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Home Mortgage Glossary
adjustable-rate mortgage (ARM)
A mortgage whose interest rate changes periodically based on the changes in a specified index
adjustment date
The date the interest rate changes on an adjustable-rate mortgage (ARM).
amortization
The loan payment consists of a portion which will be applied to pay the accruing interest on a loan, with the remainder being applied to the principal. Over time, the interest portion decreases as the loan balance decreases, and the amount applied to principal increases so that the loan is paid off (amortized) in the specified time.
amortization term
The amount of time required to amortize the mortgage loan. The amortization term is expressed as a number of months. For example, for a 30-year fixed-rate mortgage, the amortization term is 360 months.
annual percentage rate (APR)
The cost of a mortgage stated as a yearly rate; includes such items as interest, mortgage insurance, and loan origination fee (points).
application
A form, commonly referred to as a 1003 form, used to apply for a mortgage and to provide information regarding a prospective mortgagor and the proposed security.
appraisal
A written analysis of the estimated value of a property prepared by a qualified appraiser.
appraiser
An individual qualified by education, training, and experience to estimate the value of real property and personal property. Although some appraisers work directly for mortgage lenders, most are independent.
appreciation
The increase in the value of a property due to changes in market conditions, inflation, or other causes.
assessed value
The valuation placed on property by a public tax assessor for purposes of taxation.
assessor
A public official who establishes the value of a property for taxation purposes.
asset
Items of value owned by an individual. Assets that can be quickly converted into cash are considered "liquid assets." These include bank accounts, stocks, bonds, mutual funds, and so on. Other assets include real estate, personal property, and debts owed to an individual by others.
assignment
The transfer of a mortgage from one person to another.
assumable mortgage
A mortgage that can be assumed by the buyer when a home is sold
assumption
The term applied when a buyer assumes the seller's mortgage.
B
balloon mortgage
A mortgage loan that requires the remaining principal balance be paid at a specific point in time. For example, a loan may be amortized as if it would be paid over a thirty year period, but requires that at the end of the tenth year the entire remaining balance must be paid.
balloon payment
The final lump sum payment that is made at the maturity date of a balloon mortgage.
bankruptcy
A proceeding in a federal court in which a debtor who owes more than his or her assets can relieve the debts by transferring his or her assets to a trustee. The most common type for an individual seems to be a "Chapter 7 No Asset" bankruptcy which relieves the borrower of most types of debts. A borrower usually must wait for a period of two years after the bankruptcy has been discharged to qualify for a conventional mortgage loan.
biweekly mortgage
A mortgage that requires payments to reduce the debt every two weeks (instead of the standard monthly payment schedule). The 26 (or possibly 27) biweekly payments are each equal to one-half of the monthly payment that would be required if the loan were a standard 30-year fixed-rate mortgage, and they are usually drafted from the borrower's bank account. The result for the borrower is a substantial savings in interest.
broker
An individual or company that for a fee acts as an intermediary between borrowers and lenders.
C
cap
A provision of an adjustable-rate mortgage (ARM) that limits how much the interest rate or mortgage payments may increase or decrease.. Those limitations may apply to how much the loan may adjust over a six month period, an annual period, and over the life of the loan, and are referred to as "caps."
cash-out refinance
When a borrower refinances his mortgage at a higher amount than the current loan balance with the intention of pulling out money for personal use, it is referred to as a "cash out refinance."
certificate of eligibility
A document issued by the Veterans Administration that certifies a veteran's eligibility for a VA loan.
chain of title
The history of all of the documents that transfer title to a parcel of real property, starting with the earliest existing document and ending with the most recent.
closing
A meeting at which a sale of a property is finalized by the buyer signing the mortgage documents and paying closing costs. Also called "settlement."
closing costs
Closing costs are separated into what are called "non-recurring closing costs" and "pre-paid items." Non-recurring closing costs are any items which are paid just once as a result of buying the property or obtaining a loan. "Pre-paids" are items which recur over time, such as property taxes and homeowners insurance.
cloud on title
Any conditions revealed by a title search that adversely affect the title to real estate. Usually clouds on title cannot be removed except by deed, release, or court action.
co-borrower
An additional individual who is both obligated on the loan and is on title to the property.
