Mortgage Glossary

Purchasing a property may end up being one of the most important financial transactions you will make in your lifetime. Whether you’re a first-time homebuyer, seasoned investor or a business seeking a commercial property, understanding industry terms and their implications can be beneficial in your communications with real estate agents, brokers, lenders, banks and escrow/title officers. For your convenience, we have provided a comprehensive mortgage glossary.


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Click on a term below to learn more.

Acceleration Clause
This is a contractual provision in a mortgage that allows the lender to demand payment of the entire principal balance if the borrower violates one or more clauses in the note – example: missing a monthly payment.
Additional Principal Payment
To expedite payment on a loan, you can pay non-scheduled principal payments. This accelerates the closing of the loan and diminishes the amount of interest paid by the borrower over the long term.
Adjustable-Rate Mortgage (ARM)
This type of mortgage has an interest rate that changes during the life of the loan according to movements in an index rate. It adjusts at predetermined intervals and can impact the monthly payment, increasing or decreasing depending on the prevailing market rate.
Adjustment Date or Interval
This is the time frame in which the interest rate changes on an adjustable-rate mortgage (ARM).
Adjustment Period
The period elapsing between adjustment dates for an adjustable-rate mortgage (ARM).
Affordability Analysis
An analysis of a buyer’s capacity to afford a property purchase. Affordability is expressed in terms of the maximum price the consumer could carry based on their debt to income ratio and available funds.
Amortization
The gradual repayment of a mortgage loan, both principal and interest, by installments.
Amortization Term
The scheduled monthly mortgage payment less the interest equals amortization.
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 is not the same as the actual note rate.
Appraisal
A written analysis prepared by a qualified appraiser who estimates the value of a property based on neighborhood comparables and current market conditions.
Asset
Anything owned that can be express in monetary value including real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, etc.).
Assignment
The transfer of a mortgage from one person to another.
Assumability
An assumable mortgage can be transferred from the seller to the new buyer pending the buyer’s credit review. The lender 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.
Assumption Fee
The fee paid to a lender (usually by the purchaser of real property) when an assumption takes place.
Balance Sheet
A financial statement that indicates assets, liabilities, and net worth as of a specific date.
Balloon Mortgage
A mortgage with locked-in monthly payments that amortizes over a stated term but requires that a lump sum payment be paid at the end of an earlier specified term. For example, a seven-year balloon loan would normally be calculated over a 30-year period and the balance would be due and payable at the end of the 7th year or would need to be refinanced. This enables the buyer to obtain a property at a low interest rate in the early years of the loan.
Balloon Payment
The final lump sum paid at the maturity date of a balloon mortgage.
Before-tax Income
Income before taxes are deducted.
Biweekly Payment Mortgage
A property owner can reduce their mortgage debt faster by paying every two weeks (instead of the standard monthly payment schedule). The 26 (or possibly 27) biweekly payments are each equal to one-half of the monthly payment required if the loan were a standard 30-year fixed-rate mortgage. The result for the borrower is a substantial savings in interest.
Bridge Loan
A second trust that is collateralized by the borrower's present home allowing the proceeds to “bridge” the closing date of a new home purchase until the original sells. Also known as "swing loan."
Broker
An individual or company that brings borrowers and lenders together for the purpose of loan origination.
Buydown
When the seller, builder or buyer pays points in exchange for a lower interest rate. Buydowns can occur in both fixed and adjustable rate mortgages.
Cap
Limits how much the interest rate or the monthly payment can increase, either at each adjustment or during the life of the loan. Payment caps don't limit the amount of interest the lender is earning and may cause negative amortization.
Certificate of Eligibility
A document issued by the federal government certifying a veteran’s eligibility for a Department of Veterans Affairs (VA) mortgage.
Certificate of Reasonable Value (CRV)
A document issued by the Department of Veterans Affairs (VA) that establishes the maximum value and loan amount for a VA mortgage.
Closing
The transfer of ownership from the seller to the buyer as well as the disbursement of funds from the buyer and the lender to the seller. The execution of all documents is typically handled in a final meeting also known as a “Settlement
Closing Costs
These are monetary expenses over and above the price of the property. Closing costs are incurred by buyers and sellers when transferring ownership of a property and normally cover 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.
