Additional principal payment A payment by a borrower of more than the scheduled principal amount due in order to reduce the remaining balance on the loan.
Adjustable-rate mortgage (ARM) A mortgage that permits the lender to adjust its interest rate periodically on the basis of changes in a specified index.
Adjustment date The date on which the interest rate changes for an adjustable-rate mortgage (ARM).
Adjustment period The period that elapses between the adjustment dates for an adjustable-rate mortgage (ARM).
Amortization The gradual repayment of a mortgage loan by installments.
Amortization schedule A timetable for payment of a mortgage loan. An amortization schedule shows the amount of each payment applied to interest and principal and shows the remaining balance after each payment is made.
Amortization term The amount of time required to amortize the mortgage loan. The amortization term is expressed as a number of months. For example, for a 30-year fixed-rate mortgage, the amortization term is 360 months.
Amortize To repay a mortgage with regular payments that cover both principal and interest.
Annual mortgagor statement A report sent to the mortgagor each year. The report shows how much was paid in taxes and interest during the year, as well as the remaining mortgage loan balance at the end of the year.
Annual percentage rate (APR) The cost of a mortgage stated as a yearly rate; includes such items as interest, mortgage insurance, and loan origination fee (points).
Application A form used to apply for a mortgage loan and to record pertinent information concerning a prospective mortgagor and the proposed security.
Appraisal A written analysis of the estimated value of a property prepared by a qualified appraiser.
Appraised value An opinion of a property's fair market value, based on an appraiser's knowledge, experience, and analysis of the property.
Appraiser A person qualified by education, training, and experience to estimate the value of real property and personal property.
Asset Anything of monetary value that is owned by a person. Assets include real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, and so on).
Assignment The transfer of a mortgage from one person to another.
Assumable mortgage A mortgage that can be taken over ("assumed") by the buyer when a home is sold.
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Balloon payment The final lump sum payment that is made at the maturity date of a balloon mortgage.
Before-tax income Income before taxes are deducted.
Biweekly payment mortgage A mortgage that requires payments to reduce the debt 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 that would be required if the loan were a standard 30-year fixed-rate mortgage, and they are usually drafted from the borrower’s bank account. The result for the borrower is a substantial savings in interest.
Bridge loan A form of second trust that is collateralized by the borrower's present home (which is usually for sale) in a manner that allows the proceeds to be used for closing on a new house before the present home is sold. Also known as "swing loan."
Buydown mortgage A temporary buydown is a mortgage on which 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.
Capital (1) Money used to create income, either as an investment in a business or an income property. (2) The money or property comprising the wealth owned or used by a person or business enterprise. (3) The accumulated wealth of a person or business. (4) The net worth of a business represented by the amount by which its assets exceed liabilities.
Cash-out refinance A refinance transaction in which the amount of money received from the new loan exceeds the total of the money needed to repay the existing first mortgage, closing costs, points, and the amount required to satisfy any outstanding subordinate mortgage liens. In other words, a refinance transaction in which the borrower receives additional cash that can be used for any purpose.
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.
Change frequency The frequency (in months) of payment and/or interest rate changes in an adjustable-rate mortgage (ARM).
Clear title A title that is free of liens or legal questions as to ownership of the property.
Closing A meeting at which a sale of a property is finalized by the buyer signing the mortgage documents and paying closing costs. Also called "settlement."
Closing cost item A fee or amount that a homebuyer must pay at closing for a single service, tax, or product. Closing costs are made up of individual closing cost items such as origination fees and attorney's fees. Many closing cost items are included as numbered items on the HUD-1 statement.
Closing costs Expenses (over and above the price of the property) incurred by buyers and sellers in transferring ownership of a property. Closing costs normally include an origination fee, an attorney's fee, taxes, an amount placed in escrow, and charges for obtaining title insurance and a survey. Closing costs percentage will vary according to the area of the country; lenders or realtors® often provide estimates of closing costs to prospective homebuyers..
Collateral An asset that guarantees the repayment of a loan. Generally a home is considered collateral when speaking of mortgages.
Co-borrower A person who signs a promissory note along with the borrower. A co-maker's signature guarantees that the loan will be repaid, because the borrower and the co-maker are equally responsible for the repayment. See endorser.
Commitment letter A formal offer by a lender stating the terms under which it agrees to lend money to a home buyer. Also known as a "loan commitment."
Comparables (or “Comps”) An abbreviation for "comparable properties"; used for comparative purposes in the appraisal process. Comparables are properties like the property under consideration; they have reasonably the same size, location, and amenities and have recently been sold. Comparables help the appraiser determine the approximate fair market value of the subject property.
Compound interest Interest paid on the original principal balance and on the accrued and unpaid interest.
Construction loan A short-term, interim loan for financing the cost of construction. The lender makes payments to the builder at periodic intervals as the work progresses.
Conventional or Conforming mortgage A mortgage that is not insured or guaranteed by the federal government. Generally refers to loans purchased by FNMA or FHLMC.
