Mortgage Definitions

2/1 Buy Down Mortgage

The 2/1 Buy Down Mortgage allows the borrower to qualify at below-market rates to borrow more. The initial starting interest rate increases by 1% at the end of the first year and adjusts again by another 1% at the end of the second year. It then remains at a fixed interest rate for the remainder of the loan term. Borrowers often refinance at the end of the second year to obtain the best long-term rates; however, even keeping the loan in place for three full years or more will keep their average interest rate in line with the original market conditions.

Acceleration Clause

A mortgage provision allows the lender to demand payment of the entire principal balance if a monthly payment is missed or some other default occurs.

Additional Principal Payment

To reduce the remaining balance on loan by paying more than the scheduled principal amount.

Adjustable-Rate Mortgage (ARM)

A mortgage with an interest rate that changes during the loan's life according to movements in an index rate. Sometimes called AMLs (adjustable mortgage loans) or VRMs (variable-rate mortgages).

Adjusted Basis

The cost of a property plus the value of any capital expenditures for improvements to the property minus any depreciation.

Adjustment Date

The date that 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 ability to afford the purchase of a home. Reviews income, liabilities, and available funds and considers the type of mortgage you plan to use the area where you want to purchase a home, and the likely closing costs.

Amortization

The gradual repayment of a mortgage loan, both principal and interest, by installments.

Amortization Term

The length of time required to amortize the mortgage loan was expressed as many months. For example, 360 months is the amortization term for a 30-year fixed-rate mortgage.

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 should not be confused with the actual note rate.

Appraisal

A written analysis prepared by a qualified appraiser and estimating a property's value.

Appraised Value

An opinion of a property's fair market value is based on an appraiser's knowledge, experience, and property analysis.

Asset

Anything owned of 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. Generally, requires a credit review of the new borrower, and lenders 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 is paid to a lender (usually by the purchaser of real property) when an assumption occurs.

Balance Sheet

A financial statement shows assets, liabilities, and net worth as of a specific date.

Balloon Mortgage

A mortgage with level monthly payments that amortizes over a stated term and requires that a lump sum payment be paid at the end of an earlier specified term.

Balloon Payment

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

Before-tax Income

Income before taxes is deducted.

Biweekly Payment Mortgage

A plan to reduce the debt every two weeks (instead of the standard monthly payment schedule). The 26 (or possibly 27) biweekly payments are 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 saving in interest.

Bridge Loan

A second trust collateralized by the borrower's present home allows the proceeds to be used to close on a new house before the present home is sold. Also known as "swing loan."

Broker

An individual or company that brings borrowers and lenders together for loan origination.

Buydown

When the seller, builder, or buyer pays an amount of money upfront to the lender to reduce monthly payments during the first few years of a mortgage. 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 mortgage. 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) establishes the maximum value and loan amount for a VA mortgage.

Change Frequency

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

Closing

A meeting was held to finalize the sale of a property. The buyer signs the mortgage documents and pays closing costs. Also called "settlement."

Closing Costs

These are expenses - over and above the property's price- that are incurred by buyers and sellers when transferring ownership of a property. Closing costs normally include an 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.

Closing Disclosure / CD

A Closing Disclosure is a five-page form that provides final details about the mortgage loan you have selected. It includes the loan terms, your projected monthly payments, and how much you will pay in fees and other costs to get your mortgage (closing costs).

Compound Interest

Interest paid on the original principal balance and the accrued and unpaid interest.

Consumer Reporting Agency (or Bureau)

An organization that handles the preparation of lenders' reports to determine a potential borrower's credit history. The agency gets data for these reports from a credit repository and other sources.

Conversion Clause

A provision in an ARM allowing the loan to be converted to a fixed-rate at some point during the term. Usually, the 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 prepared by a credit bureau and used by a lender to determine a loan applicant's creditworthiness.

Credit Risk Score

A credit score measures a consumer's credit risk relative to the rest of the U.S. population, based on the individual's credit usage history. 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 on your credit report. Higher FICO scores represent 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. The title is conveyed to a trustee.

Default

Failure to make mortgage payments on a timely basis or to comply with other requirements of a mortgage.

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 processing a loan.

Discount

In an ARM with an initial rate discount, the lender gives up several 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 property's purchase price is paid in cash and not financed with a mortgage.

Effective Gross Income

A borrower’s normal annual income, including regular or guaranteed overtime. 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 property's fair market value and the amount still owed on the mortgage.

Escrow

An item of value, money, or documents deposited with a third party to be delivered upon a condition's fulfillment. For example, the deposit of funds or documents into an escrow account to be disbursed upon the closing of a sale of real estate.

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

A congressionally chartered, shareholder-owned company is the nation's largest supplier of home mortgage funds.

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 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 is due on a mortgage loan, including payment of both principal and interest.

Fixed-Rate Mortgage (FRM)

A mortgage interest that is fixed throughout the entire term of the loan.

