Basic Mortgage Terminology

A
Abstract of title
A summary statement of the successive transactions and other facts on which a title to a piece of land rests.

Additional principal payment
Payment made by the borrow over the scheduled principle due to reduce the balance of a loan, pay the loan off early, or save interest over the life of the loan.

Adjustable-rate mortgage (ARM)
Also referred to as a variable rate mortgage. An ARM is a mortgage where your interest rate and monthly payments may change at scheduled times over the life of the loan and based on the fluctuation of an index. Some lenders may charge a lower interest rate for the initial period of the loan. Most ARMs have a rate cap that limits the amount the interest rate can change, both in an adjustment period and over the life of the loan.

Adjustment cap
The limit on how much a variable interest rate can increase or decrease in a single adjustment period.

Amortization
To pay off a mortgage gradually, usually by periodic payments of principal and interest.

Annual adjustment cap
The limit on how much a variable interest rate on a loan can increase or decrease each year.

Annual percentage rate (APR)
A measure of the annual percentage cost of consumer credit (as in installment buying or a charge account) that is required by law to appear on statements of credit accounts and is variously computed but always takes into consideration the amount financed, the amount of the finance charges, and the schedule of repayment.

Application fees
Nonrefundable fees paid when you apply for the mortgage loan. Fees can include charges for a credit check, property appraisal, document fees, notary fees or other charges.

Appraisal
A valuation of property by the estimate of an authorized person.

Appreciation
An increase in the value of property over time. Important factors in a home’s appreciation are its location, condition and the selling price of similar homes in the area. Appreciation increases the amount of equity, which may also increase the amount you can borrow for a home equity line of credit.

Assessed value
Established value of a property by a public tax assessor. Used to determine property taxes.

B
Balloon loan
This is a type of loan that does not fully amortize over its term. Since it is not fully amortized, a balloon payment is required at the end of the term to repay the remaining principal balance of the loan.

Base rate
An interest rate that is used as a base for pricing variable-rate loans such as adjustable-rate mortgages.

Bond
A real estate bond is a written obligation that is usually secured by a mortgage or a deed of trust.

Bridge loan
A short-term loan used to finance between the termination of one loan and the start of another loan.

Broker
A third party who arranges funding or negotiates a contract between parties, but does not lend the money.

Buy-down
A subsidy for a long-term mortgage offered by a third party, as a builder or developer, to lower interest rates for a buyer in the early years of the loan.

C
Cap
The limit on how much a variable interest rate can increase. Most adjustable-rate mortgages, ARMs, have an annual or semiannual rate caps and lifetime caps.

Cash-out refinance
A mortgage option in which the new mortgage is for a larger amount than the existing loan amount in order to convert home equity into cash for the borrower. This is often an option to lower interest rates, or obtain cash for bills by the borrower.

Certificate of Eligibility
A document issued by the federal government certifying a veteran’s eligibility for a Department of Veterans Affairs (VA) loan.

Certificate of Reasonable Value (CRV)
A document issued by the Department of Veterans Affairs (VA) that establishes the maximum value and loan amount for a VA loan, based on an approved appraisal.

Certificate of Title
A statement provided by an abstract company, title company or attorney stating who holds title to real estate based on the public record.

Close(ing)
The close or closing is the date you will sign and execute your new loan documents. The borrower has three business days, right of rescission period may apply, before the funds are available. The three business days right of rescission period states that in certain real estate secured transactions that involve the refinance of a primary residence, the Truth in Lending Act allows applicants 3 business days to cancel the transaction and prohibits lenders from disbursing proceeds until after the rescission period has lapsed.

Closing costs
Closing costs or settlement costs, are the costs incurred when obtaining your loan. Closing costs may include, but are not limited to the following: attorney’s fees, preparation and title search fees, discount points, appraisal fees, title insurance, and credit report charges. The average is about 3% of your loan amount, and is often paid at closing or right before your loan closes.

Other costs, such as homeowners insurance, property taxes, and escrow impound account funds, aren’t included in closing costs and are separate costs. Be prepared to pay these costs before your loan closes.

Closing Disclosure
A closing document which provides key information such as interest rate, monthly payments, and costs to close the loan. Consumers are required to receive this form no later than 3 business days before they close on the loan.

Closing Statement
A closing statement is a document that records the details of a financial transaction. A home buyer will receive a closing statement from the bank, and the home seller will receive a closing statement from the real estate agent who handled the sale.

Collateral
Property pledged by a borrower to protect the interests of the lender. The borrower risks losing the asset if the loan is not repaid.

Comparables (Comps)
Comparables are properties similar to a particular property for a mortgage. These properties have approximately the same size, location and amenities of the property under consideration for purchase. Comps also help an appraiser determine the fair market value of a property.

