Mortgage Glossary

Adjustable Rate Mortgage (ARM)
Also known as a variable rate mortgage. This is a type of mortgage where the interest rate changes periodically. As a result, the principal and interest payments may vary over the life of the loan. This is because the loan is linked to a financial index. The lower initial payments may make it easier for buyers to qualify.

Adjustment Period
This is the length of time for which the interest rate is fixed on an adjustable. Therefore if the adjustment period is six months, then the interest rate will remain fixed for six months, after which time it will adjust.

Amortization
A gradual paying off of a debt through your payments on principal and interest.

Annual Percentage Rate (A.P.R.)
APR is a measurement of the full cost of a loan including interest and loan fee expressed as a yearly percentage rate. This is one way to compare the cost of loans offered by different lenders.

Appraisal
The assessment of the market value of the property at a given date.

Appraiser
A person who is educated and trained in the methods of determining the value of property through analysis of various factors, which determine said value.

Appreciation
An increased value of property due to either a positive improvement of the area or the elimination of negative factors. The term is commonly used to describe an increase in property value due to changes in market conditions.

Asset
Any item owned by a person that has monetary value.

Balloon Mortgage
A loan, which involves small payments for a certain period of time and one final balloon payment for the remaining amount of the principal at a time specified in the contract.

Balloon Payment
The final lump sum paid at the maturity date of a balloon mortgage.

Bankruptcy
The financial inability to pay one’s debts when due. A proceeding in which the debtor surrenders his assets to the bankruptcy court thereby relieving him from insurmountable debt.

Basis Point
A yield of 1/100th of a percentage point.

Before-Tax Income
Income before any taxes have been deducted. Also known as Gross Income.

Cap
The limit on how much an interest rate can change, either at each adjustment or over the life of the mortgage.

Cash Out Refinance
A refinance transaction that allows the borrower to take out additional funds above the existing mortgage amount. This extra cash can be used for closing costs, escrow, home improvement, education, etc.

Closing Costs
Expenses incurred in a real estate or mortgage transaction. There are two types of costs: recurring (One time transactional cost) and non recurring (costs associated with owning the property and they recur month after month).

Collateral
A type of asset (such as a car or a home) that can be used as a guarantee to pay off a loan. In the event that the terms of the loan are not met, the borrow risks losing the asset.

Condominium
Individual ownership of a dwelling unit and an individual interest in the common areas and facilities which serve the multi-unit property.

Conversion Clause
A provision in some ARMs that enable home buyers to change an ARM to a fixed rate loan, usually after the first adjustment period.

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

Cost of Index Funds (COFI)
Adjustable-rate mortgage with rates that adjust based on a cost-of-funds index, often the 11th District Cost of Funds.

Credit
The financial worthiness of the borrower. The history of whether this borrower has met financial obligations on time in the past.

An agreement made between a borrower and a lender in which the borrower receives something of value in exchange for the promise of repayment to the lender.

Credit History
A complete record detailing a person’s open and repaid debts. This is generally a good indicator of the individual’s history of timely debt repayment.

Credit Reports
A report detailing a borrowers credit history including payment history on revolving accounts (eg. credit cards) and installment accounts (e.g.. car loan), and current status of a borrower’s credit standing. A credit report also includes information found from public records including tax liens and judgements.

Debt
An amount that is owed.

Delinquency
Failure to meet legal obligations in a contract – such as the failure to make payments on time. This can lead to foreclosure.

Deposit
A sum of money that is given to show good faith in order to secure the sale of a property.

Depreciation
Decline in the value of a property due to wear and tear, obsolescence, adverse changes in the neighborhood, or any other reason.

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

Due-on-Sale Clause
A clause that requires a full payment of a mortgage or deed of trust when the secured property changes ownership.

Earnest Money Deposit
A deposit made by a buyer of real estate towards the down payment to evidence good faith. This money is typically held by the real estate brokers or the escrow company.

