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MORTGAGE GLOSSARY
Here is a list of terms to help you navigate your way around the unique language used when talking about mortgages.
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Acceleration Clause
Provision in a mortgage that allows the lender to demand payment of the entire principal balance if a monthly payment is missed or some other default occurs.
Adjustable-Rate Mortgage (ARM)
A mortgage with an interest rate that changes during the life of the loan according to movements in an index rate.
Adjustment Date
The date that the interest rate changes on an adjustable-rate mortgage (ARM).
Adjustment Period
The period elapsing between adjustment dates for an adjustable-rate mortgage (ARM).
Amortization
The gradual repayment of a mortgage, both principal and interest, by equal installments calculated to pay off the debt at the end of a fixed period.
Amortization Term
The length of time required to amortize the mortgage loan expressed as a number of months. For example, 360 months is the amortization term for a 30-year fixed-rate mortgage.
Annual Percentage Rate (APR)
The cost of credit, expressed as a yearly rate including interest, mortgage insurance, and loan origination fees. This allows the borrower to compare loans, however APR should not be confused with the actual note rate.
Appraisal
A written analysis, made by a qualified professional called an "appraiser", estimating the value of property.
Appraised Value
An opinion of a property's fair market value, based on an appraiser's knowledge, experience, and analysis of the property.
Assignment
The transfer of a mortgage from one person to another.
Assumption
Agreement between buyer and seller where the buyer takes over the payments on an existing mortgage from the seller. Generally requires a credit review of the new borrower and lenders may charge a fee for the assumption. If a mortgage contains a due-on-sale clause, it may not be assumed by a new buyer.
Balloon (Payment) Mortgage
Usually a short-term fixed-rate loan which involves small payments for a certain period of time and one large payment for the remaining amount of the principal at a time specified in the contract.
Broker
An individual in the business of assisting in arranging funding or negotiating contracts for a client but who does not loan the money himself.
Buydown
When the seller, builder or buyer pays an amount of money up front to the lender to reduce monthly payments during the first few years of a mortgage. Buydowns can occur in both fixed and adjustable rate mortgages.
Caps (Interest & Payment)
Limits the amount the interest rate or the monthly payments on an adjustable rate mortgage may change, either at each adjustment and/or during the life of the loan. Payment caps don't limit the amount of interest the lender is earning and may cause negative amortization.
Closing
Meeting between the buyer, seller and lender or their agents where the property and funds legally change hands. Also called settlement.
Closing Costs
Expenses over and above the price of the property that are incurred. Usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge, etc. Closing costs vary according to the location of the property and lender used.
Commitment
An agreement, often in writing, between a lender and a borrower to loan money at a future date subject to the completion of paperwork or compliance with stated conditions.
Conventional Loan
A mortgage not insured by FHA or guaranteed by the VA or Farmers Home Administration (FmHA).
Conversion Clause
A provision in an ARM allowing the loan to be converted to a fixed-rate at some point during the term. Usually conversion is allowed at the end of the first adjustment period. The conversion feature may cost extra.
Credit Ratio
The ratio, expressed as a percentage, which results when a borrower's monthly payment obligation on long-term debts is divided by his or her net effective income (FHA/VA loans) or gross monthly income (Conventional loans).
Deed of Trust
In many states, this document is used in place of a mortgage to secure the payment of a note. Title is conveyed to a trustee.
Default
Failure to make mortgage payments on a timely basis or to comply with other requirements of a mortgage.
Discount Points
In an ARM with an initial rate discount, the lender gives up a number of percentage points in interest to reduce the rate and lower the payments for part of the mortgage term(usually for one year or less). After the discount period, the ARM rate usually increases according to its index rate. Each point is equal to 1 percent of the loan amount (e.g. two points on a $100,000 mortgage would cost $2,000).
Down Payment
Part of the purchase price of a property that is paid in cash and not financed with a mortgage.
Due-On-Sale Clause
A provision in a mortgage or deed of trust that allows the lender to demand immediate payment of the balance of the mortgage if the mortgage holder sells the home.
Earnest Money
Given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment.
Effective Gross Income
A borrowers normal annual income, including overtime that is regular or guaranteed. Salary is usually the principal source, but other income may qualify if it is significant and stable.
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
Difference between the fair market value of the property and the amount still owed on the mortgage.
Escrow
Refers to a neutral third party who carries out the instructions of both the buyer and seller to handle all the paperwork of settlement or "closing." Escrow may also refer to an account held by the lender into which the homebuyer pays money for tax or insurance payments.
Escrow Disbursements
The use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, and other property expenses as they become due.
