Mortgage Terms

Mortgage Terminology

To help you navigate through the mortgage process here is a list of terms and definitions. 

Abstract of Title
A written history of ownership to a specific area of land. An abstract of title covers the period from the original source of title to the present time and summarizes all subsequent documents that have been recorded against that land.
Adjustable-Rate Mortgage (ARM)
With adjustable-rate mortgages (commonly called ARMs), the interest rate changes over time according to terms specified in advance by the lender. The initial interest rate is usually lower than that offered with a fixed-rate mortgage. This means that the monthly repayment amount would also be lower. At predetermined times, the interest rate will be adjusted either up or down. Consequently, the monthly payment amount will also increase or decrease. Even though the interest rate is subject to change, most adjustable-rate mortgage programs offer the protection of a "rate cap," which limits the amount the rate can be increased each year and over the life of the loan.
Adjustment Date
The date the interest rate changes on an ARM.
Adjustment Period
The amount of time between the adjustment dates for an adjustable-rate mortgage. 
The loan payment consists of a portion which will be applied to pay the accruing interest on a loan, with the remainder being applied to the principal. Over time, the interest portion decreases as the loan balance decreases, and the amount applied to principal increases so that the loan is paid off (amortized) in the specified time. 
Amortization Term
The amount of time required to repay the mortgage loan. The amortization term is expressed in months. For example, for a 30-year, fixed-rate mortgage, the amortization term is 360 months (30 years X 12 months).

Amortization Schedule
A table which shows how much of each payment will be applied toward principal and how much toward interest over the life of the loan. It also shows the gradual decrease of the loan balance until it reaches zero. 

Annual Percentage Rate (APR)
This is not the note rate on your loan. The annual percentage rate is a rate that reflects the total cost of your mortgage loan expressed in terms of an annual interest rate. The APR reflects factors including the interest rate on your mortgage loan, the term of the loan, and the other applicable costs of financing such as points, fees and certain closing costs.

The form used to apply for a mortgage loan, containing information about a borrower's income, savings, assets, debts, and more. 

A written justification made of the price paid for a property, primarily based on an analysis of comparable sales of similar homes nearby. 

Items of value owned by an individual. Assets that can be converted into cash are considered "liquid assets." These are bank accounts, stocks, bonds, mutual funds, and so on. Other assets include real estate, personal property, and debts owed to an individual by others. 

Balloon Mortgage
A balloon mortgage is a mortgage that is amortized over the full term of the loan repayment period but at the end of a specified period the balance of the mortgage comes due. Thus, a balloon payment needs to be made. For example, with a 7-year balloon you would make monthly payments for seven years that have been calculated based on a 30-year mortgage payment. At the end of the 7 years, the remaining principal balance would be due and payable in full. 

Balloon Payment
The final lump sum payment that is due at the termination of a balloon mortgage. 

The person applying for a mortgage loan, and the person who will be responsible for repaying the loan. 

Bridge Loan
Not used much anymore, bridge loans are obtained by those who have not yet sold their previous property, but must close on a purchase property. The bridge loan becomes the source of their funds for their down payment. One reason for their lack of use is that lenders can now lend a higher loan to value. In addition, sellers often prefer to accept offers from buyers who have already sold their property.

Buydown Mortgage
A temporary buydown is a mortgage where an initial lump sum payment is made by any party to reduce a borrower's monthly payments during the first few years of a mortgage. A permanent buydown reduces the interest rate over the entire life of a mortgage. 

Adjustable Rate Mortgages have fluctuating interest rates, but those fluctuations are usually limited to a certain amount. 

Currency, checks and other negotiable instruments acceptable for direct deposit by a bank. 

Cash-Out Refinance
When a borrower refinances his mortgage at a higher amount than the current loan balance with the intention of pulling out money for use. 

Change Frequency
The frequency (in months) of payment and/or interest rate changes in an adjustable-rate mortgage. 

A meeting at which the sale of a property is finalized by the buyer and seller signing the documents needed to transfer legal ownership of the property. The mortgage documents are signed and closing costs are also paid at this time. Also called "settlement."

Closing Costs
Money paid by the borrower in connection with the closing of a mortgage loan. This generally involves an origination fee, discount points, appraisal, credit report, title insurance, attorney's fees, survey and pre-paid items such as tax and insurance escrow payments. Also called "settlement." 

