money.

Refinancing:

Switching lenders by finalizing your current home loan with money obtained from a new home loan. This is a home refinancing loan.

Reserve Price:

A minimum price that a seller will accept from a buyer.

Search (Title search):

A search that provides you with details of ownership and encumbrances of a specific property.

Security:

Property which is used to guarantee a loan.

Settlement:

The finalization of the process needed for a buyer to take possession of property. All documents are finalized and handed over between seller, buyer and lender.

Settlement Date:

The date at with settlement (see above) will take place.

Signatory:

The person who’s signature is on an account and grants them access to it.

Survey:

A plan of the land that details the positions of buildings and boundaries.

Tenants in common:

Similar to joint tenants, in that, more then one person owns a share of the property. However unlike joint tenants the parties are free to sell or gift their share as in sole ownership.

Term:

The duration of a loan or a specific time period within that loan.

Valuation:

A report giving a professional opinion regarding the value of a property.

Vendor:

The seller of the property.

Mortgage Refinance Stalls on Higher Costs, Tightening Credit

Mortgage applications fell over the last week as mortgage rates climb and some borrowers wait for President Obama's mortgage plan to be implemented. However, there may be an even bigger contraction that will prevent any significant recovery--mortgage loan officers are finding it increasingly difficult to help borrowers.

The Mortgage Bankers Association released their index of application to purchase or refinance a home, which showed a 15.1 percent decline in the week ending February 20. The mortgage refinance index was down 19.1 percent and mortgage purchases were off 2.6 percent.

Much of this decline is explained in the MortgageLoan.com mortgage rate index that has risen to 5.21 percent from 5.11 percent a week ago. Borrowing costs are also increasing with reported increases in Fannie Mae and Freddie Mac fees, while credit standards are tightening.

Many are attributing some of the decline in mortgage applications to the hope that President Obama's recently announced mortgage plan will bring better deals. Unfortunately, there is growing concern that implementation may be a challenge.

As was seen in the failure of the Hope for Homeownership program, having a plan and getting it into troubled borrowers hands are two separate challenges.

Not only are these emerging programs very constrained, like previous loan modification programs, but they will find that the market now lacks sufficient qualified mortgage brokers and loan officers to originate the modifications.

Prior to the mortgage crisis better than 80 percent of loan originations were done by mortgage brokers. The population of licensed mortgage brokers is easily cut in half and dwindling. Major banks, like JP Morgan Chase, are completely cutting their wholesale and correspondent programs.

Owen Raun, Principle at RMC Vanguard, says that mortgage brokers and banks like his are "seeing their funding source options constrict." So, while their borrower inquiries are high they are unable to help many of the borrowers. Meanwhile, large lenders are minimizing their lending to preserve capital ratios against deteriorating mortgage portfolios.

This leaves the homeowner with few options to refinance at competitive rates or purchase a new home. There is increasingly no one to take their call as banks starve out their origination capacity. This is forcing homeowners into loan modification scams, who promise to "fast track" a solution or servicing departments that have little mortgage origination experience.

This constriction of loan origination capacity is perhaps having a bigger impact on getting trouble mortgages worked-out than rising borrowing costs and tightening credit standards. Leaving many borrowers wondering who to call and when they might get a call back.

Mortgage Tax Deduction May Be at Risk, Quietly Wounding Mortgage Payers

President Obama's recent budget proposal may wipe out your mortgage deduction. Is this the right time to cut incentives to homeownership? The housing industry, at record lows and bulging with home inventory, is loudly protesting.

Currently, households taxed at the 33 and 35 percent rate can claim mortgage deductions. However, under the newly proposed Obama Federal budget the deduction would be eliminated for anyone over the 28 percent tax bracket. In the 2009 tax year that would mean those households making more than $208,850 in taxable earnings will not be eligible to claim a mortgage deduction.

The elimination of the mortgage deduction for this income tax bracket seems to tie to the president's campaign promis to increase taxes on households earning over $250,000.

