Glossary & Terms

Adjustable Rate Mortgage (ARM): The interest rate on these loans fluctuates periodically in response to changing market conditions. As the interest rate fluctuates, your mortgage payment will be adjusted up or down. Rate and payments adjust at the end of 1, 3, or 5 years, and every year thereafter. The initial rate on the one-year ARM is typically 2%­3% below fixed rate loans.

Adjustment Interval: On an ARM, the time between changes in either a monthly payment or an interest rate, usually one, three or five years, depending on the index.

Annual Percentage Rate (APR): A calculation of the cost of credit, including the interest rate and finance charges such as discount points, closing costs, and mortgage insurance premiums.

Amortization: Debt reduction through regularly scheduled payments, which are calculated to pay off the loan within a specified period of time.

Application Fees: Fees taken at the time of application to cover the cost of services, such as a credit report and appraisal, which are applied toward your closing costs.

Appraisal: The value on a specific property. The maximum amount of the mortgage is the lesser of the sales price or the appraised value.

Assessed Value: The value of the property on which property taxes are determined.

Assumption: Assumable mortgages allow you to transfer your mortgage to the new owner of your home, if you should sell your home (provided the new owner meets the lender's credit standards.)

Balloons: A product that offers a fixed rate with the full unpaid balance due in 5 or 7 years.

Broker: An individual who negotiates contracts or arranges funding for a client, but does not actually loan the money personally. 

Buy-Down: A process whereby a lender or a builder subsidizes a mortgage by initially lowering the interest rate. When the subsidy terminates, the payments increase.

Caps: On an ARM, the maximum amount of interest rate or payments. The concept of caps benefits the consumer by limiting the amount ARM interest rates or payments may increase.

Cash Out: The money a borrower receives for refinancing his or her current mortgage to pay off debts or make home improvements.

Certificate of Eligibility: A document issued by the Veterans Administration, which verifies veterans or enlisted persons eligibility for a VA mortgage.

Closing: A meeting comprised of the lender, buyer and seller to legally exchange the property and funds (see Closing Costs.)

Closing Costs: Charges associated with obtaining a mortgage loan which are charged to the borrower by the lender or third parties (such as closing agents, title insurance companies, mortgage brokers, and government agencies.)

Commitment: A promise by a lender or an investor, usually in writing, with specific terms and conditions.

Contract of Sale: A contract stating terms and conditions, between buyer and seller of a property, to transfer ownership.

Conventional Fixed-Rate Loan: A real estate mortgage that adheres to conventional standards (most conform to Freddie Mac or Fannie Mae guidelines) and retains the same interest rate over the term of the loan for the period in which you own the home.

Deed: The title of ownership to a piece of real estate.

Default: Failure to make monthly payments on a mortgage.

Delinquency: Failure to make payments in a timely manner, which could possibly lead to foreclosure.

Discount Points: A fee charged by lenders to reduce the initial interest rate. Discount points are a percentage of the loan amount you can pay to reduce your initial interest rate. One "point" equals 1% of the loan amount.

Down Payment: The amount of money that the buyer puts towards the purchase of the property before closing.

Equal Credit Opportunity Act (ECOA): A federal law requiring all lenders and creditors to provide equal opportunities to those requesting credit, regardless of race, religion, color, national origin, sex, age, income or marital status.

Equity: The value of the home after the balance of any outstanding mortgage loans are deducted, plus any increase in the value of the property.

Escrow: An account set up by the lender in which funds are held until the conditions of a contract are met or until payments from the account become due (e.g., insurance, property taxes, etc.)

Extended Lock: The extended lock goes beyond the standard lock periods. Rate lock protection can be extended to 80 or 110 days by paying an up-front fee of 1% which is applied to the closing costs.

Fannie Mae (FNMA): Federal National Mortgage Association—a federal government-sponsored enterprise which purchases mortgages made by lenders.

Federal Housing Administration (FHA) Loans: These government-insured mortgage offer lower down payments and relaxed qualifying guidelines. Most lenders offer FHA loans and will discuss the restrictions and benefits that apply in your area.

Fixed Rate: When the interest rate of a mortgage remains the same throughout the life of the loan.

Float Down: A float-down plan allows the borrower to lock-in an interest rate on a loan, yet retain the right to lower that interest rate. If rates have lowered after loan approval, the borrower may "float down" to the lower interest rate. For this service, there is a small up front fee which may be refunded if this float-down option is not exercised.

Foreclosure: The legal process by which a lender or seller forces the sale of a property because a borrower has not met the terms of a mortgage loan.

Freddie Mac (FHLMC): Federal Home Loan Mortgage Corporation—a federal government-sponsored enterprise which purchases mortgages made by lenders.