Escrow Payment
The part of a mortgagor's monthly payment that is held by the servicer to pay taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due.
Federal Home Loan Mortgage Corporation (FHLMC)
Also called Freddie Mac, is a quasi-governmental agency that purchases conventional mortgages from insured depository institutions and HUD-approved mortgage bankers.
Federal Housing Administration (FHA)
Division of the Department of Housing and Urban Development. Its main activity is the insuring of residential mortgage loans made by private lenders. FHA also sets standard for underwriting mortgages.
Federal National Mortgage Association (FNMA)
Also called Fannie Mae. A congressionally chartered, shareholder-owned company that is the nation's largest supplier of home mortgage funds.
FHA Loan
Loan insured by the Federal Housing Administration (FHA). Also known as a government mortgage.
FHA Mortgage Insurance
A small fee paid at closing or a portion of this fee added to each monthly payment of an FHA loan to insure the loan with FHA. In addition, FHA mortgage insurance requires an annual fee.
Fixed-Rate Mortgage
Mortgage for which the interest rate is fixed throughout the entire term of the loan.
Fully Amortized ARM
An adjustable-rate mortgage (ARM) with a monthly payment that is sufficient to amortize the remaining balance, at the interest accrual rate, over the amortization term.
Government National Mortgage Association (GNMA)
Provides sources of funds for residential mortgages, insured or guaranteed by FHA or VA. Also known as Ginnie Mae.
Gross Monthly Income
Total amount the borrower earns per month, before any expenses are deducted.
Guarantee
Promise by one party to pay a debt or perform an obligation contracted by another if the original party fails to pay or perform according to a contract.
Hazard Insurance
Form of insurance in which the insurance company protects the insured from specified losses, such as fire, windstorm and the like.
Housing Expenses Ratio
Ratio, expressed as a percentage, which results when a borrower's housing expenses are divided by his/her net effective income (FHA/VA loans) or gross monthly income (Conventional loans).
HUD-1 Statement
Document that provides an itemized listing of the funds that are payable at closing. Items that appear on the statement include real estate commissions, loan fees, points, and initial escrow amounts. Each item on the statement is represented by a separate number within a standard numbering system. The totals at the bottom of the HUD-1 statement define the seller's net proceeds and the buyer's net payment at closing.
Hybrid ARM (3/1 ARM, 5/1 ARM, 7/1 ARM)
A combination fixed rate and adjustable rate loan. Can offer the best of both worlds: lower interest rates (like ARMs) and a fixed payment for a longer period of time than most adjustable rate loans. For example, a 5/1 Hybrid ARM has a fixed monthly payment and interest for the first five years and then turns into a traditional adjustable rate loan, based on then-current rates for the remaining 25 years. It's a good choice for people who expect to move or refinance, before or shortly after, the adjustment occurs.
Index
The measure of interest rate changes a lender uses to decide the amount an interest rate on an ARM will change over time. The index is generally a published number or percentage, such as the average interest rate or yield on Treasury bills. Some index rates tend to be higher than others and some more volatile.
Initial Interest Rate
Refers to the original interest rate of the mortgage at the time of closing. This rate changes for an adjustable-rate mortgage (ARM). It's also known as the "start rate" or "teaser rate."
Jumbo Loan
A loan which is larger than the limits set by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.
Lien
Claim upon a piece of property for the payment or satisfaction of a debt or obligation.
Lifetime Payment Cap
For an adjustable-rate mortgage (ARM), a limit on the amount that payments can increase or decrease over the life of the loan.
Lifetime Rate Cap
For an adjustable-rate mortgage (ARM), a limit on the amount that the interest rate can increase or decrease over the life of the loan.
Loan-to-Value (LTV) Ratio
Relationship between the principal balance of the mortgage and the appraised value (or sales price if it is lower) of the property. For example, a $100,000 home with an $80,000 mortgage has an LTV of 80%.
Lock-In Period
The guarantee of an interest rate for a specified period of time by a lender, including loan term and points, if any, to be paid at closing.
Margin
The amount the lender adds to the index on an adjustable rate mortgage to calculate the interest rate at each adjustment.
Mortgage
A legal document that pledges a property to the lender as security for payment of a debt.
Mortgage Broker
An individual or company that brings borrowers and lenders together for the purpose of loan origination.
Mortgage Insurance
Contract that insures the lender against loss caused by a mortgagor's default on a government mortgage or conventional mortgage. Mortgage insurance can be issued by a private company or by a government agency.
Mortgagor
The borrower in a mortgage agreement.
Mortgagee
The lender in a mortgage agreement.