collateral
An asset (such as a car or a home) that guarantees the repayment of a loan. The borrower risks losing the asset if the loan is not repaid according to the terms of the loan contract. In a home loan, the property is the collateral.
collection
The efforts used to bring a delinquent mortgage current and to file the necessary notices to proceed with foreclosure when necessary.
commission
The fee charged by a broker or agent for negotiating a real estate or loan transaction. A commission is generally a percentage of the price of the property or loan.
comparable sales
Recent sales of similar properties in nearby areas and used to help determine the market value of a property. Also referred to as "comps."
condominium
A type of ownership in real property where all of the owners own the property, common areas and buildings together, with the exception of the interior of the unit to which they have title.
contract
An oral or written agreement to do or not to do a certain thing.
conventional mortgage
Refers to home loans other than government loans (VA and FHA).
cooperative (co-op)
A type of multiple ownership in which the residents of a multiunit housing complex own shares in the cooperative corporation that owns the property, giving each resident the right to occupy a specific apartment or unit.
credit
An agreement in which a borrower receives something of value in exchange for a promise to repay the lender at a later date.
credit history
A record of an individual's repayment of debt. Credit histories are reviewed my mortgage lenders as one of the underwriting criteria in determining credit risk.
credit report
A report of an individual's credit history prepared by a credit bureau and used by a lender in determining a loan applicant's creditworthiness.
D
debt
An amount owed to another.
deed
The legal document conveying title to a property.
deed-in-lieu
Short for "deed in lieu of foreclosure," this conveys title to the lender when the borrower is in default and wants to avoid foreclosure. The lender may or may not cease foreclosure activities if a borrower asks to provide a deed-in-lieu.
deed of trust
The document used in some states instead of a mortgage; title is conveyed to a trustee.
default
Failure to make the mortgage payment within a specified period of time.
delinquency
Failure to make mortgage payments when mortgage payments are due. For most mortgages, payments are due on the first day of the month.
depreciation
A decline in the value of property; the opposite of appreciation.
discount points
A one time charge by the lender to increase the yield of the loan. A point is one percent of the amount of the mortgage.
E
easement
A right of way giving persons other than the owner access to or over a property.
effective age
An appraiser's estimate of the physical condition of a building. The actual age of a building may be shorter or longer than its effective age.
encumbrance
Anything that affects or limits the fee simple title to a property, such as mortgages, leases, easements, or restrictions.
Equal Credit Opportunity Act (ECOA)
A federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs.
equity
A homeowner's financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on its mortgage and other liens.
escrow
An item of value, money, or documents deposited with a third party to be delivered upon the fulfillment of a condition. For example, the deposit by a borrower with the lender of funds to pay taxes and insurance premiums when they become due, or the deposit of funds or documents with an attorney or escrow agent to be disbursed upon the closing of a sale of real estate.
escrow account
Deposited with a third party. Money is held in your impound account (escrow account) for the payment of items like property taxes and homeowner's insurance when they come due. The lender pays them with your money instead of you paying them yourself.
escrow analysis
Once each year your lender will perform an "escrow analysis" to make sure they are collecting the correct amount of money for the anticipated expenditures.
escrow disbursements
The use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, and other property expenses as they become due.
estate
The ownership interest of an individual in real property. The sum total of all the real property and personal property owned by an individual at time of death.
examination of title
The report on the title of a property from the public records or an abstract of the title.
F
Fair Credit Reporting Act
A consumer protection law that regulates the disclosure of consumer credit reports by consumer/credit reporting agencies and establishes procedures for correcting mistakes on one's credit record.
fair market value
The highest price that a buyer, willing but not compelled to buy, would pay, and the lowest a seller, willing but not compelled to sell, would accept.
Fannie Mae (FNMA)
A congressionally chartered, shareholder-owned company that is the nation's largest supplier of home mortgage funds..
Federal Housing Administration (FHA)
An agency of the U.S. Department of Housing and Urban Development (HUD). Its main activity is the insuring of residential mortgage loans made by private lenders. The FHA sets standards for construction and underwriting but does not lend money or plan or construct housing.
fee simple
The greatest possible interest a person can have in real estate.
