Glossary of Mortgage Terms

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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. Back to Top
Additional Principal Payment
A way to reduce the remaining balance on the loan by paying more than the scheduled principal amount due. Back to Top
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. Sometimes called AMLs (adjustable mortgage loans) or VRMs (variable-rate mortgages). Back to Top
Adjusted Basis
The cost of a property plus the value of any capital expenditures for improvements to the property minus any depreciation taken. Back to Top
Adjustment Date
The date that the interest rate changes on an adjustable-rate mortgage (ARM).Back to Top
Adjustment Period
The period elapsing between adjustment dates for an adjustable-rate mortgage (ARM). Back to Top
Affordability Analysis
An analysis of a buyers ability to afford the purchase of a home. Reviews income, liabilities, and available funds, and considers the type of mortgage you plan to use, the area where you want to purchase a home, and the closing costs that are likely.Back to Top
Amortization
The gradual repayment of a mortgage loan, both principle and interest, by installments. Back to Top
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.Back to Top
Annual Percentage Rate (APR)
The cost of credit, expressed as a yearly rate including interest, mortgage insurance, and loan origination fees. This allows the buyer to compare loans, however APR should not be confused with the actual note rate. Back to Top
Appraisal
A written analysis prepared by a qualified appraiser and estimating the value of a property.Back to Top
Appraised Value
An opinion of a property's fair market value, based on an appraiser's knowledge, experience, and analysis of the property. Back to Top
Asset
Anything owned of monetary value including real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, etc.). Back to Top
Assignment
The transfer of a mortgage from one person to another. Back to Top
Assumability
An assumable mortgage can be transferred from the seller to the new buyer. 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. Back to Top
Assumption Fee
The fee paid to a lender (usually by the purchaser of real property) when an assumption takes place. Back to Top
Balance Sheet
A financial statement that shows assets, liabilities, and net worth as of a specific date.Back to Top
Before-tax Income
Income before taxes are deducted. Back to Top
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.Back to Top
Cap
Limits how much the interest rate or the monthly payment can increase, either at each adjustment or during the life of the mortgage. Payment caps don't limit the amount of interest the lender is earning and may cause negative amortization. Back to Top
Change Frequency
The frequency (in months) of payment and/or interest rate changes in an adjustable-rate mortgage (ARM). Back to Top
Closing
A meeting held to finalize the sale of a property. The buyer signs the mortgage documents and pays closing costs. Also called "settlement." Back to Top
Closing Costs
These are expenses - over and above the price of the property- that are incurred by buyers and sellers when transferring ownership of a property. Closing costs normally include an origination fee, property taxes, charges for title insurance and escrow costs, appraisal fees, etc. Closing costs will vary according to the area country and the lenders used.Back to Top
Compound Interest
Interest paid on the original principal balance and on the accrued and unpaid interest. Back to Top
Consumer Reporting Agency (or Bureau)
An organization that handles the preparation of reports used by lenders to determine a potential borrower's credit history. The agency gets data for these reports from a credit repository and from other sources. Back to Top
Credit Report
A report detailing an individual's credit history that is prepared by a credit bureau and used by a lender to determine a loan applicant's creditworthiness. Back to Top
Credit Risk Score
A credit score measures a consumer's credit risk relative to the rest of the U.S. population, based on the individual's credit usage history. The credit score most widely used by lenders is the FICO® score, developed by Fair, Issac and Company. This 3-digit number, ranging from 300 to 850, is calculated by a mathematical equation that evaluates many types of information that are on your credit report. Higher FICO® scores represents lower credit risks, which typically equate to better loan terms. In general, credit scores are critical in the mortgage loan underwriting process. Back to Top
Deed of Trust
The document used in some states instead of a mortgage. Title is conveyed to a trustee. Back to Top
Default
Failure to make mortgage payments on a timely basis or to comply with other requirements of a mortgage. Back to Top
Delinquency
Failure to make mortgage payments on time. Back to Top
Deposit
This is a sum of money given to bind the sale of real estate, or a sum of money given to ensure payment or an advance of funds in the processing of a loan. Back to Top
Discount
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. Back to Top
Down Payment
