Glossary of Mortgage Terms
Additional Principal Payment- Payment over and above your monthly mortgage payment amount, which can be applied to the remaining principal amount of the loan.
Adjustable Rate Mortgage (ARM) - An ARM Loan (Adjustable Rate Mortgage) is a loan type that allows the lender to adjust the interest rate during the term of the loan. Generally, these changes are determined by a margin and an index so that the interest rate changes, up or down, are based on the market conditions at the time of the rate change. Most often the interest rate changes are limited by a rate change cap and a lifetime cap.
Adjustment Period - The frequency at which the interest rate on an ARM loan changes - i.e. every 6 months, once a year, once every 3 years, etc.
Amenity - An enhancement to a piece of property that is not essential to the property's use, but may increase the property's value. Examples include a swimming pool, tennis courts, scenic view, access to a body of water, etc.
Amortization - The breakdown of a mortgage loan (including principal and interest) into equal payments over a specified period of time. An amortization schedule shows the amount of each payment applied to principal and interest and the remaining balance after each payment is made.
Annual Percentage Rate (APR) - To make it easier for consumers to compare mortgage loan interest rates the federal government developed a standard format called an "Annual Percentage Rate" or APR, to provide an effective interest rate for comparison shopping purposes. Some of the costs that you pay at closing are factored into the APR for ease of comparison. Your actual monthly payments are based on the periodic interest rate, NOT on the APR.
Appraisal - An estimated value of the property. As part of the loan approval process, the lender will hire an appraiser to assess the property and determine whether the loan amount is appropriate to its value. The appraiser uses several factors to determine the property's value, including its size, location, condition and the sale price of recently sold comparable properties in the area.
Assessed Value - The value of a piece of property as determined by a public tax assessor for the purpose of determining the annual property tax.
Assessment - The process of determining a property's value. Can also refer to a fee levied against a property for a special purpose such as a sewer assessment.
Assumable Mortgage - A mortgage that can be taken over or "assumed" by the buyer when a home is sold.
Balloon Mortgage- A balloon mortgage is one in which monthly payments are made for a specified period of time, with the balance of the loan paid in full at the end of the loan term. Like an ARM, interest rates on a balloon mortgage are typically lower than on a fixed rate mortgage.
Betterment - An improvement made to a piece of property that increases its value, rather than a repair that simply maintains its current value.
Bid- Also called an "offer". When a potential buyer is interested in purchasing a house, they will place a bid, offering to pay the seller a certain price for the house. The seller may either accept, or counter-offer until a price, closing date, and all contingencies are agreed upon. The house is then considered to have an accepted offer and remains so until the closing date, at which point the buyer takes possession of the house. If the buyer is unable to purchase the house at any time between bid acceptance and closing, the house goes back on the market.
Bridge Loan - Also called a swing or interim loan, a bridge loan is an "in-between" loan that allows a buyer to make a down payment on a new home before their current home is sold. Typically, the money made from the sale of a current home would be immediately applied to the purchase of a new home; but when the timing is not right, a bridge loan can help the buyer finance their new home while the current home is still for sale.
Broker - A person who works between two parties to negotiate a contract, such as a mortgage broker or real estate broker.
Cap - In an ARM, a cap is a limit placed on the increase or decrease of the interest rate or monthly payments.
Cash-Out Refinance - A refinance transaction in which the amount of money received from the new loan exceeds the total outstanding amount on the existing first mortgage, in essence allowing the borrower to receive cash back from their loan.
Closing - -The point at which the property's sale becomes final. The borrower signs the mortgage papers and in return receives the deed to the property. It is at this point that the down payment and closing costs are paid to the lender.
Closing Costs - All costs incurred during the purchasing of the property, not including the sale price itself. This may include (but is not limited to) points, origination fees, attorney's fees and title insurance. Closing costs vary from state to state, but your loan officer will be able to give you an estimate when you apply for your loan.
Collateral - An asset (such as a car or a home) that is considered a guarantee for repayment of a loan.
