Mortgage Terminology

The Mortgage industry is loaded with abbreviations, LTV, DTI, etc. This mortgage terminology guide explains the meanings of several words and abbreviations you’ll hear through the mortgage process. 

Mortgage terminology in simple terms

Mortgages are loans that are taken out by individuals to purchase a home. When taking out a mortgage, the borrower agrees to pay back the loan over a set period of time, usually a period of 15 or 30 years. Mortgages also typically involve interest, meaning that the borrower pays back more than the initial loan amount. In order to qualify for a mortgage, the borrower will usually need to provide proof of income, a credit score, and a down payment. Additionally, the borrower will need to be approved by the lender and may need to pay closing costs and other fees.

Note: All of these lending institutions offer these types of loans with multiple variations. Fannie Mae, Freddie Mac, HUD, FHA and VA. 

Here’s our list of Mortgage terminology

Ability To Repay (ATR)

The ATR provision of the Dodd-Frank Act requires mortgage lenders to verify that borrowers can afford the payments when they are approved for a mortgage. The income must be verified by the lender.

Adjustable Rate Mortgage

A mortgage rate is fixed for three year, five year, seven year and 10-year periods, respectively, but may adjust annually after that.

Adjustment Date

The date that the interest rate changes on an adjustable rate mortgage (ARM).

Adjustment Interval

On an adjustable rate mortgage, the time between changes in the interest rate and/or monthly payment, typically one, three or five years depending on the index.

Adjustment Period

The period elapsing between adjustment dates for an adjustable rate mortgage (ARM).

Amortization

Amortization is the repayment of a loan — the allocation of interest and principal as you pay your loan each month. After the interest due is deducted by the servicer, the remaining amount of your payment goes toward reducing the principal balance. Each month, the balance is slightly lower, so less interest is due. Over time, more and more of your payment goes toward principal, and less is needed to cover interest, until your balance in zeroed and your loan is repaid.

Amortization Term

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

Amount financed

It means the amount of money you are borrowing from the lender, minus most of the upfront fees the lender is charging you.

Annual Income

Annual income is the total amount of money earned in one year pre-taxes, typically from wage or salary employment, investments, business profits, or other sources.

Other sources of annual income can include part-time work, self-employment, tips, commissions, overtime, bonuses, alimony and child support payments, Social Security or disability benefits, pension payments, and income from rental properties or investments.

Annual Percentage Rate (APR)

The APR refers to the total cost of borrowing, expressed as an interest rate. That means not just the interest you’d pay. It includes the lender fees as well. The APR’s purpose is to make shopping for a mortgage easier. For instance, what’s a better deal — a 4.5 percent 30-year loan costing no points or fees, or a 4.0 percent loan costing two points? APR can tell you. In this case, the APR for the first loan is 4.5 percent, and for the second mortgage, it’s 4.165 percent.

Appraisal

An appraisal is a report prepared by a licensed appraiser. Mortgage lenders require it to determine the value of the property they are lending against.

Appraised Value

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

ATIMA

Another acronym commonly found in the mortgagee clause, which may be used in conjunction with ISAOA, is ATIMA, or “as their interests may appear.” This term is used to extend the insurance policy to include insurance coverage for other parties with whom the mortgagee tends to do business. Its meaning is very similar to ISAOA, as it merely allows the mortgagee to include others under the policy’s protection without having to name them explicitly.

Balloon Mortgage

A loan which is amortized for a longer period than the term of the loan. Usually this refers to a thirty year amortization and a five year term. At the end of the term of the loan, the remaining outstanding principal on the loan is due. This final payment is known as a balloon payment.

Balloon Payment

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

Bi-weekly Payment

Traditional mortgage payments are made once a month. With bi-weekly payment your mortgage servicer will collect payments two times a month. The result is you’ll make 26 half payments or 13 full mortgage payments in a calendar year.

Borrower (Mortgagor)

One who applies for and receives a loan in the form of a mortgage with the intention of repaying the loan in full.

Bridge Loan

A second trust that is collateralized by the borrower’s present home allowing 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 in the business of assisting in arranging funding or negotiating contracts for a client but who does not loan the money himself. Brokers usually charge a fee or receive a commission for their services.

Buy Down

When the lender and/or the home builder subsidized the mortgage by lowering the interest rate during the first few years of the loan. While the payments are initially low, they will increase when the subsidy expires.

Caps (interest)

Consumer safeguards which limit the amount the interest rate on an adjustable rate mortgage which may change per year and/or the life of the loan.

Caps (payment)

Consumer safeguards which limit the amount monthly payments on an adjustable rate mortgage may change.