In a statement from the Mortgage Bankers Association, CEO David Kittle says the timing couldn't be worse. "This proposal could have an adverse effect on a market that is already in trouble, and this is not the time to reduce incentives for buying or refinancing a home."

Advocates of eliminating the tax deduction argue that first-time home buyers are rarely at the high-point of their earning potential. Therefore, it will have little impact on the recovery of the housing market.

However, consulting IRS data shows the disincentive may be larger than expected. Lower-income households rarely itemize deductions, so the incentive only applies to the upper two-thirds of income levels. And according to the most recent IRS study, conducted in 2003, 36 percent of those claiming a mortgage deduction had adjusted gross incomes exceeding $100,000.

The National Association of Realtors (NAR) battled a similar Bush proposal in 2005 that would have eliminated the deduction in exchange for a 15 percent tax credit. NAR argued that removing the deduction would directly decrease the value of homes, especially in high-cost areas like California. Some econometric studies demonstrate that the tax beliefs of homeownership add 5 to 7 percent to the value of a home.

Taking away key incentives for those that can afford to own homes seems counterproductive. Meanwhile, the government is considering incentives for lower-income home buying--bringing back seller down payment assistance. A program that is documented by FHA to directly correlate to increased mortgage defaults.

It seems that where the government is placing the incentives on mortgages and housing may make the housing crisis worse.

The Obama administration appears to be agressively battling the mortgage crisis with foreclosure prevention aid packages, while quietly wounding folks that continue to pay their mortgages--the only strength in the mortgage market.

Citigroup to Help Jobless with Mortgage Payments

According to a Wall Street Journal report, Citigroup will announce a program today that attempts to help unemployed homeowners make their mortgage payment.

Despite all of the emphasis on foreclosure prevention and loan modifications the latest challenge in battling the mortgage crisis is homeowners losing jobs. Citigroup is launching a new program to give these borrowers some temporary relief.

Under the new program Citigroup will give borrowers a three month reprieve on their mortgage payment obligations, lowering them to an average of $500. This program is for homeowners that have recently lost a job and are at least 60 days behind on their payments.

The Citigroup plan is expected to preempt an Obama administration announcement on guidelines for a massive new loan modification program--a new offensive on a deepening housing crisis.

Danjiv Das, the CEO of CitiMortgage told the Wall Street Journal that they expect to help thousands of borrowers and called rising unemployment "the single bigget issue facing mortgage servicers." This program is expected to be copied by other large servicers to help stem increasing foreclosures.

To qualify for the CitiMortgage program borrowers need to live in the home and the mortgage must be owned and serviced by CitiMortgage. The program is also capped at mortgages less than $417,500. Citigroup currently holds 1.4 million mortgages that it owns and services.

Many investors have considered Citigroup as a prime target for nationalization by the Federal government. Citigroup has received $45 billion in Federal funding and the US now taking a 36 percent stake in the company. This has fueled concern that the company may be making politically, but not financially sound decisions.

Das assured the Wall Street Journal that this latest loan modification program "was created by us, developed by us, and is now being implemented by us." This is not the first time Citigroup has bucked the rest of the banking industry with controversial moves in the mortgage crisis. In January, Citigroup came out all alone in endorsing legislation to allow bankruptcy-court judges to modify mortgages--so call "cram-downs."

Treasury Releases Details of Expansive Mortgage Modification Program

Today the US Treasury announced the much anticipated details of the Obama loan modification plan. This program is the broadest program to date targeting foreclosure prevention. Unique to other similar loan modification programs this plan seeks to aid troubled borrowers before they begin missing mortgage payments.

The Home Affordable Refinance program is projected to provide government assistance to 7 to 9 million homeowners. The mortgage modification plan is focused on homeowners that have a solid payment history and have their loans owned or serviced by Fannie Mae or Freddie Mac.

The new government refinance program is expected to help homeowners that are unable to refinance in a traditional manner due to significant losses in home equity. The economic depreciation of most housing markets is push many homeowners loan to values much higher than the customary 80 percent required to refinance.