Compound Interest
Interest computed on the sum of an original principal and accrued interest

Contingency
A specified condition in a sales contract that must be satisfied before the home sale can occur. For example, when purchasing a home a borrower will make contingent that the house must pass inspection or the seller will make contingent that the borrower must be approved for a loan. There can be additional contingencies dependent on the terms of the sales contract.

Conventional Loan
A home loan that is not insured or guaranteed by the federal government. A conventional loan can be for conforming or non-conforming loan amounts.

Convertibility Clause
A provision in some adjustable-rate mortgages (ARMs) that allows the borrower to change the ARM to a fixed-rate loan at specified times during the life of the loan.

Convertible ARM
Converting an adjustable rate mortgage (ARM) to a fixed-rate loan.

Co-signer
A second person who signs your loan and assumes equal responsibility for payment of the loan.

Credit Bureau
The 3 major credit bureaus are Equifax, Experian and TransUnion. You are legally entitled to receive 1 free report each year from each of these agencies. They gather, record, update and store financial and public records of individuals who have been granted credit and provides this information to lenders and other authorized users for a fee.

Credit Limit
The maximum amount you can borrow under a line of credit.

Credit Report
A record of an individual’s debts and payment habits. It helps a lender determine whether or not a potential borrower is a good business risk. The 3 major credit bureaus that provide credit reports are Equifax, Experian and TransUnion and you are legally entitled to receive 1 free report each year from each of these agencies. Learn how to read a credit report

Credit Score
A credit score is a number between 300-850 that depicts a consumer’s creditworthiness. The higher the score, the better a borrower looks to potential lenders. A credit score is based on credit history: number of open accounts, total levels of debt, and repayment history, and other factors. Credit scores can help to determine eligibility for some types of loans, and impact interest rates.

Creditor
The bank or organization from which you owe money.

Creditworthiness
How likely a borrower is to repay a debt.

D
Debt Consolidation
A single loan to pay off multiple debts. This is a popular reason for a home equity line of credit or for cash out on a refinance.

Debt-to-Income Ratio
Your total monthly debt payments divided by your gross monthly income before taxes. This number is a percentage. Federal Housing Administration (FHA) guidelines recommend that your monthly mortgage payment should be no greater than 31% of your monthly income before taxes and your total monthly debt should be no greater than 43% of your monthly income before taxes.

Deed
A document (warranty or quit-claim) that legally transfers ownership of real estate from a seller to a buyer and given to the buyer at closing.

Deed of Trust
A document used in some states instead of a mortgage; title is vested in a trustee to secure repayment of the loan.

Default
Not making your mortgage payments on time or failure to meet other terms of a loan. Default can and often does lead to foreclosure.

Delinquency
Failure to make payments on time.

Down Payment
How much in cash that you pay for the purchase of your home before your loan. Down payments often range between 3.5% and 20% of the sales price depending on these factors: your loan, your lender and your credit history.

E
Earnest Money
They buyers gives money to the seller to use as a down payment on a home purchase. Putting down a deposit as a good faith gesture. This is usually done when a purchase agreement is signed.

Encumbrance
A claim (such as a mortgage, lien, unpaid taxes, etc) against property.

Equal Credit Opportunity Act (ECOA)
A federal law that requires lenders and other creditors to make credit available without discrimination based on race, color, religion, national origin, age, sex, marital status or receipt of income from public assistance programs.

Equity
The money value of a property or of an interest in a property in excess of claims or liens against it.

Escrow
A deed, a bond, money, or a piece of property held in trust by a third party to be turned over to the grantee only upon fulfillment of a condition.

F
Fair Credit Reporting Act (FCRA)
The Fair Credit Reporting Act (FCRA) is a federal law that regulates the collection of consumers’ credit information and access to their credit reports. It was passed in 1970 to address the fairness, accuracy, and privacy of the personal information contained in the files of the credit reporting agencies.

Fair Market Value
Estimated selling price of a home usually determined by an appraisal.

Fannie Mae
Federal National Mortgage Association, a government-sponsored enterprise that buys and consolidates mortgages for resale in the secondary market.

Federal Housing Administration (FHA)
The Federal Housing Administration, generally known as “FHA”, provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories. FHA insures mortgages on single family homes, multifamily properties, residential care facilities, and hospitals. It also sets standards for underwriting these mortgages and for construction of homes secured by these mortgages.

FHA Home Loan
A mortgage that is insured by the Federal Housing Administration (FHA). Also known as a government loan. FHA mortgage insurance protects the lender (not the borrower) if a borrower defaults on the FHA loan. This insurance enables a lender to provide loan options and benefits often not available through conventional financing.

FICO®
An acronym for Fair Isaac Corporation, which develops the mathematical formulas used to produce credit scores for assessing credit risk. FICO® scores fall between 300–850. The higher the FICO® score, the lower credit risk a consumer presents.