Equity
The difference between the fair market value and current indebtedness. The value an owner has in real estate over and above the obligation against the property.

Escrow
Neutral third party that handles all funds in a real estate transaction.

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.

Estate
A taxable entity that is established upon the death of a taxpayer. It consists of all the decedent’s property and personal effects. The estate exists until the final distribution of its assets to the heirs and other beneficiaries. During the period of administration, the executor must usually file a return.

Fair Market Value
Price, which is usually arrived at by comparable sales in the area, that is negotiated between the seller and buyer in a reasonable time.

Fannie Mae
Federal National Mortgage Association; a federally sponsored secondary market agency that purchases loans made by mortgage lenders.

FHA Loan
A loan insured by the Federal Housing Administration open to all qualified home purchasers. While there are limits to the size of FHA loans, they are generous enough to handle moderately priced homes almost anywhere in the country.

First Mortgage
A mortgage that has priority as a lien over all other mortgages. In the case of a foreclosure the first mortgage will be satisfied before other mortgages.

Fixed-Rate Mortgage
A type of loan where the interest rate is locked in for the full term of the loan.

Fully Indexed Rate
The index plus the margin, rounded to the next highest eighth.

Home Equity Line of Credit
A revolving line of credit that is usually secured by a second deed of trust and lasts for the term of the loan. This operates like a credit card in which you can pay down or charge up.

Home Equity Loan
Often referred to as a second mortgage, a home equity loan allows you to borrow against the equity accumulated in your home.

Housing Ratio
The relationship of the total housing payments (PITI- Principal, Interest, Taxes, Insurance) to the gross monthly income.

Impound Account
That portion of a borrower’s monthly payments held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments and other items as they become due. Also known as reserves or escrow account.

Index
A measure by which Adjustable Rate Mortgage interest rates are raised and lowered. By law the index must be published and is able to be verified by the borrower and not controlled by any one financial institution.

Jumbo Mortgage
A loan, which is larger (more than $359,650 currently) than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.

Lien
An encumbrance against the property as security for a debt or charge.

Lender
The institution, i.e., bank, mortgage company or mortgage broker that is offering the loan.

Loan-to-Value Ratio
The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage.

Margin
The amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate.

Mortgage Loan
A loan for the purpose of buying a home. The four basic components are principal, interest, taxes and insurance (PITI).

Points
A point is equal to one percent of your mortgage loan. You may want to consider “buying down” your interest rate by paying discount points up front – especially if you plan to own your home for a long time.

Pre-Approval
A process that mortgage lenders use to determine how much money they would lend based on a limited review of the buyers’ financial situation. Lenders issue a pre-approval letter to strengthens buyers’ position when bidding on a home, as it shows sellers that buyers will be able to raise funds needed to purchase.

Prepayment Penalty
A penalty charged to the borrower when full or partial payment of the principal is paid before the due date. Not allowed for FHA or VA loans.

Pre-qualification
A preliminary assessment of the buyer’s ability to secure a loan, based on a specific set of lending guidelines and representations made by the buyer. A prequal is not a guarantee or commitment by the lender to extend credit.

P.I.T.I.
Principal, Interest, Taxes and Insurance. This is usually referred to as the total monthly payment on a loan.

Principal
The amount borrowed or outstanding balance on a loan.

Private Mortgage Insurance (PMI)
Insurance against a loss by the lender in the event of default by the borrower. Borrowers are usually required to carry private mortgage insurance if the down payment is less than 20%. The premium is paid by the borrower and is included in the mortgage payment.

Refinancing
Repaying an existing loan from the proceeds of a new loan on the same property.

Title
Evidence of an individual’s ownership of property.

Title Search
Research of public records to determine the history of ownership and loans for a particular piece of real estate.

VA Loan
A long-term, low- or no-down payment loan guaranteed by the Department of Veteran Affairs. Restricted to individual’s qualified by military service or other entitlements.