FHA mortgage
A mortgage that is insured by the Federal Housing Administration (FHA). Also known as a government mortgage.
firm commitment
A lender's agreement to make a loan to a specific borrower on a specific property.
first mortgage
The mortgage that is primary among any loans recorded against a property.
fixed-rate mortgage
A mortgage in which the interest rate does not change during the entire term of the loan.
flood insurance
Insurance that compensates for physical property damage resulting from flooding. It is required for properties located in federally designated flood areas.
foreclosure
The legal process by which a borrower in default under a mortgage is deprived of his or her interest in the mortgaged property. This usually involves a forced sale of the property at public auction with the proceeds of the sale being applied to the mortgage debt.
G
good faith estimate
An estimate of charges which a borrower is likely to incur in connection with a settlement.
H
hazard insurance
Insurance coverage that in the event of physical damage to a property from fire, wind, vandalism, or other hazards.
home equity line of credit
a credit line that is secured by a second deed of trust on a house. Equity lines of credit are revolving accounts that work like a credit card, which can be paid down or charged up for the term of the loan. The minimum payment due each month is interest only.
home equity loan
a loan secured by a second deed of trust on a house.
homeowner's insurance
An insurance policy that combines personal liability insurance and hazard insurance coverage for a dwelling and its contents.
HUD-1 settlement statement
A document that provides an itemized listing of the funds that were paid at closing. Items that appear on the statement include real estate commissions, loan fees, points, and initial escrow (impound) amounts. Also known as the "closing statement" or "settlement sheet."
I
index
A published interest rate to which the interest rate on an Adjustable Rate Mortgage (ARM) is tied. Some commonly used indices include the 1 Year Treasury Bill, 6 Month LIBOR, and the 11th District Cost of Funds (COFI).
impound account
An impound account is an account established by the lender to pay a borrower's tax and insurance costs. The borrower's monthly mortgage payment is then increased to cover these costs, with the additional amount being held in the impound account and disbursed by the lender when the payments are due. Lenders typically prefer this arrangement because it reduces the possibility of a lapse in tax or insurance payments that could diminish the value of the lender's investment (your house). Therefore, while it is often possible to opt out of an impound account it will result in additional charges.
interest-only loan option
Loan payments have two components, principal and interest. An interest-only loan has no principal component for a specified period of time. These special loans minimize your monthly payments by eliminating the need to pay down your balance during the interest-only period, giving you greater cash flow control and/or increased purchasing power.
J
jumbo loan
A loan that exceeds Fannie Mae's and Freddie Mac's loan limits, currently at $417,000. Also called a nonconforming loan and usually subject to higher pricing.
L
lender
A term which can refer to the institution making the loan or to the individual representing the firm.
liabilities
A person's financial obligations. Liabilities include long-term and short-term debt, as well as any other amounts that are owed to others.
liability insurance
Insurance coverage that offers protection against claims alleging that a property owner's negligence or inappropriate action resulted in bodily injury or property damage to another party. It is usually part of a homeowner's insurance policy.
lien
A legal claim against a property that must be paid off when the property is sold. A mortgage or first trust deed is considered a lien.
life cap
A provision of an ARM that limits the highest rate that can occur over the life of the loan.
line of credit
An agreement by a commercial bank or other financial institution to extend credit up to a certain amount for a certain time to a specified borrower.
loan servicing
After you obtain a loan, the company you make the payments to is "servicing" your loan. They process payments, send statements, manage the escrow/impound account, provide collection efforts on delinquent loans, ensure that insurance and property taxes are made on the property, handle pay-offs and assumptions, and provide a variety of other services.
loan-to-value (LTV)
The percentage relationship between the amount of the loan and the appraised value or sales price (whichever is lower).
lock-in
An agreement in which the lender guarantees a specified interest rate for a certain amount of time at a certain cost.
lock-in period
The amount of time that a lender will guarantee a loan's interest rate. Once you've locked in the interest rate on a loan, the lender will guarantee that rate for a certain period of time, usually for 30, 45 or 60 days.
M
margin
The number of percentage points a lender adds to the index value to calculate the ARM interest rate at each adjustment period.
maturity
The date on which the principal balance of a loan, bond, or other financial instrument becomes due and payable.
mortgage
A legal document that pledges a property to the lender as security for payment of a debt.
mortgage broker
A mortgage company that originates loans, then places those loans with a variety of other lending institutions.
mortgagee
The person or company who receives the mortgage as a pledge for repayment of the loan. The mortgage lender.
mortgage insurance (MI)
Insurance written by an independent mortgage insurance company protecting the mortgage lender against loss incurred by a mortgage default. Usually required for loans with an LTV of 80.01% or higher.
mortgagor
The borrower in a mortgage agreement.