Compound Interest
This is the interest paid on the original principal balance and on the accrued and unpaid interest.
Conversion Clause
A provision in an ARM allowing the loan to be converted to a fixed-rate at some point during the term. Usually conversion is allowed at the end of the first adjustment period. The conversion feature may cost extra.
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.
Credit Risk Score
A numerical score based on an individual’s credit history measures his/her risk relative to the rest of the U.S. population. The credit score most widely used by lenders is the FICO® score, developed by Fair, Isaac 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.
Deed of Trust
The document used in some states instead of a mortgage. Title is conveyed to a trustee.
Default
Failure on the part of the borrower to honor the terms of the loan agreement.
Delinquency
Failure to make mortgage payments on time.
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.
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.
Down Payment
Part of the purchase price of a property that is paid in cash and not financed with a mortgage.
Effective Gross Income
A borrower’s 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.
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.
Escrow
A non-biased third party entity that holds deposit of funds and processes documents of sale which are delivered upon fulfillment of a condition.
Escrow Disbursements
The use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, and other property expenses as they become due.
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.
Fannie Mae
One of two Federal agencies that purchase home loans from lenders.
FHA Mortgage
A mortgage that is insured by the Federal Housing Administration (FHA). Also known as a government mortgage.
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.
First Mortgage
The primary lien against a property.
Fixed Installment
The monthly payment due on a mortgage loan including payment of both principal and interest.
Fixed-Rate Mortgage (FRM)
A mortgage interest rate that is fixed throughout the entire term of the loan.
Freddie Mac
One of two Federal agencies that purchase home loans from lenders. The other is Fannie Mae.
Fully Amortized ARM
The monthly mortgage payment which, if maintained unchanged through the remaining life of the loan at the then-existing interest rate, will pay off the loan over the remaining term.
GNMA
A government-owned corporation that assumed responsibility for the special assistance loan program formerly administered by Fannie Mae. Popularly known as Ginnie Mae.
Guarantee Mortgage
A mortgage that is guaranteed by a third party.
HARP
The Home Affordability Refinance Program (HARP) was started by Fannie Mae and Freddie Mac in 2010 to provide refinancing to borrowers with loan–to-value ratios too high to be eligible for their standard programs.
Home Equity Line of Credit (HELOC)
A mortgage set up as a line of credit from which a borrower an draw up to a maximum amount as opposed to a fixed dollar amount.
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. The totals at the bottom of the HUD-1 statement define the seller's net proceeds and the buyer's net payment at closing.
Hybrid ARM (3/1 ARM, 5/1 ARM, 7/1 ARM)
A combination fixed rate and adjustable rate loan - also called 3/1,5/1,7/1 - 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 "5/1 loan" has a fixed monthly payment and interest for the first five years and then turns into a traditional adjustable rate loan, based on then-current rates for the remaining 25 years. It's a good choice for people who expect to move or refinance, before or shortly after, the adjustment occurs.
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.
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."
Installment
The regular periodic payment that a borrower agrees to make to a lender.
Insured Mortgage
A mortgage that is protected by the Federal Housing Administration (FHA) or by private mortgage insurance (MI).
Interest
The fee charged for borrowing money.
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.
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.
Jumbo Mortgage
A mortgage that is larger than the maximum eligible for purchase by Freddie Mac and Fannie Mae (typically $417,000).
Late Fee
The penalty a borrower must pay when a payment is made a stated number of days (usually 15) after the due date.
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 down payment.
Liabilities
A person's financial obligations. Liabilities include long-term and short-term debt.
Lien
The lender’s right to claim the borrower’s property in the event the borrower defaults.
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.
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.
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.
Liquid Asset
A cash asset or an asset that is easily converted into cash.
Loan
A sum of borrowed money (principal) that is generally repaid with interest.
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.
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.
Margin
The number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment.
Maturity
The date on which the principal balance of a loan becomes due and payable.
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.
Mortgage
A legal document that pledges a property to the lender as security for payment of a debt.
Mortgage Banker
A company that originates mortgages exclusively for resale in the secondary mortgage market.
