Directory of Mortgage Terms
Adjustable Rate Mortgage (ARM): a mortgage loan subject to changes in interest rates; when rates change, ARM monthly payments increase or decrease at intervals determined by the lender; the Change in monthly -payment amount, however, is usually subject to a Cap.
Amortization: a schedule of payments for a mortgage. An amortization schedule lists each monthly payment from first to last, indicating the amount of principal and interest allocated to each payment and the balance due on the mortgage. At the end of a typical mortgage amortization, such as a 30 year fixed rate mortgage, the loan balance will be zero.
Annual Percentage Rate (APR): The APR reflects the total cost of a mortgage, including all interest, points and fees associated with a loan, express as an annual percentage rate. Because the standard calculation for APR includes all the costs of a loan, it will generally be higher than the actual mortgage rate. APR will also vary from lender to lender for loans with the same interest rate, depending on the fees each lender charges.
Appraisal: an appraisal is an estimate or informed opinion on the value of a property, as given by a certified appraiser. The appraisal is provided in a standard format, and shows the value of comparable properties, as well as any adjustments to the property value for improvements or unusual characteristics. Lenders require a current appraisal before approving a new loan in order to confirm the value of the property is in line with the loan amount.
Appraiser: an appraiser is an individual who has been trained and certified to evaluate the value of real estate. Look for an appraiser who holds a certification from a major national organization, such as the National Association of Real Estate Appraisers, the American Society of Appraisers, the National Association of Independent Fee Appraisers or the Appraisal Institute.
ARM: see Adjustable Rate Mortgage
Balloon Mortgage: a mortgage that starts with a low rate or payment for an initial time period, usually 5, 7, or 10 years. When this period ends, the loan my either “balloon” to a market rate for the remainder of the loan, or the balance becomes due.
Bi-Weekly Mortgage: a mortgage with payments scheduled every two weeks instead of the standard monthly payment. By making 26 bi-weekly payments instead of 12 monthly payments each year, the borrower reduces the loan balance more quickly. While a bi-weekly mortgage has the same effect as paying 13 monthly payments each year, a borrower can also add 1/12 of a payment to each monthly mortgage payment and achieve the same result, without the high fees that are often associated with a bi-weekly mortgage.
Bridge Loan: a bridge loan is a short term loan used to fund the down payment required to close on a new loan prior to the sale of the borrower’s current home. When the sale of the first home closes, the bridge loan is paid off.
Cash-Out Refinance: a refinance loan in which the new loan balance is more than the original loan. The additional cash, which is equity that has been taken out of the home, is given to the borrower at closing. Cash out refinancing was popular during the housing boom, when property values rapidly escalated, and borrowers released equity for personal use.
Certificate of title: a document detailing the ownership of real property. The Certificate of Title is prepared by an attorney or title company after researching public land and tax records to identify any encumbrances or liens, which must be cleared prior to transfer of title at closing.
Closing: the process of signing all the mortgage papers and completing the sale of the property. Closing, also known as settlement, occurs once the property has been appraised and all conditions of the underwriting process have been cleared. The borrower takes on the loan obligation, and the title to the property is transferred to the buyer.
Closing costs: the costs associated with closing on a home sale and originating a new mortgage. These costs, and who pays them (buyer or seller) vary by state or locale. Typical closing costs include lender and appraisal fees, title insurance and government fees like recording and transfer taxes. Projected closing costs are detailed on the Good Faith Estimate (GFE) provided by the lender when a borrower applies for a loan.
Condominium: a multi-unit building or complex in which each unit of housing is owned individually. Common parts of the property, such as the grounds, recreational facilities and parking areas (as well as the exterior of the buildings) are owned and maintained jointly by the unit owners, usually in an association. Individual property owners pay maintenance fees to the association, and may be assessed additional charges for major expenses such as repaving a parking lot or replacing a roof.
Construction Loan: a loan used to finance the costs of building a new home. A construction loan must be paid off or converted to a mortgage at the completion of the construction process. The borrower draws against the construction loan to make payments to the builder as the work progresses.