Negative Amortization
Occurs when monthly payments are not large enough to pay all the interest due on the loan. This unpaid interest is added to the unpaid balance of the loan. This means that even after making many payments, you could owe more than you did at the beginning of the loan.
Note
A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.
Origination Fee
Fee paid to the lender for processing a loan application. The fee is usually computed as a percentage of the loan amount and is stated in the form of points. One point is 1% of the loan amount.
Periodic Payment Cap
Limit on the amount that payments can increase or decrease during any one adjustment period.
Periodic Rate Cap
Limit on the amount that the interest rate can increase or decrease during any one adjustment period, regardless of how high or low the index might be.
PITI (Principal, Interest, Taxes, and Insurance)
The four components of a monthly mortgage payment. Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the monthly cost of property taxes and homeowner insurance, whether these amounts are paid into an escrow account each month or not.
PITI Reserves
Cash amount that a borrower must have on hand after making a down payment and paying all closing costs for the purchase of a home. The PITI reserves must equal the amount that the borrower would have to pay for PITI for a predefined number of months.
Points
A point is equal to one percent of the principal amount of your mortgage. For example, if you get a mortgage for $165,000 one point means $1,650 to the lender. Points usually are collected at closing.
Prepayment Penalty
Fee that may be charged to a borrower who pays off a loan before it is due.
Principal
Amount borrowed or remaining unpaid, not including interest.
Principal Balance
The amount of outstanding balance, not counting interest, remaining on a loan.
Private Mortgage Insurance (PMI)
Mortgage insurance 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%.
Qualifying Ratios
Calculations used to determine if a borrower can qualify for a mortgage. They consist of two separate calculations: a housing expense as a percent of income ratio and total debt obligations as a percent of income ratio.
Rate Lock
A commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified interest rate and lender costs for a specified period of time.
Real Estate Settlement Procedures Act (RESPA)
A consumer protection law that requires lenders to give borrowers advance notice of closing costs.
Recision
The cancellation of a contract. With respect to mortgage refinancing, the right of recision law gives, in some cases, the homeowner three days to cancel a contract once it is signed.
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.
Recording Fees
Paid to the lender for recording a home sale or refinance with the local authorities, thereby making it part of the public records.
Refinance
Paying off one loan with the proceeds from a new loan using the same property as security.
Secondary Mortgage Market
Where existing mortgages are bought and sold.
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. The servicer often services mortgages that have been purchased by an investor in the secondary mortgage market.
Settlement
Closing.
Settlement Costs
Closing costs.
Survey
Measurement of land, prepared by a registered land surveyor, showing the location of the land with reference to known points, its dimensions, and the location and dimensions of any building.
Third-party Origination
When a lender uses another party to completely or partially originate, process, underwrite, close, fund, or package the mortgages it plans to deliver to the secondary mortgage market.
Title
Document that gives evidence of an individual's ownership of property.
Title Insurance
Policy, usually issued by a Title Insurance company, which insures a homebuyer against errors in the title search. The cost of the policy is usually a function of the value of the property, and is often borne by the purchaser and/or seller.
Title Search
Examination of municipal records to determine the legal ownership of property. Usually is performed by a title company.
Total Expense Ratio
Total obligations as a percentage of gross monthly income including monthly housing expenses plus other monthly debts.
Treasury Index
An index used to determine interest rate changes for certain adjustable-rate mortgage (ARM) plans. Based on the results of auctions that the U.S. Treasury holds for its Treasury bills and securities or derived from the U.S. Treasury's daily yield curve, which is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market.
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.
Underwriting
The process of evaluating a loan application to determine the risk involved for the lender. Underwriting involves an analysis of the borrower's creditworthiness and the quality of the property itself.
VA Mortgage
A mortgage that is guaranteed by the Department of Veterans Affairs (VA). Also known as a government mortgage. Restricted to individuals qualified by military service or other entitlements.
VA Mortgage Funding Fee
Premium paid on a VA-backed loan either paid at closing or added to the amount financed.
Verification of Deposit (VOD)
Document signed by the borrower's financial institution verifying the status and balance of his/her financial accounts.
Verification of Employment
Document signed by the borrower's employer verifying his/her position and salary.
"Wrap Around" Mortgage
A mortgage that includes the remaining balance on an existing first mortgage plus an additional amount requested by the mortgagor. Full payments on both mortgages are made to the "Wrap Around" mortgagee, who then forwards the payments on the first mortgage to the first mortgagee. These mortgages may not be allowed by the first mortgage holder, and if discovered, could be subject to a demand for full payment.
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