Closing Statement
A list giving a complete breakdown of costs involved in a real estate transaction, prepared by the lender's agent at closing. Also referred to as the HUD1. 

If more than one person will be responsible for repaying the loan, the second person listed on the application is the Co-Borrower. If there will be more than one borrower, either one can be listed as the borrower and/or co-borrower, but the borrower's name must appear on the deed to the property being purchased. 

Commitment (Loan)
A binding pledge made by the lender to the borrower to make a loan, usually at a stated interest rate within a given period of time for a given purpose, subject to the compliance of the borrower to stated conditions. 

Commitment Letter
A formal offer by a lender stating the terms under which it agrees to lend money to a homebuyer. Also known as a "loan commitment."

Comparables are properties similar to the property under consideration; they are reasonably similar in size, location, and amenities and have been recently sold. Comparables help the appraiser determine the approximate fair market value of the subject property. Also referred to as "Comps." 

Construction Loan
A short-term, interim loan for financing the cost of construction. The lender makes payments directly to the builder at periodic intervals as the home is built. Once the home is complete, the interim loan is converted to the mortgage loan. 

A condition that must be met before a contract is legally binding. For example, home purchasers often include a contingency that specifies that the contract is not binding until the purchaser obtains a satisfactory home inspection report from a qualified home inspector.

Conventional Mortgage
A mortgage that is not insured or guaranteed by the federal government. 

Convertible ARM
An adjustable-rate mortgage that can be converted to a fixed-rate mortgage under specified conditions. 

Credit History
A record of an individual's open and fully repaid debts. A credit history helps a lender determine whether a potential borrower has a history of repaying debts in a timely manner. 

Credit Report
An account of an individual's credit history that is prepared by a credit bureau and used by a lender to determine a loan applicant's creditworthiness. 

Credit Repository
An organization that gathers, records, updates, and stores financial and public records information about the payment records of individuals who are being considered for credit. 

An amount owed to another. Also referred to as liability.

Debt-to-Income Ratio
Relationship of a borrower's monthly payment obligation on long-term debts divided by gross monthly income, expressed as a percentage. Also called the bottom ratio or back-end ratio. 

The legal document conveying title to a real property. 

The failure to make on-time payment in the amount specified in the terms of the obligation or note. 

The sum of money given to bind a sale of real estate. Also knows as "earnest money." 

Discount Point
A point paid to the lender to permanently buy down or lower and interest rate. It is usually a percentage of the loan amount. 

Down Payment
Money paid to make up the difference between the purchase price and the mortgage amount. 

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. 

A homeowner's financial interest in a property. Equity is the difference between the fair market value of the property and the amount owed on its mortgage. 

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 by a borrower to the lender of funds to pay taxes and insurance premiums when they become due, or the deposit of funds or documents with an attorney or escrow agent to be disbursed upon the closing of a sale of real estate.

Escrow Account
Third-party account for holding money, such as a buyer's earnest money or the owner's taxes and insurance payment, prior to paying the expenses. 

Escrow Analysis
The periodic examination of escrow accounts to determine if current monthly deposits will provide sufficient funds to pay taxes, insurance, and other bills when due. 

Escrow Payment
The portion 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. Known as "impounds" or "reserves" in some states. 

The ownership interest of an individual in real property. The sum total of all the real property and personal property owned by an individual at time of death. 

Examination of Title
The review of title on a property from the public records or an abstract of the title. 

Fair Credit Reporting Act (FCRA)
This law requires consumer reporting agencies to exercise fairness, confidentiality and accuracy in preparing and disclosing credit information. 

Fair Market Value
The price at which property is transferred between a willing buyer and a willing seller, each of whom has a reasonable knowledge of all pertinent facts and neither being under any compulsion to buy or sell. 

Fannie Mae (FNMA)
The nation's largest mortgage investor created in 1968 by an amendment to Title III of the National Housing Act (12 USC 1716 et seq.) this stockholder-owner corporation, a portion of whose board of directors is appointed by the President of the United States, supports the secondary market in mortgages on residential property with mortgage purchase and securitization programs.

FHA Loan
A loan made through an approved lender and insured by the Federal Housing Administration. While there are limits to the size of FHA loans, they are intended to finance moderately priced homes. 