Part of the purchase price of a property that is paid in cash and not financed with a mortgage. Back to Top
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. Back to Top
Equity
The amount of financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on the mortgage. Back to Top
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 of funds or documents into an escrow account to be disbursed upon the closing of a sale of real estate.Back to Top
Escrow Disbursements
The use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, and other property expenses as they become due. Back to Top
Escrow Payment
The part of a mortgagor’s monthly payment that is held by the servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Back to Top
Fannie Mae
A congressionally chartered, shareholder-owned company that is the nation's largest supplier of home mortgage funds. Back to Top
FICO Score
FICO® scores are the most widely used credit score in U.S. mortgage loan underwriting. This 3-digit number, ranging from 300 to 850, is calculated by a mathematical equation that evaluates many types of information that are on your credit report. Higher FICO® scores represent lower credit risks, which typically equate to better loan terms. Back to Top
First Mortgage
The primary lien against a property.Back to Top
Fixed Installment
The monthly payment due on a mortgage loan including payment of both principal and interest. Back to Top
Fixed/Adjustable Mortgage (5/5, 7/23, 10/10)
A combination fixed rate and adjustable rate loan - such as with the 5/5, 7/23, and 10/10/10 mortgages - 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 7/23 mortgages has a fixed monthly payment and interest for the first seven years and then turns into a traditional adjustable rate loan, based on then-current rates for the remaining 25 years, adjusting once per year. The 5/5 has a fixed monthly payment for the first five years, adjusting once every five years thereafter, and the 10/10/10 has a fixed monthly payment for the first ten years, adjusting once every ten years thereafter. Fixed/Adjustable Mortgages are a good choice for people who expect to move or refinance, before or shortly after, the adjustment occurs. Back to Top
Fixed-Rate Mortgage (FRM)
A mortgage interest that are fixed throughout the entire term of the loan. Back to Top
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. Back to Top
Housing Expense Ratio
The percentage of gross monthly income budgeted to pay housing expenses. Back to Top
HUD-1 statement
A 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 standardized 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. Back to Top
Hybrid ARM
See Fixed/Adjustable Mortgage. Back to Top
Index
The index is 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. Back to Top
Initial Interest Rate
This 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 "start rate" or "teaser." Back to Top
Installment
The regular periodic payment that a borrower agrees to make to a lender.Back to Top
Insured Mortgage
A mortgage that is protected by the Federal Housing Administration (FHA) or by private mortgage insurance (MI). Back to Top
Interest
The fee charged for borrowing money. Back to Top
Interest Accrual Rate
The percentage rate at which interest accrues on the mortgage. In most cases, it is also the rate used to calculate the monthly payments. Back to Top
Interest Rate Buydown Plan
An arrangement that allows the property seller to deposit money to an account. That money is then released each month to reduce the mortgagor's monthly payments during the early years of a mortgage.Back to Top
Interest Rate Ceiling
For an adjustable-rate mortgage (ARM), the maximum interest rate, as specified in the mortgage note. Back to Top
Interest Rate Floor
For an adjustable-rate mortgage (ARM), the minimum interest rate, as specified in the mortgage note. Back to Top
Late Charge
The penalty a borrower must pay when a payment is made a stated number of days (usually 15) after the due date. Back to Top
Lease-Purchase Mortgage Loan
An alternative financing option that allows low- and moderate-income home buyers to lease a home with an option to buy. Each month's rent payment consists of principal, interest, taxes and insurance (PITI) payments on the first mortgage plus an extra amount that accumulates in a savings account for a downpayment. Back to Top
Liabilities
A person's financial obligations. Liabilities include long-term and short-term debt. Back to Top
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 mortgage. Back to Top
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. See cap. Back to Top
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. Back to Top
Liquid Asset
A cash asset or an asset that is easily converted into cash. Back to Top
Loan
A sum of borrowed money (principal) that is generally repaid with interest. Back to Top
Loan-to-Value (LTV) Percentage
The 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 percent. Back to Top
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. Short term locks (under 21 days), are usually available after lender loan approval only. However, many lenders may permit a borrower to lock a loan for 30 days or more prior to submission of the loan application. Back to Top