Convertible ARM An adjustable-rate mortgage (ARM) that can be converted to a fixed-rate mortgage under specified conditions.
Cost of funds index (COFI) An index that is used to determine interest rate changes for certain adjustable-rate mortgage (ARM) plans. It represents the weighted-average cost of savings, borrowings, and advances of the 11th District members of the Federal Home Loan Bank of San Francisco.
Covenant A clause in a mortgage that obligates or restricts the borrower and that, if violated, can result in foreclosure.
Credit An agreement in which a borrower receives something of value in exchange for a promise to repay the lender at a later date.
Credit history A record of an individual's open and fully repaid debts. A credit history helps a lender to determine whether a potential borrower has a history of repaying debts in a timely manner.
Credit life insurance A type of insurance often bought by mortgagors because it will pay off the mortgage debt if the mortgagor dies while the policy is in force.
Creditor A person to whom money is owed.
Credit report A report of an individual's credit history prepared by a credit bureau and used by a lender in determining a loan applicant's creditworthiness. See merged credit report.
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.
Deed-in-lieu A deed given by a mortgagor to the mortgagee to satisfy a debt and avoid foreclosure.
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 when mortgage payments are due.
Discount points See “Points”
Down payment The part of the purchase price of a property that the buyer pays in cash and does not finance with a mortgage.
Due-on-sale provision A provision in a mortgage that allows the lender to demand repayment in full if the borrower sells the property that serves as security for the mortgage.
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.
Equity A homeowner's financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on its mortgage.
Escrow 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 with 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 The account in which a mortgage servicer holds the borrower’s escrow payments prior to paying property expenses.
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.
Fannie Mae/Freddie Mac Fannie Mae (FNMA) and Freddie Mac (FHLMC) are two quasi-government agencies that provide the lion’s share of home financing money in the United States. While both are stock companies traded on the NYSE, they are government chartered and regulated.
Federal Housing Administration (FHA) An agency of the U.S. Department of Housing and Urban Development (HUD). Its main activity is the insuring of residential mortgage loans made by private lenders. The FHA sets standards for construction and underwriting but does not lend money or plan or construct housing.
Fee simple The greatest possible interest a person can have in real estate.
FHA mortgages A mortgage that is insured by the Federal Housing Administration (FHA). Also known as a government mortgage.
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.
Flood insurance Insurance that compensates for physical property damage resulting from flooding. It is required for properties located in federally designated flood areas.
Foreclosure The legal process by which a borrower in default under a mortgage is deprived of his or her interest in the mortgaged property. This usually involves a forced sale of the property at public auction with the proceeds of the sale being applied to the mortgage debt.
Fully amortized ARM An adjustable-rate mortgage (ARM) with a monthly payment that is sufficient to amortize the remaining balance, at the interest accrual rate, over the amortization term.
Growing-equity mortgage (GEM) A fixed-rate mortgage that provides scheduled payment increases over an established period of time, with the increased amount of the monthly payment applied directly toward reducing the remaining balance of the mortgage.
Guarantee mortgage A mortgage that is guaranteed by a third party.
Guaranteed loan Also known as a government mortgage.
Home equity line of credit A mortgage loan, which is usually in a subordinate position, that allows the borrower to obtain multiple advances of the loan proceeds at his or her own discretion, up to an amount that represents a specified percentage of the borrower's equity in a property.
Home inspection 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.
Housing expense ratio The percentage of gross monthly income that goes toward paying housing expenses.
HUD median income Median family income for a particular county or metropolitan statistical area (MSA), as estimated by the Department of Housing and Urban Development (HUD).
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. 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. The blank form for the statement is published by the Department of Housing and Urban Development (HUD). The HUD-1 statement is also known as the "closing statement" or "settlement sheet."
Investment or Income property Real estate developed or improved to produce income.
In-file credit report An objective account, normally computer-generated, of credit and legal information obtained from a credit repository.
Initial interest rate The original interest rate of the mortgage at the time of closing. This rate changes for an adjustable-rate mortgage (ARM). Sometimes known as "start rate" or "teaser."
Installment The regular periodic payment that a borrower agrees to make to a lender.
Installment loan Borrowed money that is repaid in equal payments, known as installments. A furniture loan is often paid for as an installment loan.
Insurable title A property title that a title insurance company agrees to insure against defects and disputes.
Insurance binder A document that states that insurance is temporarily in effect. Because the coverage will expire by a specified date, a permanent policy must be obtained before the expiration date.
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, although it is not used for an adjustable-rate mortgage (ARM) with payment change limitations.
Interest rate The rate of interest in effect for the monthly payment due.
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.
Liabilities A person's financial obligations. Liabilities include long-term and short-term debt, as well as any other amounts that are owed to others.
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. See cap.
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.
Liquid asset A cash asset or an asset that is easily converted into cash.
Loan origination The process by which a mortgage lender brings into existence a mortgage secured by real property.