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

Fixed-Rate Mortgage (FRM)
A mortgage in which the interest rate does not change during the entire term of the loan. 

Freddie Mac (Federal Home Loan Mortgage Corp)
Created by Congress in Title III of the Emergency Home Finance Act of 1970 (12 USC 1451 et seq.). This stockholder-owned corporation, a portion of whose board of directors is appointed by the President of the United States, supports the secondary market in mortgages on residential and multifamily properties with mortgage purchase and securitization programs. 

Good Faith Estimate
A document, which tells borrowers the approximate costs, they will pay at or before settlement, based on common practice in the locality. 

Gross Monthly Income
Total monthly income earned before tax and other deductions. 

Hard Costs
Land acquisition and construction costs. 

Hazard Insurance
Insurance coverage which provides compensation to the insured in case of property loss or damage. 

Home Equity Line of Credit
A form of revolving credit in which your home serves as collateral. 

Home Equity Loan
A second mortgage loan based on the equity in the mortgagor's house. The property is the security for the loan, which is usable for any purpose. 

Home Mortgage Disclosure Act (HMDA)
Federal legislation which requires certain types of lenders to compile and disclose data on where their mortgage and home improvement loans are being made.

Homeowners' Association Dues
The fees imposed by a condominium or homeowners' association for maintenance of common areas. 

Homeowner's Insurance
Insurance carried by the homeowner to protect the dwelling against fire and other hazards. 

Homeowner's Policy
Insurance policy that combines liability coverage and hazard insurance covering at least the appraised value of a house and property. 

Housing Expense Ratio
The relationship of a borrower's monthly payment obligation on housing (PITI - Principal, Interest, Taxes, and Insurance) divided by the gross monthly income, expressed as a percentage. This ratio is sometimes referred to as the top ratio or front-end ratio. 

HUD-1 Uniform Settlement Statement
Standard form used to disclose costs at closing. All charges imposed in the transaction, including mortgage broker fees, must be disclosed separately. 

Sources of revenue such as salary, bonuses, interest, investment income, etc. 

A published interest rate to which the interest rate on an adjustable-rate mortgage is tied. Some commonly used indices include the 1-Year Treasury Bill, 6-Month LIBOR, and the 11th District Cost of Funds (COFI). Return to Top

Consideration in the form of money paid for the use of money. Also a right, share or title in property. 

Interest Rate
The fee paid to a lender to borrow money. 

Joint Tenancy
An undivided interest in property, taken by two or more joint tenants. Upon the death of a joint tenant, the interest passes to the surviving joint tenants, rather than to the heirs of the deceased. 

Late Charge
The penalty a borrower must pay when a payment is made after the due date. 

A legal claim or attachment against property as security for payment of an obligation. 

Lifetime Cap
A provision of an adjustable-rate mortgage (ARM) that limits the highest rate that can occur over the life of the loan. 

Loan Amount
The amount of money the homebuyer will borrow from the lender to purchase the home.

Loan-To-Value Ratio (LTV)
The ratio of the amount of a mortgage loan to the appraised value of the home or the sales price, whichever is lowest.

The process by which a lender commits to lend at a particular rate as long as the mortgage transaction closes within a specified time period. The document, which specifies the terms of the lock-in, is called a "rate commitment" or "lock-in agreement." 

The set percentage the lender adds to the index rate to determine the interest rate of an ARM. 

The date on which an agreement expires; termination of a promissory note.

Monthly Payment
The monthly payment of principal and interest collected by mortgage lenders. May also include escrow items for taxes or insurance and thereby called the housing payment. 

A pledge of property, usually real property, as security for a debt. By extension, the document evidencing the pledge. 

Mortgage Insurance (MI)
Insurance which protects mortgage lenders against loss in the event of default by the borrower. This allows lenders to make loans with lower down payments. The federal government offers MI through HUD/FHA; private entities offer MI for conventional loans. 

Mortgage Note
A written promise to pay a sum of money at a stated interest rate during a specified term. A mortgage note is secured by a mortgage. 

The person or company (lender) who receives the mortgage as a pledge for repayment of the loan. 

The borrower in a mortgage transaction who pledges property as security for a deal. 

A general term for any kind of paper or document signed by a borrower that is an acknowledgment of the debt, and is, by inference, a promise to pay. When the note is secured by a mortgage, it is called a mortgage note and the mortgagee is name as the payee. 

