We’ve compiled the following mortgage terms here for your convenience. If you would like further clarification on a term you see here or one that is not listed, one of our mortgage specialists would be happy to help.
A schedule that shows the gradual repayment of debt through regular installments. The amortization schedule shows the amount of each payment applied to interest and principal and shows the remaining principal balance after each payment is made.
Annual Percentage Rate (APR)
A measure of the total cost of credit (interest as well as other charges) expressed as a yearly percentage rate. Because all lenders should apply these rules in calculating the annual percentage rate, it provides consumers with a good basis for comparing the cost of loans.
Adjustable Rate Mortgage (ARM)
A mortgage loan subject to changes in interest rates; when rates change, ARM monthly payments increase or decrease at intervals determined by the lender; the change in monthly payment amount, however, is usually subject to a cap.
A document from a professional that gives an estimate of a property's fair market value based on the sales of comparable homes in the area and the features of a property; an appraisal is generally required by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property.
A meeting, typically held at a title company or attorney's office, where the borrower finalizes a sale or refinances a property by signing the mortgage documents, paying closing costs and other costs as applicable. Also known as the “settlement.”
Fees for final property transfer not included in the price of the property. Typical closing costs include charges for the mortgage loan such as origination fees, discount points, appraisal fee, survey, title insurance, legal fees, real estate professional fees, prepayment of taxes and insurance, and real estate transfer taxes. A common estimate of a buyer's closing costs is two to four percent of the purchase price of the home. A common estimate for seller's closing costs is three to nine percent.
A short-term loan to finance the cost of building a new home. The lender pays the builder based on milestones accomplished during the building process. For example, once a subcontractor pours the foundation and inspectors approve it, the lender will pay for their service.
A private sector loan, one that is not guaranteed or insured by the U.S. government.
A record of an individual that lists all debts and the payment history for each. The report that is generated from the history is called a credit report. Lenders use this information to gauge a potential borrower's ability to repay a loan.
A score calculated by using a person's credit report to determine the likelihood of a loan being repaid on time. Scores range from about 360 to 840. A lower score means a person is a higher risk, while a higher score means that there is less risk.
A comparison or ratio of gross income to housing and non-housing expenses.
A document that legally transfers ownership of property from one person to another. The deed is recorded on public record with the property description and the owner's signature. Also known as the title.
The portion of a home's purchase price that is paid in cash and is not part of the mortgage loan. This amount varies based on the loan type, but is determined by taking the difference of the sale price and the actual mortgage loan amount. Mortgage insurance is required when a down payment less than 20 percent is made.
Earnest Money Deposit
A deposit made by the potential homebuyer to show that he or she is serious about buying the house. The earnest money may be applied toward the down payment at closing. If the sale does not go through, the earnest money deposit will be forfeited to the seller unless the purchase contract expressly provides conditions for its return to the buyer.
The deposit of funds by the borrower to the lender in order to pay taxes and insurance premiums when they become due. Escrow could also be a deposit of funds to an attorney or escrow agent, which are disbursed once certain requirements are met.
An owner's financial interest in a property; calculate by subtracting the amount still owed on the mortgage loan(s) from the fair market value of the property.
A mortgage with payments that remain the same throughout the life of the loan because the interest rate and other terms are fixed and do not change.
Good Faith Estimate
An estimate of all closing fees including pre-paid and escrow items as well as lender charges. It must be given to the borrower within three days after submission of a loan application.
Home Equity Line of Credit
A mortgage loan, usually in second mortgage, allowing a borrower to obtain cash against the equity of a home, up to a predetermined amount.
A thorough inspection that evaluates the structural and mechanical condition of a property. A satisfactory home inspection is often included as a contingency by the purchaser. (Not to be confused with the appraisal of the property.)
An insurance policy, also called hazard insurance, that combines protection against damage to a dwelling and its contents from fire, storms, or other damages with protection against claims of negligence or inappropriate action that result in someone's injury or property damage. Most lenders require homeowners insurance and may escrow the cost. Flood insurance is generally not included in standard policies and must be purchased separately.