Ginnie Mae (GNMA): The Government National Mortgage Association—a federal government-sponsored enterprise which purchases government loans from lenders.

Good Faith Estimate: As required by the Real Estate Settlement Procedures Act, this estimate discloses the settlement charges the borrower will incur at closing. This disclosure has estimated costs that may be different than the actual costs due at settlement.

Hazard Insurance: Insurance to protect the borrower from specific losses such as from windstorm, hail or fire.

HUD 1 Settlement Statement: An itemization of costs associated with purchasing a home. This document is used during closing and is mandated by the Department of Housing and Urban Development (HUD.)

Interest Rate: The charge assessed to the borrower for the use of credit.

Jumbo Mortgage: A mortgage for a higher principal amount than conventional FNMA/FHLMC market maximums—currently over $240,000.

Lien: A claim on the borrower's property for the payment of debt.

Loan-to-Value Ratio (LTV): The relationship between the mortgage loan amount and the appraised property value expressed as a percentage. For example, for a property appraised at $100,000, and a loan amount of $80,000, the LTV would be 80%. Note: Loans with LTV's above 80% may require private mortgage insurance. Some programs may require private mortgage insurance on LTV's lower than 80%.

Lock-in Period: A period of time in which the quoted interest rate and discount on a specific loan is guaranteed. For example, if a lender quotes an interest rate of 8% on a $100,000 loan with a discount of 2% for 45 days, the borrower is guaranteed that quote if the loan is approved and closed within that stated time. A lock-in agreement does not constitute a mortgage loan commitment.

Mortgage Insurance Premium (MIP): An insurance fee required by the FHA on all FHA loans. This fee is collected up front as a one-time premium at closing and there are monthly payments.

Mortgage Loan: The mortgage is your agreement to assure your property as security. The loan uses your property as collateral in case you default on the terms of the loan.

Mortgagee: The lender.

Mortgagor: The borrower.

Origination Fee: A fee charged by a lender for processing a loan. Origination fees are a percentage of the loan amount charged by the lender to cover the cost of processing the loan. This fee is usually 1% of the loan amount.

Points: (See Discount Points.)

Pre-paids: Fees which are put into escrow or otherwise prepaid at closing (e.g., insurance, real estate taxes, and interest.)

Principal: The amount of debt, excluding interest, remaining on a loan.

Principal, Interest, Taxes & Insurance (P.I.T.I.): The total monthly payment on a mortgage loan. Your monthly mortgage payment consists of a payment on the principal of your loan, the interest payment and your escrow payment (monthly payments collected to fund your hazard insurance premium and property taxes.)

Private Mortgage Insurance (PMI): Insurance policy paid for by the borrower which protects the lender from loss due to nonpayment of the loan. This is normally required if the down payment on a conventional loan is less than 20% of the sales price.

Processing: The process of obtaining and verifying borrower documentation.

Qualifying Ratios: Percentage guidelines used by lenders to determine maximum monthly mortgage payments borrowers qualify for based on income and debt.

Real Estate Agent: A licensed professional who helps people buy and sell homes.

Real Estate Settlement Procedures Act (RESPA): A federal law requiring lenders to disclose information and estimated settlement costs to a borrower.

Refinance: Acquiring a replacement mortgage on a property you already own, usually requested by a borrower in order to obtain a lower interest rate, a shorter loan term or cash out.

Sales Contract: A written agreement between buyer and seller stating terms and conditions of a sale or exchange of property.

Servicing a Loan: The lender's responsibilities throughout the term of the mortgage, such as the collection of payments on the loan and the payment of taxes, insurance, etc.

Term: The time between the borrowing date and the loan's due date. For example, a 15-year mortgage has a term of 15 years.

Title: A written document providing evidence of ownership of a property.

Title Insurance: Insurance that guarantees and insures the buyer and/or lender's ownership interest in the property. The owner's title insurance insures the buyer's title to the property against ownership claims of third parties. The lender's (or mortgagee's) title insurance insures the lien priority of the mortgage lender's mortgage on the property. The lender only requires mortgagee's title insurance.

Title Search: Research, usually done by a title company, to determine who legally owns a property.

Truth-In-Lending: A federal law requiring lenders to disclose the APR (annual percentage rate) to the borrower after loan application.

Underwriting: The process of determining the buyer's ability to repay the requested loan amount, including, for example, credit checks, review of credit reports, employment verification, verification of assets and liabilities, and review of the current appraisal of the property proposed to be mortgaged.

VA Loans: Loans guaranteed by the Veterans Administration that is available to veterans of the armed services, those currently in the service or reserves and their spouses. It is possible to obtain a VA loan with no money down. Most lenders offer VA loans and will discuss the restrictions and benefits that apply in your area.