Open-End Mortgage
A mortgage with a provision that the outstanding loan amount may be increased upon mutual agreement of the lender and the borrower. 

Origination Fee
The lender's fee charged a borrower to prepare documents, make credit checks, inspect and sometimes appraise a property. Usually stated as a percentage of the face value of the loan. 

An abbreviation for Principal and Interest. For the complete monthly payment associated with a loan see PITI. 

Payment Cap
The limitation on increases or decreases in the payment amount of an adjustable-rate mortgage. 

Perfecting Title
The elimination of claims against title.

Permanent Financing
A mortgage loan, usually covering development costs, interim loans, construction loans, financing expenses, and marketing, administrative, legal, and other costs. This loan differs from the construction loan in that financing goes into place after the project is constructed and open for occupancy. It is a long-term obligation, generally for a period of 10 years or more. 

An abbreviation for Principal, Interest, Taxes and Insurance, the components of a total monthly mortgage payment. 

An amount equal to one percent of the principal amount of a mortgage. Loan discount points are a one-time charge assessed at closing by the lender to increase the yield on the mortgage loan to a competitive position with other types of investments. 

The payment of all or part of a mortgage debt before it is due. 

Prepayment Penalty
A fee charged to a borrower who pays off a loan before it is due.

Evaluation of a potential borrower's financial status to determine the size and type of mortgage available to him or her. 

The original balance of money lent, excluding interest. Also, the remaining balance of a loan, excluding interest. 

Private Mortgage Insurance (PMI)
Insurance written by a private company protecting the mortgage lender against financial loss resulting from a mortgage default. 

Purchase Agreement
An agreement between a buyer and seller of real property, setting forth the price and terms of the sale. Also known as a sales contract. 

Purchase Price
The price a homebuyer pays to buy a home. 

The process which determines whether an applicant can be approved for a mortgage loan. 

Quitclaim Deed
A deed relinquishing all interest, title, or claim an owner has in a property. A quitclaim deed implies no warranty. 

Rate Cap
A limit on how much the interest rate can change, either at each adjustment period or over the life of the loan. 

Rate Lock-In
The process by which a lender commits to lend at a particular rate as long as the mortgage transaction closes within a specified time period. The document, which specifies the terms of the lock-in, is called a rate commitment or lock-in agreement. 

Raw Land
Land in its natural state, having no physical improvements such as grading, sewers, or structures. 

The repayment of a debt from the proceeds of a new loan using the same property as security. 

The cancellation of a transaction or contract by law or by mutual consent. 

Satisfaction of Mortgage
The recorded instrument the lender provides to evidence payment in full of the mortgage debt. 

Second Home Purchase
A property purchased for occupancy by the owner but is not the primary residence. Usually recreational properties.

Second Mortgage
A mortgage that has rights subordinate to a first mortgage. Also called "second trust."

Security Interest
The interest of a creditor in the security collateralizing an investment. 

Subject To Mortgage
A mortgage clause in which title to a mortgaged property is taken without assuming personal liability for the mortgage debt. 

Tax Lien
A claim against property for unpaid taxes. 

The period of time between the commencement date and termination date of a note, mortgage, legal document, or other contract. 

Written evidence of the right to or ownership in property. 

Title Insurance Policy
A contract by which the insurer agrees to pay the insured a specific amount for any loss caused by defects of title to real estate, wherein the insured has an interest as purchaser, mortgagee, or otherwise. 

Title Search
An examination of public records, laws, and court decisions to ensure that no one except the seller has a valid claim to the property, and to disclose past and current facts regarding ownership of the subject property.

Total Monthly Payment
The total monthly mortgage payment includes principal, interest, taxes, and insurance. 

Truth-in-Lending Act
Federal law which requires a truth in lending statement to be disclosed for consumer loans. This statement would include disclosure of the annual percentage rate, or APR, as well as other facets of the mortgage program. The law also requires the right of rescission period which follows the closings of refinances. 

The analysis of the risk involved in making a mortgage loan to determine whether the risk is acceptable to the lender. Underwriting involves the evaluation of the property as outlined in the appraisal report, and of the borrower's ability and willingness to repay the loan. 

Uniform residential loan application. 

Waiver of lien
The written evidence from a contractor or supplier, surrendering the right of lien to enforce collection of debt against a property.