Mortgage Terms A - Z

A

Acceleration Clause
This a clause that gives the lender an option to call the entire loan balance due and payable. This clause could be exercised for many reasons but usually happens on the transfer of property or because the buyer has failed to make regular payments.

Adjustable-Rate Mortgage (ARM)s
A mortgage or home equity loan in which the interest rate and monthly payment may change according to a certain market index.

Additional Principal Payment
The borrower can add an extra amount and apply it to the mortgage balance. Additional payments could be added to the current monthly mortgage payment or could be made via a lump sum at any point in time.

Amortization
The gradual reduction of the principal owed on a debt. In the beginning of a mortgage, a majority of each payment is applied to the interest. At the end of the loan, most of each payment is applied toward the principal.

Amortization Term
The amount of time required to pay off the loan. This is expressed in month. For example a 30-year loan is shown as 360 months.

Annual Adjustment Cap
A limit on how much the variable interest rate can go up or down in a year.

Annual Percentage Rate (APR)
The annual cost of a loan to a borrower. Like an interest rate, the APR is expressed as a percentage of the loan amount. Unlike an interest rate, however, it includes other charges or fees to reflect the total cost of the loan. The Federal Truth in Lending Act requires that every consumer loan agreement disclose the APR. Since all lenders must follow the same rules to ensure the accuracy of the APR, borrowers can use the APR as a good basis for comparing certain costs of loans.

Application Fees
Non-refundable fees paid when you apply for your loan. They may include charges for property appraisal, a credit report, etc.

Appraisal or Appraised Value
An informed, written estimate of the value of property by a qualified professional.

Appraisal Fee
A charge for estimating the value of property.

Appreciation
An increase in the value of an asset over time. If the home is held for a long period of time, it may go up in value above the purchase price.

Asset
Something that is owned; such as real estate or stocks.

Assumable
Means the buyer is able to take over an existing mortgage at the existing interest rate.

B

Balloon
A short-term loan with small payments at the beginning but a large lump sum due at the end.

Bankruptcy
A proceeding in federal court that alters or eliminates a person's obligation to repay debts to creditors.

Base Rate
The underlying interest rate that is used as an index for pricing variable-rate loans.

Biweekly Mortgage
This is also known as a Canadian Mortgage. Basically, half of the mortgage payment is made every two weeks. At the end of the year, an extra months payment has been made and it's applied to the principal balance of the mortgage.

Broker
A third party who brings borrowers and lenders together but does not loan money directly.

C

Cap
A limit on how much an interest rate can go up over a specific period of time.

Closing
The time and place where all the loan documents are signed.

Closing Costs
Fees that are paid for obtaining a loan. These fees could range from Title insurance, property taxes, documentation and loan origination, etc.

Conforming Loan
A mortgage loan that adheres to the underwriting guidelines of Freddie Mac or Fannie Mae.

Credit Reporting Agency or Credit Bureau
An organization that collects information about you which is used to gauge your creditworthiness to lenders.

Credit Report
A record of a person's debts and repayment history.

Credit Score
A number that rates the quality of a person's creditworthiness.

Creditworthiness
The likelihood that a borrower will repay money that is owed.

D

Debt to Income Ratio
This is a calculation used by lenders to determine the maximum monthly mortgage payment as well as the back end debt. Backed debt is all other debt such as car payments, credit card payments, student loans, etc.

Default
Failure to make payments on time.

Depreciation
A decline in the value of an asset. (Opposite of appreciation)

Discount Points
An amount paid at closing in exchange for a lower interest rate.

Down Payment
The amount of cash you initially put toward the purchase of your home.

E

Earnest Money Deposit
When purchasing a home, a buyer usually writes a check and offers it to the seller to show their good faith. The earnest money deposit could also be a promissory note.

Equity
The amount that you actually own in a home. The difference between the home's value and the outstanding balance of the mortgage.

Escrow
The transfer of funds to a third party for the purpose of paying homeowner's insurance and property tax.

F

Fair Credit Reporting Act (FCRA)
The act that gives consumers rights when dealing with credit bureaus.

Fannie Mae
Federal National Mortgage Association, which is a government-sponsored enterprise that buys mortgages on the secondary market.

FHA
Federal Housing Administration, an agency of the Department of Housing and Urban Development.

FICO ®
Fair Isaac Company, Inc., the company that developed the credit score used by mortgage lenders to determine credit worthiness.

Fixed-Rate Mortgage
A home loan with an interest rate that remains the same throughout the life of the loan.

Foreclosure
A legal procedure where property is sold by the lender to secure repayment, due to default by the borrower.

Freddie Mac
A government-sponsored enterprise that buys mortgages on the secondary market.

G

Good Faith Estimate (GFE)
This form should be given to everyone who obtains a mortgage. It is a detailed estimate of the costs associated with a mortgage and is required by the Real Estate Settlement and Procedures Act.

Gross Annual Income
The total amount of income before taxes are taken out.