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 a LTV percentage of 80 percent.
Lock-in A written agreement in which the lender guarantees a specified interest rate if a mortgage goes to closing within a set period of time. The lock-in also usually specifies the number of points to be paid at closing.
Lock-in period The time period during which the lender has guaranteed an interest rate to a borrower. Back to Top
Merged credit report A credit report that contains information from three credit repositories. When the report is created, the information is compared for duplicate entries. Any duplicates are combined to provide a summary of a your credit.
Modification The act of changing any of the terms of the mortgage.
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 brokers typically require a fee or a commission for their services.
Mortgagee The lender in a mortgage agreement.
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 such as the Federal Housing Administration (FHA).
Mortgage insurance premium (MIP) The amount paid by a mortgagor for mortgage insurance, either to a government agency such as the Federal Housing Administration (FHA) or to a private mortgage insurance (MI) company.
Mortgage life insurance A type of term life insurance often bought by mortgagors. The amount of coverage decreases as the principal balance declines. In the event that the borrower dies while the policy is in force, the debt is automatically satisfied by insurance proceeds.
Mortgagor The borrower in a mortgage agreement.
Note A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.
Note rate The interest rate stated on a mortgage note.
Owner financing A property purchase transaction in which the property seller provides all or part of the financing.
Periodic payment cap For an adjustable-rate mortgage (ARM), a limit on the amount that payments can increase or decrease during any one adjustment period.
Periodic rate cap For an adjustable-rate mortgage (ARM), 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.
Personal property Any property that is not real property.
PITI reserves A cash amount that a borrower must have on hand after making a down payment and paying all closing costs for the purchase of 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.
Point A one-time charge by the lender for originating a loan. A point is 1 percent of the amount of the mortgage. .
Prearranged refinancing agreement A formal or informal arrangement between a lender and a borrower wherein the lender agrees to offer special terms (such as a reduction in the costs) for a future refinancing of a mortgage being originated as an inducement for the borrower to enter into the original mortgage transaction.
Prepayment Any amount paid to reduce the principal balance of a loan before the due date. Payment in full on a mortgage that may result from a sale of the property, the owner's decision to pay off the loan in full, or a foreclosure. In each case, prepayment means payment occurs before the loan has been fully amortized.
Prepayment penalty A fee that may be charged to a borrower who pays off a loan before it is due.
Pre-qualification The process of determining how much money a prospective homebuyer will be eligible to borrow before he or she applies 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. The principal balance does not include 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 amounts that are paid into an escrow account each month for property taxes and mortgage and hazard insurance.
Private mortgage insurance (MI) Mortgage insurance that is 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 in excess of 80 percent.
Purchase money transaction The acquisition of property through the payment of money or its equivalent.
Real Estate Settlement Procedures Act (RESPA) A consumer protection law that requires lenders to give borrowers advance notice of closing costs.
Rescission The cancellation or annulment of a transaction or contract by the operation of a law or by mutual consent. Borrowers usually have the option to cancel a refinance transaction within three business days after it has closed.
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 transaction The process of 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 preapproved line of credit when purchasing goods and services. The borrower is billed for the amount that is actually borrowed plus any interest due.
Secondary mortgage market The buying and selling of existing mortgages.
Secured loan A loan that is backed by collateral.
Security The property that will be pledged as collateral for a loan.
Seller take-back An agreement in which the owner of a property provides financing, often in combination with an assumable mortgage.
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.
Servicing The collection of mortgage payments from borrowers and related responsibilities of a loan servicer.
Step-rate mortgage A mortgage that allows for the interest rate to increase according to a specified schedule (i.e., seven years), resulting in increased payments as well. At the end of the specified period, the rate and payments will remain constant for the remainder of the loan.
Subordinate financing Any mortgage or other lien that has a priority that is lower than that of the first mortgage.
Survey A drawing or map showing the precise legal boundaries of a property, the location of improvements, easements, rights of way, encroachments, and other physical features.
Sweat equity Contribution to the construction or rehabilitation of a property in the form of labor or services rather than cash.
Title company A company that specializes in examining and insuring titles to real estate.
Title insurance Insurance that protects the lender (lender's policy) or the buyer (owner's policy) against loss arising from disputes over ownership of a property.
Title search A check of the title records to ensure that the seller is the legal owner of the property and that there are no liens or other claims outstanding.
Total expense ratio Total obligations as a percentage of gross monthly income. The total expense ratio includes monthly housing expenses plus other monthly debts.
Transfer tax State or local tax payable when title passes from one owner to another.
Treasury index An index that is used to determine interest rate changes for certain adjustable-rate mortgage (ARM) plans. It is based on the results of auctions that the U.S. Treasury holds for its Treasury bills and securities or is 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 A federal law that 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) that has 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.
Department of Veterans Affairs (VA) An agency of the federal government that guarantees residential mortgages made to eligible veterans of the military services. The guarantee protects the lender against loss and thus encourages lenders to make mortgages to veterans.
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