Mortgage Broker
An individual or company that brings borrowers and lenders together for the purpose of loan origination.
Mortgage Insurance
A contract that insures the lender against loss caused by a borrower’s default on a government mortgage or conventional mortgage. Mortgage insurance can be issued by a private company or by a government agency.
Mortgage Insurance Premium (MIP)
The upfront and/or periodic charges that the borrower pays for mortgage insurance.
Mortgagor
The borrower in a mortgage agreement.
Negative Amortization
Amortization means that monthly payments are large enough to pay the interest and reduce the principal on your mortgage. Negative amortization occurs when the monthly payments do not cover all of the interest cost. The interest cost that isn't covered is added to the unpaid principal balance. This means that even after making many payments, you could owe more than you did at the beginning of the loan. Negative amortization can occur when an ARM has a payment cap that results in monthly payments not high enough to cover the interest due.
Net Worth
The value of all of a person's assets, including cash.
Non Liquid Asset
An asset that cannot easily be converted into cash.
Note
A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.
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.
Owner Financing
A property purchase transaction in which the party selling the property provides all or part of the financing.
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.
Periodic Payment Cap
A limit on the amount that payments can increase or decrease during any one adjustment period.
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.
PITI Reserves
Shorthand for principal, interest, taxes and insurance that a borrower must have on hand after making a down payment and paying all closing costs for the purchase of a home.
Points
A point is equal to one percent of the principal amount of your mortgage. For example, if you get a mortgage for $200,000 one point means $2,000 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.
Prepayment Penalty
A fee that may be charged to a borrower who pays off a loan before it is due.
Pre-Approval
The process of determining how much money you will be eligible to borrow before you apply for a loan.
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.
Principal
The amount borrowed or remaining unpaid. The part of the monthly payment that reduces the remaining balance of a mortgage.
Principal Balance
The outstanding balance of principal on a mortgage not including interest or any other charges.
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.
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 PMI for a loan with a loan-to-value (LTV) percentage in excess of 80 percent.
Qualification
The process of determining whether or not 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.
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.
Real Estate Agent
A person licensed to negotiate and transact the sale of real estate on behalf of the property owner.
Real Estate Settlement Procedures Act (RESPA)
A consumer protection law that requires lenders to give borrowers advance notice of closing costs.
Real Estate Agent®
A real estate broker or an associate who is an active member in a local real estate board that is affiliated with the National Association of Real Estate Agents.
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.
Refinance
Paying off one loan with the proceeds from a new loan using the same property as security.
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.
Secondary Mortgage Market
Where existing mortgages are bought and sold.
Security
The property that will be pledged as collateral for a loan.
Seller Carry-back
An agreement in which the owner of a property provides financing, often in combination with an assumable mortgage. See Owner Financing.
Servicer
An organization that collects principal 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.
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.
Subprime Borrower
A borrower with poor credit must typically work through sub-prime lenders who specialize in this market. These borrowers pay more in rates and fees than prime borrowers due to the higher risk involved.
Third-party Origination
When a lender uses another party to completely or partially originate, process, underwrite, close, fund, or package the mortgages it plans to deliver to the secondary mortgage market.
Total Expense Ratio
The ratio of total housing expenses to borrower income.
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.
Truth-in-Lending
The federal law requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the annual percentage rate (APR) and other charges.
Two-step Mortgage
An adjustable-rate mortgage (ARM) with one interest rate for the first five or seven years of its mortgage term and a different interest rate for the remainder of the amortization term.
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.
VA Mortgage
A mortgage with no down payment, available only to ex-servicemen and women or those on active duty, that is guaranteed by the Department of Veterans Affairs (VA). Also known as a government mortgage.
Wholesale Lender
A lender who provides loans through mortgage brokers or correspondents. The mortgage broker or correspondent initiates the transaction, takes the borrower’s application, and processes the loan.
"Wrap Around" Mortgage
A mortgage that includes the remaining balance on an existing first mortgage plus an additional amount requested by the mortgagor. Full payments on both mortgages are made to the "Wrap Around" mortgagee, who then forwards the payments on the first mortgage to the first mortgagee. These mortgages may not be allowed by the first mortgage holder, and if discovered, could be subject to a demand for full payment.