Commitment Letter - A formal offer by a lender stating the terms under which it agrees to lend money to a home buyer, also called a "loan commitment".
Construction Loan - A short-term loan used for financing the construction cost of a home, in which the lender makes payments to the builder at periodic intervals as the work progresses.
Consumer Reporting Agency - An organization that prepares credit reports for lenders to determine the credit history of a potential borrower.
Contingency- A condition placed on a contract that must be met in order for the contract to be legally binding. For example, a bid placed on a house might contain a contingency that states the house must pass inspection.
Conventional Loan - A conventional loan is one that is not backed by the federal government.
Convertible ARM - An ARM that can be converted to a fixed-rate mortgage under specified conditions.
Cost of Funds (COF) - Monthly average cost of borrowings reported by members of the Federal Home Loan Bank system, calculated on either a national or regional basis. The COF is one of the indexes that a lender can use to determine the rate adjustments on ARM loans.
Credit History/Report - A record of a person's debts, both open and paid, and their payments toward those debts. This is a tool used by a lender to determine a potential borrower's ability to repay a mortgage, based on their history of repaying other debts in a timely manner.
Curtailment - Additional payment to principal
Default - When a borrower fails to make their mortgage payment, resulting in foreclosure on the mortgaged property.
Earnest Money- A deposit paid by a potential homebuyer to a realtor upon bid acceptance that indicates their intention to purchase the house.
Easement - A right-of-way given by the owner to allow others access to or over the property.
Escrow - An escrow account is somewhat like a forced savings account, in which a portion of the monthly mortgage payment is set aside by the lender for payment of such expenses as property taxes or hazard insurance. This assures the lender that when these types of payments come due, adequate funds will be available.
Equity - The amount of a property that is actually "owned" by the homeowner, versus the amount still owed on its mortgage.
Equity Loan - A loan taken against a home's equity; in essence, the homeowner is taking out a loan against him or herself, and is repaying into their own mortgage.
Fannie Mae/Freddie Mac- These institutions are the nation's largest secondary investors in residential mortgages. Referring to the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC).
Fixed Rate Mortgage - A mortgage loan that carries a guaranteed fixed interest rate and payments throughout the life of the loan.
Fixture- Personal property that becomes real property when attached in a permanent manner to real estate, such as shelving, light fixtures, etc.
Flood Insurance - Insurance that protects a homeowner from the cost of damages to a property due to flooding or high water. It is required by law that properties located in areas prone to flooding (Special Flood Hazard Areas - SFHA) have flood insurance. The federal government determines if a property is located in a SFHA.
Foreclosure - The process by which a mortgaged property is taken over by the lending institution when the borrower defaults on the loan. The foreclosed property is usually then auctioned off, with the proceeds being applied to the unpaid portion of the loan.
Fully Indexed Accrual Rate - The sum of the index plus the margin.
Government Loan - A government loan is one that is insured by the federal government, through agencies such as the Federal Housing Administration (FHA), or Veterans Administration (VA).
Index - A number used to determine the interest rate for an ARM. The index is generally a published number or percentage, such as the average interest rate or yield on Treasury bills. A margin is added to the index to determine the interest rate that will be charged on the ARM.
Inspection - A thorough review of the home's structural and mechanical condition performed by a qualified home inspector hired by the buyer. A satisfactory home inspection is often included as a contingency in the offer to purchase.
Interest - The fee charged by the lending institution for borrowing money.
Introductory Rate - An Adjustable Rate Mortgage (ARM Loan) may begin with a discounted, introductory rate. This introductory rate is not to be confused with the fully indexed accrual rate. While an introductory rate might be 6.00%, the fully indexed accrual rate at the same time might actually be 7.50%, or 5.00% index plus 2.50% margin.
Jumbo Loan- A loan that exceeds the purchase limits established by Fannie Mae and Freddie Mac, also called a non-conforming loan.
LIBOR - London Inter Bank Offered Rates. A common index used by financial institutions when determining interest rates. This rate is published in the Wall Street Journal.
Line of Credit - An agreement by a financial institution to extend credit up to a certain amount for a certain time to a specified borrower. Often taken against a home's equity.