Finance Charge
In United States law, a finance charge is any fee representing the cost of credit, or the cost of borrowing.
Finance charges are expressed as a dollar amount. It includes the amount of interest you will pay during the terms of the loan, origination points and certain other items. Some closing costs are not treated as finance charges.

First Mortgage
A mortgage that is the first or primary lien against a property.

Fixed-Rate Mortgage
A home loan with a predetermined fixed interest rate for the entire term of the loan.

Forbearance
A period during which your monthly loan payments are temporarily suspended or reduced. You may qualify for forbearance if you are willing but unable to make loan payments due to certain types of financial hardships. During forbearance, principal payments are postponed but interest continues to accrue.

Foreclosure
A legal procedure in which property securing a defaulted loan is sold by the lender in order to repay a borrower’s loan. The amount paid by a buyer at the foreclosure may not be enough to fully repay the loan and the borrower may continue to owe the lender the difference.

Forfeiture
The loss of property or money because of a breach of a legal obligation .

Form 1098
Mortgage interest statement. A legal tax form that reports the amount of interest and points paid during the previous year.

Freddie Mac
A government-sponsored enterprise that buys and consolidates mortgages for resale in the secondary market.

G
Good Faith Estimate
Also called a GFE, is a form that a lender must give you when you apply for a reverse mortgage. The GFE lists basic information about the terms of the mortgage loan offer. It includes the estimated costs for the mortgage loan.

Government Loan
A loan that is insured by the Federal Housing Administration (FHA), guaranteed by the Department of Veterans Affairs (VA) or guaranteed by the Rural Housing Service (RHS). The insurance protects the lender if a borrower defaults on the loan. Enables a lender to provide loan options and benefits often not available through conventional financing.

H
Home Equity Line of Credit (HELOC)
A HELOC is a line of credit secured by your home that gives you a revolving credit line to use for expenses or to consolidate other debt, such as high interest credit cards.

Homeowners insurance
Insurance to protect your home against damage from fire, hurricanes, storms, floods and other catastrophes. Homeowners insurance also covers you against theft/vandalism, and personal liability in case someone is hurt or injured on your property.

HUD
HUD stands for the U.S. Department of Housing and Urban Development. HUD is a government agency responsible for the implementation and administration of housing and urban development programs. HUD administers the Federal Housing Administration, enforces RESPA (Real Estate Settlement Procedures Act) regulations and oversees Fannie Mae and Freddie Mac.

I
Income Property
Real estate developed or improved to produce income.

Index
In the context of mortgages, a financial index is the measurement used to decide how much the annual percentage rate will change at the beginning of each adjustment period.

Initial Advance
The first draw or disbursement made from the proceeds of a loan.

Initial Draw Amount
The proceeds of the home equity line of credit or construction loan up to an amount the borrower is allowed to request at closing.

Initial Rate
The starting interest rate. Some people call this the “teaser rate,” because it gives you low interest and low monthly payments at the beginning, but may adjust up at the next adjustment period (it will usually adjust even if the index doesn’t go up, since it’s lower than index plus margin for the initial period).

Inquiry
A request for your credit report, made by you or a company considering you for an offer of credit.

Installment Loan
A financial product that permits individuals to borrow a large sum of money that they can then repay over time. Typically, the loan is repaid in equal payments, known as installments.

Interest Accrual Rate
An accrual rate is the interest rate applied to a financial obligation, such as bonds, mortgages, and credit cards. Usually, it is also the rate used to calculate the monthly payments.

Interest-Only Loan
A borrower pays only the interest on the mortgage through monthly payments for a term (usually 5-7 years)that is fixed on an interest-only mortgage loan. After the term is over a balloon payment is typical at the end of the loan.

Interest Rate
The proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding

Interest Rate Cap
The limit on how much the variable interest rate can increase at any one time.

Investment Property
Property that is purchased to generate rental income, or to be sold once it has appreciated in value.

J
Jumbo Loan
A jumbo loan, sometimes called a jumbo mortgage, is a loan for over the amount set for mortgages eligible for purchase by the federal government sponsored programs Fannie Mae and Freddie Mac. Most loans are bought and administered on single-family home mortgages.

L
Liabilities
An individual’s debts or financial obligations. Liabilities include long-term and short-term debt, including potential losses from legal claims.

LIBOR
Stands for London Interbank Offering Rate. This is an index commonly used for some adjustable-rate mortgages (ARMs).

Lien
The legal claim of a creditor on a borrower’s property, to be used as security for a debt.

Lien Holder
An individual or entity that has placed a lien on real estate property.

Lifetime Adjustment Cap
A limit on how much the variable interest rate can increase during the term of a loan.

Line of Credit
The amount of credit extended to a borrower.

Loan Commitment
An agreement by a commercial bank or other financial institution to lend a business or individual a specified sum of money.