Contingency: A condition of sale that must be satisfied before the contract is complete. Purchase agreements for real estate often contain contingencies that the buyer will qualify for financing at a certain interest rate, that the property will appraise for the sale price, or that the buyer will sell their current home. If these contingencies are not met, the purchaser has the option to cancel the contract.
Conventional loan: a mortgage loan that is not insured or guaranteed by a government agency such as the Veterans Administration (VA) or Federal Housing Administration (FHA). The term is also used to refer to a loan which is below the conforming loan limit set by the government.
Conforming Loan: A loan which meets eligibility requirements for purchase by a Government Sponsored Enterprise (GSE) such as Fannie Mae or Freddie Mac
Cooperative (Co-op): a residential building owned by a cooperative corporate. Shares in the corporation are sold to residents, giving them the right to live in a specific unit of the structure. Because each owner of the co-op owns a share in the corporation and not a share of the building itself, co-ops require special financing rather than a traditional mortgage loan.
Credit history: a record of an individual’s pattern of borrowing and repaying debts. The credit history is used to develop a credit score, which lenders rely on as an indicator of a borrower’s ability to repay a loan.
Credit report: a document listing an individual's current and past debts, along with their payment history. A credit report is the written record of an individual’s credit history.
Credit score: a rating ranging from 300 to 850 used to sum up an individual’s credit rating. Originally developed by Fair Isaac Corp. as the “FICO” score, a credit score combines 22 pieces of data from the three major credit bureaus (Equifax, Experian and TransUnion). The score is determined by ratings in five categories: payment history (35% of the rating), length of credit history (15%), new credit (10%), types of credit used (10%) and total debt (30%).
Debt to Income ratio (DTI): the ratio of a borrower’s outstanding loans to their gross income, expressed as a percentage. There are two DTI measures that factor into a lending decision, the front ratio and the back ratio. The front ratio shows how much income is allocated to housing expenses, such as rent or a mortgage payment, and the back ratio indicates the percent of income required to pay all debts, including housing, car payments, consumer credit and student loans. These numbers are commonly presented together, as in 28/35.
Deed: the document that legally transfers ownership of a property from one person to another. There are different types of deeds, including warranty deeds and quitclaim deeds.
Deed-in-lieu: rather than face foreclosure, borrowers who cannot repay a loan may negotiate a deed in lieu of foreclosure. The borrower’s agree to give up their right to the property in exchange for the lender’s agreement not to pursue foreclosure proceedings.
Deed of Trust: similar to a mortgage, a deed of trust places the title to a property into a trust instead of transferring it directly to the borrower. The trustee, usually a title company, holds the title as security for the lender until the loan is paid and title is finally transferred to the borrower. The trustee can only sell the property if the borrower does not meet the loan terms.
Default: the failure to meet the terms and conditions of a mortgage agreement. If a borrower cannot make payments, or does not comply with other terms of the loan, they will be in default and the loan will be subject to foreclosure or immediate repayment in full.
Discount points: a fee paid to reduce the interest rate on a loan, express in terms of percentage points, usually one percent of the loan amount.
Down payment: the amount of cash a borrower contributes to purchase a home. This amount is not financed.
Earnest money: a deposit provided by a borrower to show that their commitment to purchase a home. The earnest money deposit is used as a portion of the down payment if the offer is accepted. If the offer is rejected, it is returned to the borrower. If the buyer cancels the contract, the earnest money is forfeited.
Equity: a borrower’s ownership interest in a property. The amount of equity is the difference between the fair market value of the property and any loan balances due.
Escrow account: an account the lender uses to hold reserves for taxes and insurance payments. The lender collects a portion of these fees in the borrower’s monthly payment, and put this amount into the escrow account to be used when the payments are due.