Loan-to-Value (LTV) - The relationship between the principal balance on the mortgage and the appraised value of the property. For example, a $100,000 home with $80,000 remaining on the mortgage has an LTV of 80%.
Lock- Also called a "rate lock". A commitment by the lender to guarantee a specific interest rate if a mortgage closes within a set period of time (usually 30, 45 or 60 days), after which the guaranteed rate will expire. At the time of application, the borrower is given the option to immediately lock the rate, or "float" the rate to see if a better interest rate will come along. Because interest rates can fluctuate from day to day, it's a good idea to pay close attention to the current market to determine whether or not rates may go up or down.
Margin - A premium, typically between 2% and 3%, that is added to an ARM's index to establish the loan's actual interest rate.
Mortgagee - The lender.
Mortgage Insurance - Insurance for the lender in the event that the borrower defaults on the loan. The cost for mortgage insurance is usually built into the monthly payment made to the lender, and is typically required when the loan has an LTV of 80% or greater (when the down payment is less than 20% of the home's value). This can also be called private mortgage insurance for conventional loans, because a private institution rather than the federal government backs them.
Mortgagor - The borrower.
Negative Amortization- A gradual increase in mortgage debt that occurs when the monthly payment is not large enough to cover the entire principal and interest due. The amount of the shortfall is added to the remaining balance to create "negative" amortization.
Origination Fee- A fee paid to a lender for processing a loan application. The origination fee is stated in the form of points, and is paid at the time of closing. Additional points can also be purchased as a means of reducing the interest rate (see the definition for "points").
PITI - An acronym for principal, interest, taxes, and insurance, four components that comprise a monthly mortgage payment.
PITI Reserves - The cash amount that the borrower must have on hand after paying the down payment and closing costs as an "emergency" reserve in case of an interruption in their monthly income. The borrower must show proof of this cash reserve, generally two or three months' worth of PITI, or total monthly payments.
Points - The borrower can purchase points in exchange for a lower interest rate. One point is equal to one percent of the loan amount and can decrease the interest rate by 1/8 to 1/4 percent. Before purchasing points, it is important to determine if the up-front cost will justify the long-term savings.
Principal - The portion of your mortgage loan that represents the actual amount borrowed, not including interest.
Purchase and Sale Agreement - The written contract between buyer and seller indicating all terms and conditions of the sale.
Qualifying Ratios- Equations used to evaluate family income, existing debt and credit history for the purpose of determining the loan amount the borrower qualifies for.
Real Estate Settlement Procedures Act (RESPA)- A consumer protection law that requires lenders to give borrowers advance notice of closing costs in the form of a Good Faith Estimate. RESPA also provides guidelines to protect and inform borrowers during the servicing of their mortgage loan.
Refinance - The process of paying off one loan with the proceeds from a new loan (usually for a lower interest rate) using the same property as security.
Secondary Mortgage Investor- A lending institution that buys and sells existing mortgages, rather than working directly with the consumer.
Servicer - An organization that collects mortgage payments from borrowers and manages their escrow accounts.
Subprime- - A term referring to borrowers with a less-than-perfect credit history, also called B&C credit.
Title - The legal document guaranteeing ownership of a piece of property.
Title insurance - Insurance that protects the lender or buyer against loss arising from a dispute over ownership of a piece of property. As with a car, the property may have changed ownership many times before reaching the current buyer, and errors and discrepancies can happen along the way. Title insurance is the lender's way of insuring their interest in the property. The cost for title insurance is paid once, at the closing of the loan.
Treasury Securities - Treasury bill yields are another index that a lender can use to determine the rate adjustments on ARM loans.
Truth-In-Lending - A federal law that requires lenders to fully disclose, in writing, all costs and terms associated with a mortgage, including the Annual Percentage Rate (APR) and other charges.
Underwriting - The "behind-the-scenes" process of reviewing a loan application to verify all information given and evaluate the borrower's credit history to determine whether the borrower qualifies for the loan for which they have applied.