H

Homeowner's Insurance
Insurance that protects a home against damage from fire, hurricanes and other catastrophes.

HUD
U.S. Department of Housing and Urban Development.

I

Index
The measurement used to determine the interest rate. The index plus margin equals the interest rate.

Initial Rate
The beginning interest of a loan. This is an under market rate that increases after the initial period.

Interest
The cost for borrowing money.

Interest Rate
The amount of interest charged on a loan. It is a percentage of the loan amount.

Interest Rate Cap
A limit on how much an interest rate can go up.

J

Jumbo Loan
A type of non-conforming loan that does not conform to Freddie Mac or Fannie Mae guidelines because of the high amount borrowed.

L

Late Charge
A fee that is assessed to the buyer for not making payments on time.

Lender
A person or business that loans money. Lifetime Adjustment Cap
A limit on how high the interest rate can rise over the course of a loan

Loan Application
The process where an applicant provides financial and other information to a lender to determine if a loan can be approved.

Loan Amount
The amount of debt, not including interest.

Loan to Value Ratio (LTV)
This is the difference between the actual loan balance and its present value. For example, if a home is worth $100,000 and has a loan balance of $80,000, the loan to value ratio would be 80%.

Lock
When applying for a loan, most lenders will lock-in the interest rate to protect the borrower in the event that interest rates start to rise while the loan is being obtained.

M

Margin
Points that the lender adds to the index rate to determine the interest rate.

Maturity Date
The day on which all outstanding principal, interest, and fees will be repaid.

Mortgage
In purchasing real estate the borrower obtains a mortgage and provides the lender with a lien to secure repayment of the debt.

Mortgage Insurance (PMI)
Protects the lender if the borrower should default on the loan. This type of insurance is usually placed on conventional loans and is required for all first mortgage loans that have a loan balance above 80% of the purchase price.

Mortgage Insurance Premium (MIP)
This is required on any loan insured by the Federal Housing Administration (FHA). The fee is charged to the borrower in two ways, a one-time fee and a monthly fee.

Mortgagee
The lending institution that loans money to purchase real estate.

Mortgagor
The person(s) who obtain a loan to purchase real estate.

N

Non-Conforming Loan
A mortgage loan that does not conform to Freddie Mac or Fannies Mae underwriting guidelines.

Note
A written agreement in which a borrower agrees to pay a company for money that is borrowed.

O

Origination Date
The closing date.

Origination Fee
This fee is charged by a broker, banker or lender to process the loan application. You might see the fee charged as a percentage – 1% for .5% Recently, some lenders are charging a flat rate fee (example: $500.00) to process the loan application.

Outstanding Balance
The balance owed on a debt.

Owner Financing
This happens when the seller of a property acts as the lender for the buyer.

P

Payment
The amount of money paid periodically that includes principal, interest and any applicable escrow payments.

PITI
Principal, Interest, Taxes and Insurance.

PMI
Private Mortgage Insurance and is used on conventional loans. This is required if you put down less than 20% on your home.

Points
An amount equal to 1% of the value of the loan that are charged in order to gain a more favorable interest rate.

Prequalifying
The lender gathers some basic information on the borrower to determine the maximum amount the lender is willing to loan.

Preapproved
The borrower has completed the application process, credit check, verification of employment, etc. At this stage, all that is usually required of the borrower is a sales contract and a property appraisal.

Prepaid Expenses
The expenses paid in advance at closing (escrow fees, prepaid interest, etc.)

Prepaid Interest
The interest for the first month of the mortgage, collected at closing.

Prepayment Penalty
A penalty some lenders assess for paying off a mortgage too early.

Principal
The amount of money borrowed on a loan.

Processing Fees
Fees that cover the administrative costs of a mortgage loan.

Property Tax
A fixed percentage based on the value of the property. The local government assesses this based on specific values.

R

Rate
The rate of interest on a loan

Rate Lock
The securing of an interest rate for a period of time.

Refinancing
Paying off one loan with another loan.

Real Estate Settlement Procedures Act (RESPA)
A federal law that requires lenders to provide borrowers with certain information about transaction costs prior to settlement.

Revolving Line of Credit
A line of credit that allows a certain amount of money (the credit limit) to be borrowed and re-borrowed. Credit cards are revolving lines of credit.

S

Secondary Market
The market in which lenders and investors buy and sell existing mortgage notes.

Second Mortgage
A mortgage that is subordinate to the first mortgage.

Settlement
The process of signing all documents related to the purchase of real estate.

T

Term
The amount of time it will take to pay off a loan. (15 years, 30 years, etc.)

Title
Written document that defines who owns the property.

Truth-in-Lending
Lenders are required by law to disclose the real cost of the loan in a dollar amount and Annual Percentage Rate (APR).

U

Underwriting
The process by which the lender decides whether to loan money to a potential borrower based on their creditworthiness and the ability to repay the loan.

V

VA
Veterans Affairs, a branch of the federal government that provides home loan guarantees for qualified veterans of U.S. military forces.