N
negative amortization
Some adjustable rate mortgages allow the interest rate to fluctuate independently of a required minimum payment. If a borrower makes the minimum payment it may not cover all of the interest that would normally be due at the current interest rate. In essence, the borrower is deferring the interest payment, which is why this is called "deferred interest." The deferred interest is added to the balance of the loan and the loan balance grows larger instead of smaller, which is called negative amortization.
note
A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.
note rate
The interest rate stated on a mortgage note.
O
origination fee
A fee imposed by a lender to cover certain processing expenses in connection with making a real estate loan. Usually a percentage of the amount loaned, such as one percent.
owner financing
A property purchase transaction in which the property seller provides all or part of the financing.
P
periodic cap
The maximum rate increase for a specific period for a specific loan (ARM) only.
PITI
This stands for principal, interest, taxes and insurance. The components of a monthly mortgage payment.
planned unit development (PUD)
A type of ownership where individuals actually own the building or unit they live in, but common areas are owned jointly with the other members of the development or association.
point
A point is 1 percent of the amount of the mortgage.
prepayment penalty
A fee that may be charged to a borrower who pays off a loan before it is due.
principal balance
The outstanding balance of principal on a mortgage. The principal balance does not include interest or any other charges.
private mortgage insurance (MI)
Mortgage insurance that is provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults. Most lenders generally require MI for a loan with a loan-to-value (LTV) percentage in excess of 80 percent.
Q
qualifying ratios
The ratio of your fixed monthly expenses to your gross monthly income, used to determine how much you can afford to borrow. The fixed monthly expenses would include PITI along with other obligations such as student loans, car loans, or credit card payments.
quitclaim deed
A deed that transfers without warranty whatever interest or title a grantor may have at the time the conveyance is made.
R
rate cap
A limit on how much the interest rate can change, either at each adjustment period or over the life of the loan
rate lock-in
A written agreement in which the lender guarantees the borrower a specified interest rate, provided the loan closes within a set period of time.
Real Estate Settlement Procedures Act (RESPA)
A consumer protection law that requires lenders to give borrowers advance notice of closing costs.
recording
The noting in the registrar's office of the details of a properly executed legal document, such as a deed, a mortgage note, a satisfaction of mortgage, or an extension of mortgage, thereby making it a part of the public record.
refinancing
The process of paying off one loan with the proceeds from a new loan using the same property as security.
remaining term
The original amortization term minus the number of payments that have been applied.
repayment plan
An arrangement made to repay delinquent installments or advances.
revolving debt
A credit arrangement, such as a credit card, that allows a customer to borrow against a preapproved line of credit when purchasing goods and services. The borrower is billed for the amount that is actually borrowed plus any interest due.
S
second mortgage
A mortgage that has a lien position subordinate to the first mortgage.
secured loan
A loan that is backed by collateral.
security
The property that will be pledged as collateral for a loan.
servicer
An organization that collects principal and interest payments from borrowers and manages borrowers' escrow accounts.
stated/documented income
Some loan products require only that applicants "state" the source of their income without providing supporting documentation such as tax returns.
subordinate financing
Any mortgage or other lien that has a priority that is lower than that of the first mortgage.
survey
A drawing or map showing the precise legal boundaries of a property, the location of improvements, easements, rights of way, encroachments, and other physical features.
T
title
A legal document evidencing a person's right to or ownership of a property.
title company
A company that specializes in examining and insuring titles to real estate.
title insurance
Insurance that protects the lender (lender's policy) or the buyer (owner's policy) against loss arising from disputes over ownership of a property.
title search
An investigation into the history of ownership of a property to check for liens, unpaid claims, restrictions or problems, to prove that the seller can transfer free and clear ownership.
transfer tax
State or local tax payable when title passes from one owner to another.
Treasury index
An index that is used to determine interest rate changes for certain adjustable-rate mortgage (ARM) plans.
Truth-in-Lending
A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the annual percentage rate (APR) and other charges. This is intended to facilitate comparisons between the lending terms of different financial institutions.
V
variable rate
An interest rate that may change once an account opens.
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