Fully Amortized ARM

An adjustable-rate mortgage (ARM) with a monthly payment sufficient to amortize the remaining balance, at the interest accrual rate, over the amortization term.

GNMA

A government-owned corporation assumed responsibility for the special assistance loan program formerly administered by Fannie Mae. Popularly known as Ginnie Mae.

Growing-Equity Mortgage (GEM)

A fixed-rate mortgage that provides scheduled payment increases over an established period of time. The increased amount of the monthly payment is applied directly toward reducing the mortgage's remaining balance.

Guarantee Mortgage

A mortgage that is guaranteed by a third party.

Housing Expense Ratio

The percentage of gross monthly income budgeted to pay housing expenses.

HUD-1 statement (retired form now called the Closing Disclosure / CD) 

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. Each item on the statement is represented by a separate number within a standardized numbering system. 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 whether 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. Some index rates tend to be higher than others and some more volatile.

Initial Interest Rate

This refers to the original interest rate of the mortgage at the closing time. 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 is protected by the Federal Housing Administration (FHA) or private mortgage insurance (MI).

Interest

The fee charged for borrowing money.

Interest Accrual Rate

The percentage rate at which interest accrues on the mortgage. It is also the rate used to calculate the monthly payments in most cases.

Interest Rate Buy-down 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.

Interest Rate Ceiling

For an adjustable-rate mortgage (ARM), the maximum interest rate, as specified in the mortgage note.

Interest Rate Floor

For an adjustable-rate mortgage (ARM), the minimum interest rate, as specified in the mortgage note.

Late Charge

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 savings account for a down payment.

Liabilities

A person's financial obligations. Liabilities include long-term and short-term debt.

Lifetime Payment Cap

For an adjustable-rate mortgage (ARM), a limit on the amount that payments can increase or decrease over the mortgage's life.

Lifetime Rate Cap

For an adjustable-rate mortgage (ARM), a limit on the amount that the interest rate can increase or decrease over the loan's life. 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) is generally repaid with interest.

Loan Estimate

A Loan Estimate is a three-page form that you receive after applying for a mortgage. The Loan Estimate tells you important details about the loan you have requested. ... The form provides you with important information, including the estimated interest rate, monthly payment, and total closing costs for the loan.

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. However, many lenders may permit a borrower to lock a loan for 30 days or more before submitting 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 is applied toward principal and interest. When a mortgage negatively amortizes, the monthly fixed installment does not include any 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 loan origination.

Mortgage Insurance

A contract that insures the lender against loss caused by a mortgagor'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 amount paid by a mortgagor for mortgage insurance.

Mortgage Life Insurance

A type of term life insurance If the borrower dies while the policy is in force, the debt is automatically paid by insurance proceeds.

Mortgagor

The borrower in a mortgage agreement.

Negative Amortization

Amortization means that monthly payments are large enough to pay the interest and reduce the mortgage's principal. Negative amortization occurs when the monthly payments do not cover all interest costs. The interest cost that isn't covered is added to the unpaid principal balance. This means that you could owe more than you did at the beginning of the loan, even after making many payments. 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 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 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

A cash amount that a borrower must have on hand after making a down payment and paying all closing costs to purchase a home. The principal, interest, taxes, and insurance (PITI) reserves must equal the amount that the borrower would have to pay for PITI for a predefined number of months (usually three).

Points

A point is equal to one percent of your mortgage's principal amount. For example, if you get a mortgage for $165,000, one point means $1,650 to the lender. Points usually are collected at closing and may be paid by the borrower or the home seller or split between them.

Prepayment Penalty

A fee may be charged to a borrower who pays off a loan before it is due.

Pre-Approval / Pre-Qualification

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 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 homeowner’s insurance, whether these amounts 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 MI for a loan with a loan-to-value (LTV) percentage over 80 percent.

Qualifying Ratios

Calculations used to determine if 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 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 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, allows a customer to borrow against a pre-approved credit line 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 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 a mortgage's remaining balance in substantially equal installments over the remaining term of the mortgage at the current interest rate.

Step-Rate Mortgage

A mortgage that allows for the interest rate to increase according to a specified schedule (i.e., seven years) results in increased payments. At the end of the specified period, the rate and payments will remain constant for the loan's remainder.

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

Total obligations as a percentage of gross monthly income, including monthly housing expenses plus other monthly debts.

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 actively traded Treasury securities in the over-the-counter market.

Truth-in-Lending (retired form now called the Closing Disclosure / CD)

A federal law that requires lenders to fully disclose the terms and conditions of a mortgage, including the annual percentage rate (APR) and other charges, in writing.

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 analyzing the borrower's creditworthiness and the quality of the property itself.

VA Mortgage

A mortgage guaranteed by the Department of Veterans Affairs (VA). Also known as a government mortgage.

"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 first mortgage payments 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.