Cap: A limit, such as that placed on an adjustable rate mortgage, on how much a monthly payment or interest rate can increase or decrease.
COFI: Acronym for 11th District Cost of Funds Index, a common index to which loans are tied. The COFI is tied to interest paid on savings accounts.
Collateral: In real estate, property offered to secure [or offered as security for] repayment of a loan, though not with the intention of transferring property ownership.
Credit report: A detailed history of an individual’s credit worthiness. This is used by lenders to gauge a potential borrower’s ability to repay a loan.
Default: The inability to pay monthly mortgage payments in a timely manner or to otherwise meet the mortgage terms.
Delinquency: A borrower’s failure to make mortgage payments when they are due.
Discount point: Discount points are paid to a lender (usually at closing) to reduce the interest rate on a loan. Each point is equal to 1% of the total loan amount. (Also see: Points)
Equity: Calculated by subtracting the amount still owed on the mortgage loan and any liens from the fair market value of the property. Equity grows as the mortgage is paid down and the property appreciates in value.
Fannie Mae: A private, shareholder-owned company that purchases residential mortgages and converts them into securities for sale to investors. Fannie Mae supplies funds that lenders may loan to potential homebuyers. Its original name was Federal National Mortgage Association (FNMA), started by the federal government in 1938.
The Fed: The Federal Reserve System, a network of twelve Federal Reserve Banks and affiliated branches that serves as the central bank of the United States. “The Fed” also often refers to the Board of Governors of the Federal Reserve System. The Fed Board sets overnight lending rates for banks. This is what banks charge each other for borrowing money overnight, which they do when they need to replenish their reserves. The Fed uses these rates to control inflation: if it lowers these rates, more money flows in the form of loans to consumers and businesses; if it raises rates, there are fewer loans. Mortgage rates are not tied to the Fed’s rates, but they are influenced by it.
Federal Housing Administration (FHA): The FHA was established in 1934 to advance homeownership opportunities for all Americans. It provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories.
FICO: An acronym for the Fair Isaac Corporation, the company that developed the most commonly used credit scoring system. Credit reporting agencies issue FICO scores to lenders who in turn use them to calculate the risk on a loan.
Fixed-rate mortgage: A mortgage with payments that remain the same throughout the life of the loan because the interest rate and other terms do not change.
Foreclosure: The legal process by which a bank or lender sells or repossesses a mortgaged property because the borrower could not pay the loan.
Freddie Mac: Created in 1970 by the federal government as the Federal Home Loan Mortgage Corporation, it 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.
Fully amortized loan: If the payment schedule on a loan is met, the loan principal will be entirely paid off at the end of the term.