Certificate of Eligibility

The document given to qualified veterans which entitles them to VA guaranteed loans for homes, business and mobile homes. Certificates of eligibility may be obtained by sending form DADA (Separation Paper) to the local VA office with VA form 1880 (request for Certificate of Eligibility)

Change Frequency

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

Closing

The meeting between the buyer, seller and lender or their agents where the property and funds legally change hands, also called settlement. Closing costs usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement. The cost of closing usually are about 3 percent to 6 percent of the mortgage amount.

Closing Costs

These are the charges that buyers pay when they purchase property. They may include property transfer taxes, mortgage lender fees, fees to third party providers and to government.

Closing Disclosures (CD)

This is your final set of documents when you close a mortgage. They replace the old HUD-1 form. These disclose the terms of your loan and its costs. It should match the most recent Loan Estimate that you received when you locked your interest rate

Co-Borrower

A co-borrower is a person who jointly applies for a loan with another person or group and takes on responsibility for repaying the debt. A co-borrower can be a spouse, family member, friend, or business partner. A co-borrower is someone who agrees to take full responsibility to pay back a mortgage loan with you. This person is obligated to pay any missed payments and even the full amount of the loan if you don’t pay.

Construction Loan

A short term interim loan to pay for the construction of buildings or homes. These are usually designed to provide periodic disbursements to the builder as he or she progresses.

Consumer Reporting Agency (or Bureau)

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

Contract Sale or Deed

A contract between purchaser and a seller of real estate to convey title after certain conditions have been met. It is a form of installment sale.

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.

Conventional Loan

A conventional loan is a type of mortgage loan that is not insured or guaranteed by the government. It is typically offered by a private lender.

Credit History

A credit history is a record of a person’s borrowing and repaying habits. It shows how a person has handled their financial obligations, including loan repayments, credit cards, and other lines of credit. The credit history is often used to evaluate a person’s creditworthiness when applying for a loan or other type of credit.

Credit Report

A credit report is a statement from a credit reporting agency that outlines an individual’s credit history, including their borrowing and payment activities, and is used to assess the individual’s creditworthiness. It typically includes information such as an individual’s name and address, their credit accounts and related payment histories, public records, inquiries, and more.

Credit Risk Score

A credit risk score is a statistical summary of the information contained in a consumer’s credit report. The most well known type of credit risk score is the Fair Isaac or FICO score. This form of credit scoring is a mathematical summary calculation that assigns numerical values to various pieces of information in the credit report. The overall credit risk score is highly relative in the credit underwriting process for a mortgage loan.

Lenders use your credit report to determine whether you qualify for a loan and what interest rate to offer you.

Debt-To-Income Ratio (DTI)

This is the relationship between your income and monthly debt payments. It’s your debts like mortgage payments, auto loan payments, student loans, credit cards, etc., divided by your gross (before tax) income. Mortgage lenders prefer DTIs under 41 percent.

Deed of trust

In many states, this document is used in place of a mortgage to secure the payment of a note.

Deed-in-lieu of foreclosure

A deed-in-lieu of foreclosure is a voluntary act in which a borrower signs over their title of a property to a lender of the mortgage, to avoid a foreclosure. The lender agrees to release any debt the borrower may have to them in exchange for the deed. This is usually a last resort when all other methods of avoiding foreclosure have been exhausted. It is a type of loss mitigation.

Default

Failure to meet legal obligations in a contract, specifically, failure to make the monthly payments on a mortgage.

Deferred interest

When a mortgage is written with a monthly payment that is less than required to satisfy the note rate, the unpaid interest is deferred by adding it to the loan balance. See negative amortization.

Delinquency

Failure to make payments on time. This can lead to foreclosure.

Demand Feature

A demand feature permits the lender to require early repayment of the loan. Another term for the demand is for the lender to “call the loan”. This is something rare in the mortgage industry.

Down Payment

This is the amount you pay toward your property purchase. For a 90 percent loan, you’d put ten percent of the purchase price down. Some loans require as little as 3.5 percent, three percent or even zero percent down.

Due-on-Sale-Clause

A provision in a mortgage or deed of trust that allows the lender to demand immediate payment of the balance of the mortgage if the mortgage holder sells the home.

Earnest Money Deposit

An earnest money deposit is a deposit made by the prospective buyer of a property to demonstrate good faith in the transaction and bind the parties to the purchase contract. It is usually held by the seller’s real estate broker or escrow agent as security for the performance of the contract.  If the contract is terminated for a permissible reason, the earnest money is returned to the buyer. If the buyer does not perform in good faith, the earnest money may be forfeited and paid out to the seller.