Fannie Mae (FNMA): one of two government-sponsored enterprises (GSEs), FNMA was created in 1938 to improve access to mortgages and expand home ownership. Fannie Mae purchases and guarantees mortgages from lenders, and converts them into mortgage-backed securities (MBS) which are them sold to investors. (FMAC is the other GSE)
Fixed-rate mortgage: a mortgage with payments that remain the same throughout the life of the loan because the interest rate and other terms are fixed and do not change.
Flood cert: a certificate stating whether a property is located in a federally defined flood plain. For information about flooding risks, visit www.FloodSmart.gov.
Flood insurance: a Federal insurance program that protects homeowners against losses from a flood. If a home is located in a flood plain, the lender will require flood insurance before approving a loan. To learn more, visit www.fema.gov
Foreclosure: when a borrower does not keep current on mortgage payments, the lender has can to begin a legal process, called foreclosure, to take back the property and recover their investment. The home then sold to pay off the loan.
Freddie Mac (FMAC): the second and smaller GSEs (government-sponsored enterprise) – the other is Fannie Mae- which purchases and guarantees mortgages, then converts them to mortgage backed securities (MBSs) for sale to investors.
Good Faith Estimate (GFE): an estimate of all closing fees including pre-paid and escrow items as well as lender charges; must be given to the borrower within three days after submission of a loan application.
Home inspection: an examination of the structure and mechanical systems to determine a home's safety; makes the potential homebuyer aware of any repairs that may be needed.
Home Warranty: a contract to repair major appliances and systems in a home, protecting the homeowner from the expense of unexpected repairs. The warranty may cover items like heating and air conditioning, plumbing, refrigerators or washers and dryers. The warranty is good for a specific period of time, and does not protect the structure of the home as homeowners insurance policy does.
Homeowner's Insurance: an insurance policy that protects a homeowner from losses due to damage to their property, as well as the contents of the home and claims of negligence that may result in injury or damage to other people’s personal property.
Index: the interest rate on adjustable rate mortgages (ARMs) is determined by an interest rate from a standard index, such as LIBOR (London Inter Bank Offering Rate), added to a margin or mark-up. The index used to determine your interest rate will be disclosed to you in your mortgage closing documents.
Interest: a fee charged for the use of money.
Interest rate: the amount of interest charged on a monthly loan payment; usually expressed as a percentage.
Impound: Also known as escrow - The amount a lender adds to a mortgage payment to cover expenses such as taxes and insurance. The lender collects a portion of these fees each month, reserving them in an escrow or impound account. When payments are due, the lender will make the payment on behalf of the borrower.
Lease Purchase: an agreement in which a person rents a home with the option to buy it in the future. A portion of the rental payment is credited to an account for use as a down payment.
Loan-to-value (LTV) ratio: a percentage calculated by dividing the amount borrowed by the price or appraised value of the home to be purchased; the higher the LTV, the less cash a borrower is required to pay as down payment.
Lock (also Lock In): a commitment from a lender that a loan will be made at a specific interest rate if the loan closes within a specific time period, usually 30 days. In a market environment when rates change often, locking in a rate can assure a borrower that their rate at closing will be the same rate they were quoted when applying for their loan.
Margin: an amount the lender adds to an index to determine the interest rate on an adjustable rate mortgage.
Mortgage: a loan used to purchase real estate.
Mortgage banker: a company that originates loans and resells them to secondary mortgage lenders like Fannie Mae or Freddie Mac.
Mortgage broker: a firm or individual that originates loans for a number of lenders. Unlike a mortgage banker, brokers do not fund the loan with their own money, but work on behalf of several investors, such as mortgage bankers, S and L's, banks, or investment bankers
Mortgage insurance: protects lenders against losses that occur when a borrower defaults on a mortgage loan. Mortgage insurance is required for loans with a down payment of less than 20% of the home's purchase price.
Mortgage Insurance Premium (MIP): The cost of mortgage insurance. Typically, the MIP is paid monthly as part of the mortgage payment.
Origination: the process of starting a mortgage loan. Origination includes preparing and submitting the application for review, and initial evaluation of the application with a credit check, verification of employment and a property appraisal.
