Office of the State Comptroller
Thomas P. DiNapoli, State Comptroller
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Mortgage Definitions

The U.S. Department of Housing and Urban Development offers a Mortgage Glossary to help you understand some of the most important mortgages and terms. The following summarizes their definitions to help you gain a better understanding of some of the different mortgage products available and some of the sources of loans in today’s marketplace:

Fixed-rate mortgage

The most common mortgage is a fixed-rate mortgage, meaning your interest rate will not change for the entire term of your loan. The term of your loan (the amount of time it will take to repay) will generally be between 10 and 30 years.

Adjustable-rate mortgage

Adjustable-rate mortgages are also called ARMs. ARMs generally start at a lower interest rate than fixed-rate mortgages, but only stay at the initial rate for a predetermined amount of time, generally between 1 month and 10 years. After that period, the rate is adjusted or “floated,” based on current market conditions. Your payments would then change, up or down, to reflect the new interest rate (alternatively, the term of the loan could change). A 5/1 ARM would mean that the fixed rate will remain the same for the first 5 years of the loan, but then change every year until the end of the loan.

Interest-only mortgage

With an interest-only mortgage, the borrower pays only the interest on the loan for a set period of time. The principal does not change and is not paid down. At the end of the interest-only term, typically five or ten years, the borrower begins to make higher payments that include payment of the principal for the remainder of the mortgage term. The lure of interest-only mortgages is the initially low mortgage payments; however, while you are paying only interest your payments don't build any home equity, your loan balance doesn't decrease and may even increase depending on the loan structure. Interest-only mortgages can carry either a fixed or adjustable rate.

  • The Federal Reserve Board of Governors offers a guide to help you understand the mechanics of interest-only mortgages and payment-option ARMs.

Subprime mortgage

Subprime mortgages are simply mortgages made to individuals with lower credit. Before subprime mortgages, individuals with credit scores in the mid- to lower 600s may not have qualified for a loan.

Consumers with poor credit, with a history of paying bills late, or who have had a recent foreclosure may qualify for subprime mortgages. There is, however, a cost to you. When a lender takes on additional risk, they are compensated for this risk by charging higher interest rates. According to a study by the Federal Reserve Bank of Chicago, subprime borrowers generally pay interest rates that are 2 to 3 percentage points higher than those of prime borrowers.

Consumers need to be very careful when agreeing to a subprime loan. Subprime loans have higher rates than prime loans and most likely have prepayment penalties. Some companies have even misled consumers about their credit scores. Before speaking with any lender, know your credit score and seek referrals for reputable lenders from family, friends, and professionals.

Balloon mortgage

Balloon mortgages offer lower rates and payments for a shorter term of 3-10 years or so. However, after that period, the borrower is required to pay a lump sum of the remaining principal balance. Sometimes, the loan can be switched to a fixed-rate or adjustable-rate loan, or refinanced with a new loan, but usually borrowers plan to sell the home before the lump sum due date.

Assumable mortgage

Assumable mortgages are not very common. If the seller has an assumable mortgage, the seller can turn over the house along with the existing mortgage to the buyer. But, the sale price tends to be higher than it would be without an assumable mortgage, and the borrower needs more cash in pocket to cover the difference between the two dollar amounts. The price is higher with an assumable mortgage to ensure that the seller recovers his or her equity in the house.

Seller financing / lease with option to buy

Seller financing occurs when a seller assists the buyer in purchasing a home, by either lending the entire amount of the house price or lending a portion of the amount.

If the seller finances the entire amount of the house, the buyer makes monthly payments to the seller rather than to a bank. The actual property serves as collateral in this type of loan, which often includes an assumable mortgage.

"Lease with option to buy" is an arrangement in which the tenant and the seller agree on a price for the sale of the home, and they confirm an actual sale date sometime in the future. The seller will charge rent and set aside a negotiated portion of the monthly payment to be applied toward the sale of the home when the sale date nears. In the case of such leases, it is wise to list all the negotiated terms in a legally binding contract to protect both parties.