Equal Credit Opportunity Act (ECOA)

Is 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

Equity is the difference between amount you owe on the home versus the homes value. Value – Mortgage Balance = Equity.

Escrow

Escrow can mean two things. First, it’s a process through which payments to and from all parties in a real estate are collected and distributed. Down payments, earnest money, closing costs, real estate commissions, etc., all pass through the escrow account. The second definition of escrow is money that your mortgage lender collects with your monthly payment for property taxes and homeowners insurance. The lender then pays these on your behalf as they become due.

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.

Federal Home Loan Mortgage Corporation (FHLMC) also called (Freddie Mac)

Is a quasi-governmental agency that purchases conventional mortgage from insured depository institutions and HUD-approved mortgage bankers. They also provide a secondary market for savings and loans by purchasing their conventional loans.

Federal Housing Administration (FHA)

A division of the Department of Housing and Urban Development. Its main activity is the insuring of residential mortgage loans made by private lenders. FHA also sets standards for underwriting mortgages.

Federal National Mortgage Association (FNMA) also know as (Fannie Mae)

A tax-paying corporation created by Congress that purchases and sells conventional residential mortgages as well as those insured by FHA or guaranteed by VA. This institution, which provides funds for one in seven mortgages, makes mortgage money more available and more affordable.

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.

FICO AKA Credit Score

This is the most commonly used credit scoring method. You can get a FICO score from any of the three major credit bureaus: TransUnion, Experian and Equifax.

Finance Charge

A finance charge is any fee or additional cost added to a loan or line of credit, such as an interest charge or late fee. It is the total amount of money a borrower must pay for the privilege of borrowing money.

Firm Commitment

A promise by FHA to insure a mortgage loan for a specified property and borrower. A promise from a lender to make a mortgage loan.

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

The mortgage interest rate will remain the same on these mortgages throughout the term of the mortgage for the original borrower.

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.

Forbearance

Forbearance is when a lender/servicer agrees to allow a borrower to temporarily make reduced payments or even pause payments altogether without penalty due to extenuating circumstances. if, for example, you recently lost your job, suffered from a disaster, or from an illness or injury that increased your health care costs. It is a type of loss mitigation

Foreclosure

Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan. Some states require the lender to go to court to foreclose on your property (judicial foreclosure), but other states do not require a court process (non-judicial foreclosure). Generally, borrowers must be notified if the lender or servicer begins foreclosure proceedings.

Government National Mortgage Association (GNMA)

Also known as (Ginnie Mae), provides sources of funds for residential mortgages, insured or guaranteed by FHA or VA.

Graduated Payment Mortgage (GPM)

A type of flexible payment mortgage where the payments increase for a specified period of time and then level off. This type of mortgage has negative amortization built into it.

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 remaining balance of the mortgage.

Guaranty

A promise by one party to pay a debt or perform an obligation contracted by another if the original party fails to pay or perform according to a contract.

Guarantee Mortgage

A mortgage that is guaranteed by a third party.

H4P

H4P stands for Home Equity Conversion for Purchase. It allows borrowers who are 62 and older to buy a new primary residence and take out a reverse mortgage or home equity line of credit in a single transaction.

HOA

HOA dues are fees paid by homeowners to a homeowners’ association. These dues are typically used to fund maintenance, infrastructure improvements, and other services such as security or other amenities. They usually found in a home with a planned subdivision, condo, or co-op.

Home Equity

The difference between the property value and the total of all mortgage balances against it is called home equity. Over time, you add equity by paying down your mortgage. As the property value increases, you also add to your home equity.

Home equity line of credit (HELOC)

Think of it like a “credit card” for your home. The loan amount is based on the equity in your home. It is typically an adjustable rate with a specific draw period. When the “draw period” ends, you will no longer be able to borrow money from your line of credit. After the “draw period” ends you may be required to pay off your balance all at once or you may be allowed to repay over a certain period.

Home Inspection

A home inspection is a comprehensive assessment of a residential property, typically conducted by a certified or licensed professional. It is used to identify any potential issues or deficiencies with the property to ensure it meets local and state building codes. A home inspection typically covers the structure, roofing, plumbing, electrical, and heating and cooling systems of the property. It is normally part of the home buying process.

Homeowners Insurance

Also known as Hazard insurance. Homeowners insurance is a type of property insurance that covers a private residence. It covers damage or loss by theft, fire and other such perils, as well as liability for injuries or damage to other people’s property on the property. Homeowners insurance often includes coverage for additional living expenses if you are temporarily unable to live in your home due to a covered loss.