Also known as the "settlement sheet" or "closing statement," this statement itemizes all closing costs and must be given to the borrower at or before closing. Items that appear on the statement include real estate commissions, loan fees, points and escrow amounts.
A percentage rate used to calculate the monthly payment of a mortgage loan.
Loan-to-Value (LTV) Ratio
A percentage calculated by dividing the amount borrowed by the price or appraised value of the home to be purchased. The higher the LTV, the less cash a borrower is required to pay as down payment.
The amount a willing buyer would pay a willing seller for a home. An appraised value is an estimate of the current fair market value.
A lien on the property that secures the promise to repay a loan. A security agreement between the lender and the buyer in which the property is collateral for the loan. The mortgage gives the lender the right to collect payment on the loan and to foreclose if the loan obligations are not met.
Insurance that is required for a loan-to-value ratio above 80 percent, which insures the lender against loss caused by a borrower’s default on a conventional mortgage. Mortgage insurance is issued by a private mortgage insurance (PMI) company. Depending on the type of mortgage insurance, the percentage of coverage will/may vary.
The process of preparing, submitting, and evaluating a loan application. It generally includes a credit check, verification of employment and a property appraisal.
A fee or charge for work involved in the evaluation, preparation and submission of a proposed mortgage loan.
Abbreviation for Principal, Interest, Taxes and Insurance, which make up a monthly mortgage payment.
A point is equal to one percent of the principal amount of your mortgage. For example, if you get a mortgage for $95,000, one point means you pay $950 to the lender. Lenders frequently charge points in both fixed-rate and adjustable-rate mortgages in order to increase the yield on the mortgage and to cover loan closing costs. These points usually are collected at closing and may be paid by the borrower or the home seller, or may be split between them.
A lender commits to lend to a potential borrower a fixed loan amount based on a completed loan application, credit reports, debt, savings and underwriter review. The commitment remains as long as the borrower still meets the qualification requirements at the time of purchase. This does not guaranty a loan until the property has passed inspections and underwriting guidelines.
Any amount paid to reduce the principal balance of a loan before the due date or payment in full of a mortgage. This can occur with the sale of the property, the pay off of the loan in full, or a foreclosure. In each case, full payment occurs before the loan has been fully amortized.
The amount of money borrowed to buy a house or the amount of the loan that has not been paid back to the lender. This does not include the interest paid to borrow that money. The principal balance is the amount owed on a loan at any given time. It is the original loan amount minus the total repayments of principal made.
A lender informally determines the maximum amount an individual is eligible to borrow. This is not a guaranty of a loan.
Private Mortgage Insurance (PMI)
Privately-owned companies offer standard and special affordable mortgage insurance programs for qualified borrowers with down payments of less than 20 percent of a purchase price.
The process of paying off one loan with the proceeds from a new loan, using the same property as collateral.
An additional mortgage on a property. In the case of a default, the first mortgage must be paid before the second mortgage. Second loans are more risky for the lender and usually carry a higher interest rate.
A property diagram that indicates legal boundaries, easements, encroachments, rights of way, improvement locations, etc. Surveys are conducted by licensed surveyors and are normally required by the lender in order to confirm that the property boundaries and features such as buildings, and easements are correctly described in the legal description of the property.
A legal document establishing the right of ownership that is recorded to make it part of the public record. Also known as a Deed.
An insurance policy guaranteeing the accuracy of a title search protecting against errors. Most lenders require the buyer to purchase title insurance protecting the lender against loss in the event of a title defect. This charge is included in the closing costs. (A policy that protects the buyer from title defects is known as an owner's policy and requires an additional charge.)
A review of the public records, generally at the local courthouse, to make sure the buyer is purchasing a house from the legal owner. The title search also verifies there are no liens, overdue special assessments, other claims or outstanding restrictive covenants in the records, which would adversely affect the marketability or value of title.
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.
A legal document that includes the guarantee that the seller is the true owner of the property, has the right to sell the property, and that there are no claims against the property.