Origination fee: the lender’s charge for originating a loan. The origination fee is usually calculated as a percentage of the loan, or points, and is paid at closing.
PITI: Short for Principal, Interest, Taxes, and Insurance, the main components of a monthly mortgage payment. The principal reduces the outstanding loan balance, the interest is the cost of borrowing, taxes and insurance are paid into an escrow account.
PMI: Private Mortgage Insurance; privately-owned companies that offer standard and special affordable mortgage insurance programs for qualified borrowers with down payments of less than 20% of a purchase price.
Pre-approval: an initial approval of a loan application, based on a borrower’s credit, the expected property value and loan amount. Once the property is selected, if the borrower still meets the loan criteria, the loan will close with the specific terms.
Pre-qualify: an informal assessment of the maximum amount an individual is eligible to borrow. Less thorough than a pre-approval, a pre-qualification is non-binding on the lender.
Prepayment: payment of the mortgage loan before the scheduled due date; may be Subject to a prepayment penalty.
Pre-Payment Penalty: a fee charged to the borrower if they pay off the loan balance before a predetermined point in the life of the loan.
Principal: the amount of money borrowed from a lender. The initial principal balance will go down over the life of the loan, unless the loan is interest only.
Quitclaim Deed: Not really a deed, a quitclaim deed is actually a document indicating an individual is giving up rights to a property or the claim to any ownership rights. A quitclaim deed does not convey title to the property.
Rate: The interest charged on a mortgage loan, expressed as a percentage of the balance outstanding.
Rate Lock: A commitment to make a loan at a specific interest rate, for a specific term, which a set time period. For example, a borrower may lock a rate of 5.75% on a 15 year fixed rate loan for a period of 30 days. By locking the rate, the borrower is assured that even if rate go up before closing, the rate on their loan will not change if the loan closes within the 30-day lock period.
Real estate agent: an individual who is trained and licensed to represent buyers and sellers of real estate. The Listing agent represents the homeowner in the sale of the home, and a buyer’s agent work with the buyer to find and purchase a home. An agent works under the direction of a real estate broker.
REALTOR®: a member of the National Association of Realtors.
Refinancing: Getting a new loan to replace an existing mortgage. Refinancing is generally done to obtain a lower interest rate, obtain cash from equity, or reduce the length of the mortgage term.
Real Estate Settlement Procedures Act (RESPA): a law that defines what, how and when lenders must disclose information to borrowers regarding settlement costs, lending practices and business relationships between parties. RESPA was enacted to protect borrowers from abusive lending practices and conflicts of interest among lenders and industry professionals.
Survey: mapping a property to determine that the house and any structure are properly located within the legal boundaries of the property. A survey identifies any easements, encroachments or rights of way that may impact the title of a property. These items are shown on a map of the property, which is provided to the borrower at closing.
Title insurance: an insurance policy that protects the lender against any claims regarding ownership of the property. Homebuyers may also purchase a separate owners title insurance policy to protect their own interest in the property.
Title search: a check of public records to be sure that the seller is the recognized owner of the real estate and that there are no unsettled liens or other claims against the property.
Truth in Lending Act (TILA): a federal law designed to protect consumers in credit transactions by requiring full disclosure of the terms of the lending arrangement. The lender is obligated to give written disclosure of all fees, terms, and conditions associated with the loan. TILA is part of the Consumer Credit Protection Act. Its requirements are detailed in Regulation Z (“Reg Z”) of the CCPA.
Underwriting: the process of analyzing a loan application to determine the amount of risk involved in making the loan. Underwriting includes a review of the potential borrower's credit history and an assessment of the property value to determine if the amount to be borrowed is appropriate, and whether the borrower is likely to be able to pay back the mortgage.
Warranty deed: In the transfer of real estate, a deed conveys ownership from the old owner (the grantor) to the new owner (the grantee), and can include various warranties, which limit to degree to which the grantor warrants the title. The grantor may give a general warranty of title against any claims, or the warranty may be limited only to claims which occurred after the grantor obtained the real estate.