Construction loan

Someone who wishes to build a house rather than buy an existing one may be eligible for a construction mortgage, which is done in a two-step process. The borrower pays higher rates while the house is being built, but can draw money from the loan to pay the builder. At that time, the borrower is only paying the interest to the lender. After the house is built, the borrower will go through a second closing that will convert the loan to a traditional long-term fixed-rate mortgage.

Reverse mortgage

If you are age 62 or older, you may be eligible for a reverse mortgage rather than a home equity loan. A reverse mortgage gives you money that you don’t have to repay until you move, sell your house or pass away. You can choose to take the money in a lump sum, in monthly payments or a combination of both. Under a reverse mortgage, the money you are being paid is coming from the equity you have already earned/built in your home. However, you need to be careful for that reason – your home’s value may decrease or remain the same after you take a reverse mortgage. Additionally, if you take monthly payments and inflation continues, you may not be able to continue living the same lifestyle year-to-year, because you'll be receiving a fixed amount as costs rise.

FHA loan

FHA (Federal Housing Administration) loans may have benefits and protections that conventional mortgage loans do not offer. Some of the benefits are: it is easier to qualify for FHA loans, even with less than perfect credit; lower down payments are required and FHA loans generally cost less, since they have competitive interest rates because the loans are insured by the Federal Government.

VA loan

Veteran's Administration (VA) loans are for veterans, active duty military personnel, some members of the reserves and the National Guard. The VA allows a veteran who qualifies (with respect to income and credit) to purchase a primary residence without a down payment, as long as the sale price does not exceed the appraised value. However, veterans may need money to put toward closing costs as well as a deposit, which the seller generally requires when a sales contract is signed.

Fannie Mae

Fannie Mae (Federal National Mortgage Association) is government-sponsored and operates in the U.S. secondary mortgage market. Rather than making home loans directly with consumers, it works with mortgage bankers, brokers and other primary mortgage market partners to help ensure they have funds to lend to homebuyers at affordable rates. Fannie Mae currently offers the Making Home Affordable Program help borrowers avoid foreclosure.

Freddie Mac

Freddie Mac (Federal Home Loan Mortgage Corporation) is a stockholder-owned corporation chartered by Congress to increase the supply of funds that mortgage lenders, such as commercial banks, mortgage bankers, savings institutions and credit unions, can make available to homebuyers and multifamily investors. Freddie Mac helps expand housing opportunities for all families, including low-income and minority families. Freddie Mac offers a guide to help you determine if homeownership is right for you.

SONYMA (State of New York Mortgage Agency)

SONYMA makes home purchases more affordable by financing loans through the sale of tax-exempt bonds.  SONYMA provides low interest fixed-rate mortgages, down payment assistance, closing cost assistance and no prepayment penalties, and is specifically designed to help low-and moderate-income families become homeowners.   The mortgage programs SONYMA offers are:

  • Low Interest Rate Program - This is SONYMA's standard mortgage program, and is for a first-time homebuyer purchasing a newly constructed or existing home.
  • Remodel New York - This program allows first-time homebuyers to buy an existing home and finance the cost of renovating it with a below-market fixed rate mortgage.
  • Achieving the Dream - This program offers low interest rates for lower income first-time homebuyers.  
  • Construction Incentive Program - This program allows first-time homebuyers to buy a home under construction or rehabilitation. The program offers up to 100 percent financing.  
  • Homes for Veterans Program - This program is specifically designed for military veterans, and allows qualified veterans to apply for any currently available SONYMA program with favorable terms.
  • Section 8 Voucher Homeonership Mortgage Program - This program features low, fixed interest rate mortgages and closing cost assistance to first-time homebuyers in receipt of a Section 8 homeownership voucher.
  • Closing Cost Assistance Loans – This program offers closing cost assistance in combination with any currently available SONYMA program.

 

Next: Resources for First-Time Home Buyers