Margin
The number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment. Back to Top
Maturity
The date on which the principal balance of a loan becomes due and payable. Back to Top
Monthly Fixed Installment
That portion of the total monthly payment that is applied toward principal and interest. When a mortgage negatively amortizes, the monthly fixed installment does not include any amount for principal reduction and doesn't cover all of the interest. The loan balance therefore increases instead of decreasing. Back to Top
Mortgage
A legal document that pledges a property to the lender as security for payment of a debt. Back to Top
Mortgage Insurance
A 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. Back to Top
Mortgage Insurance Premium (MIP)
The amount paid by a mortgagor for mortgage insurance.Back to Top
Mortgagor
The borrower in a mortgage agreement. Back to Top
Net Worth
The value of all of a person's assets, including cash. Back to Top
Non Liquid Asset
An asset that cannot easily be converted into cash.Back to Top
Note
A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time. Back to Top
Origination Fee
A fee paid to a lender for processing a loan application. The origination fee is stated in the form of points. One point is 1 percent of the mortgage amount.Back to Top
Owner Financing
A property purchase transaction in which the party selling the property provides all or part of the financing. Back to Top
Payment Change Date
The date when a new monthly payment amount takes effect on an adjustable-rate mortgage (ARM) or a graduated-payment mortgage (GPM). Generally, the payment change date occurs in the month immediately after the adjustment date. Back to Top
Periodic Payment Cap
A limit on the amount that payments can increase or decrease during any one adjustment period. Back to Top
Periodic Rate Cap
A 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. Back to Top
PITI Reserves
A 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 principal, interest, taxes, and insurance (PITI) reserves must equal the amount that the borrower would have to pay for PITI for a predefined number of months (usually three). Back to Top
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 and may be paid by the borrower or the home seller, or may be split between them.Back to Top
Prepayment Penalty
A fee that may be charged to a borrower who pays off a loan before it is due. Back to Top
Pre-Approval
The process of determining how much money you will be eligible to borrow before you apply for a loan. Back to Top
Prime Rate
The interest rate that banks charge to their preferred customers. Changes in the prime rate influence changes in other rates, including mortgage interest rates.Back to Top
Principal
The amount borrowed or remaining unpaid. The part of the monthly payment that reduces the remaining balance of a mortgage.Back to Top
Principal Balance
The outstanding balance of principal on a mortgage not including interest or any other charges. Back to Top
Principal, Interest, Taxes, and Insurance (PITI)
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 homeowners insurance, whether these amounts that are paid into an escrow account each month or not. Back to Top
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 percent. Back to Top
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. Back to Top
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.Back to Top
Real Estate Agent
A person licensed to negotiate and transact the sale of real estate on behalf of the property owner.Back to Top
Real Estate Settlement Procedures Act (RESPA)
A consumer protection law that requires lenders to give borrowers advance notice of closing costs.Back to Top
REALTOR®
A real estate agent is a REALTOR® when he or she is a member of the National Association of REALTORS®. Back to Top
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. Back to Top
Refinance
Paying off one loan with the proceeds from a new loan using the same property as security.Back to Top
Revolving Liability
A credit arrangement, such as a credit card, that allows a customer to borrow against a pre-approved line of credit when purchasing goods and services. Back to Top
Secondary Mortgage Market
Where existing mortgages are bought and sold.Back to Top
Security
The property that will be pledged as collateral for a loan. Back to Top
Seller Carry-back
An agreement in which the owner of a property provides financing, often in combination with an assumable mortgage. See Owner Financing. Back to Top
Servicer
An organization that collects principle 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. Back to Top
Standard Payment Calculation
The method used to determine the monthly payment required to repay the remaining balance of a mortgage in substantially equal installments over the remaining term of the mortgage at the current interest rate. Back to Top
Total Expense Ratio
Total obligations as a percentage of gross monthly income including monthly housing expenses plus other monthly debts. Back to Top
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. Back to Top
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.Back to Top
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. Back to Top