Millions of borrowers are facing pending hardship because of job loss or resetting adjustable-rate mortgages. The Home Affordable Refinance program is designed to efficiently renegotiate these mortgages into less risky 30-year fixed-rate loans taking advantage of low mortgage rates to lower monthly payments.

Early details of the government mortgage modification program include these eligibility guidelines:

• Mortgages were originated on or before January 1, 2009
• Loans must be first-lien loans on owner-occupied properties
• Principal balance must not exceed $729,750. Higher limits for owner-occupied 2-4 unit properties
• Borrowers must fully document income, including signed IRS 4506-T, two most recent pay stubs, and most recent tax return, and must sign an affidavit of financial hardship
• Property owner occupancy status will be verified; no investor-owned, vacant, or condemned properties
• Incentives will be provided to lenders and servicers to modify at risk borrowers who have not yet missed payments
• Loan modifications will begin immediately and be available until December 31, 2012. Loans can be modified only once

Mortgage Crisis Expands as Economy Weakens

Recent mortgage industry data reports are showing that the mortgage crisis continues to alarming deepen despite a variety of government assistance programs and capital. One of the major contributors in the expansion of job loss to multiple sectors and an increasing number of States.

According to First American CoreLogic's data 1 in 5 homeowners owe more than their properties are worth. This number represents 8.31 million homes with negative equity at the end of 2008. A number that is up 9 percent from 7.63 million at the end of September 2008.

The real alarm is in the report's analysis that 2.16 million more homes could be added to those already under-water is home prices drop another 5 percent--a real possibility give current economic indicators.

The aggregate value of residential properties in the US fell from $19.2 trillion from $21.5 trillion in 2007. The housing markets currently impacted the most are California, Florida, and Nevada. However, as the economy continues to weaken housing markets in multiple States are feeling consistent declines--Arizona, Georgia, Michigan, and Ohio are starting to feel even larger percentage declines resulting from job loss impacts.

Mortgage Bankers Association data is showing the first order effect of these job loss models. Released today, the MBA default statistics show 5.4 million behind in payments or in foreclosure. This represents 12 percent of US mortgages.

Mortgage defaults and foreclosures are up 10 percent in the July-September 2008 quarter, up 8 percent from a year prior.

The sharpest increases in mortgage defaults and foreclosures are in Louisiana, New York, Georgia, Texas, and Mississippi--all States facing massive job loss.

Mortgage Cram-Down Bankruptcy Legislation Passes in House

A controversial bill that would allow Federal judges to modify loans, forcing banks to reduce the payments of borrowers in bankruptcy got one step closer to becoming a law. The so called mortgage "cram-down" law passed in the House of Representatives yesterday 234-191 and heads to the Senate.

According to reports from the Congressional Budget Office this law will help 1 million homeowners remain in their homes. The proposed law would give Federal judges the authority to modify mortgage contracts by lengthening terms, cutting mortgage rates, or reducing loan balances. It would also permanently increase the Federal Deposit Insurance Corporation (FDIC) coverage of deposits to $250,000.

Although this law would arguably give judge more tools to help consumers recover from crushing debt, it will continue to apply pressure to banks and housing prices.

The bill stalled in the House earlier this week amid significant opposition from the banking industry. Industry groups, like the American Banker, claim that this legislation will just further destabilize housing prices. There was also concern with the earlier version of the bill being too attractive; therefore, ceasing to be a true "last resort."

As a result, the House tightened the legislation with the provisions such as a equity share that would be paid back to the bank if the property was sold later at a profit.

Experts believe that this will significantly increase Chapter 13 bankruptcy filings. Chapter 13 bankruptcy code allows individuals with regular income to pay all or a portion of their debts and avoid losing their homes in foreclosure.

Friday jobless numbers that continue to climb give us reason to believe that this bankruptcy provision is likely to get a lot of exercise, if passed. February jobless claims reported another 651,000 jobs lost. This raises the unemployment rate to 8.1 percent from 7.6 percent in January, the highest level since 1983. Total job loss since the recession began in December 2007 reaches 4.4 million.