Housing Expenses-to-Income Ratio

The ratio, expressed as a percentage, which results when a borrower’s housing expenses are divided by his/her gross monthly income. See debt-to-income ratio.

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.

Impounds

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.

Independent Contractor (1099)

Independent Contractor (1099) A 1099 is a tax form used to report payments made to independent contractors and other non-employee service providers. The 1099 form is issued by the payer to the recipient, who then reports the income on their tax return. Recipients of 1099 forms must report the income on their tax returns, as it is considered taxable income. They operate in a similar fashion to self-employed borrowers.

Index

A published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments (such as one- three-, and five-year U.S. Treasury security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average costs-of-funds incurred by savings and loans), which is then used to adjust the interest rate on an adjustable mortgage up or down.

Indexed rate

The sum of the published index plus the margin. For example if the index were 9% and the margin 2.75%, the indexed rate would be 11.75%. Often, lenders charge less than the indexed rate the first year of an adjustable rate mortgage.

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.

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.

Interim Financing

A construction loan made during completion of a building or a project. A permanent loan usually replaces this loan after completion.

Interest Rate

An interest rate is the cost for borrowing money, typically expressed as a percentage of the principal loan amount. It is the rate a lender charges for the use of assets expressed as a percentage of the principal. Interest rates can be fixed or variable and vary from lender to lender.

ISAOA

ISAOA is an acronym found in mortgagee clauses that stands for “its successors and/or assigns.” It’s included in the clause to stipulate that the mortgagee can transfer their rights to another bank or financial institution. This ability to assign rights to another party allows the mortgagee to sell the mortgagor’s loan on the secondary mortgage market.

Investor

A money source for a lender.

Jumbo Loan

A loan which is larger 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.

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 a savings account for a down payment.

Liabilities

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

Lien

A claim upon a piece of property for the payment or satisfaction of a debt or obligation.

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 caps.

Loan

A sum of borrowed money (principal) that is generally repaid with interest.

Loan Estimate

This preliminary disclosure replaced the old Good Faith Estimate (GFE). It discloses the rate and terms of the home loan including the costs involved. You should get one within three days of applying for a mortgage, and updated estimates when there are major in loan terms.

Loan Modification

Loan modification is a process that allows homeowners to get a more affordable mortgage by changing the terms of the original loan. This includes getting a lower interest rate or extending the loan term. The loan modification process involves working with a loan servicer and submitting an application. The servicer may then review the homeowner’s financial information to determine if they are eligible for a loan modification. If approved, the servicer will adjust the loan terms to make payments more affordable.

Loan-To-Value Ratio

Loan-to-value, or LTV, refers to the relationship between a property’s sales price or appraised value and the amount of loans against it. It’s the mortgage balance / the property value. So a $100,000 house with a $90,000 mortgage against it has an LTV of 90 percent. When there is more than one loan involved, perhaps a first and second mortgage, the calculation is called the combined loan-to-value, or CLTV.

Lock

Lender’s guarantee that the mortgage rate quoted will be good for a specific number of days from day of application. Also knows as a rate lock.

Loss Mitigation

Loss mitigation for a mortgage is a process where lenders work with borrowers who are having difficulty making their monthly mortgage payments. The goal of the loss mitigation process is to help borrowers find solutions that allow them to keep their home and remain current on their loan obligations. Common options include loan modifications, repayment plans, forbearance agreements and deed in lieu of foreclosure Certain loss-mitigation options may help you stay in your home. Other options may help you leave your home without going through foreclosure.

Margin

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

Market Value

The highest price that a buyer would pay and the lowest price a seller would accept on a property. Market value may be different from the price a property could actually be sold for at a given time.

Maturity

The date on which the principal balance of a loan becomes due and payable.

MIP (Mortgage Insurance Premium)

It is insurance from FHA to the lender against incurring a loss on account of the borrower’s default.

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. A mortgage is a loan secured by real estate that is used to purchase a property. The borrower agrees to make regular payments to the lender, which includes both principal and interest, in exchange for ownership of the property.

Mortgage Banker

A company that originates mortgages exclusively for resale in the secondary mortgage market.

Mortgage Broker

An individual or company that charges a service fee to bring borrowers and lenders together for the purpose of loan origination.

Mortgagee

The lender.

Mortgagee Clause

A mortgagee clause is a protective provisional agreement between a mortgage lender (the mortgagee) and a property insurance provider. This type of clause safeguards the lender from incurring financial losses in cases where the mortgaged property becomes damaged, as it requires the insurer to guarantee payouts when any claims covered by the property insurance policy are made. Mortgagee clauses are also known as mortgage clauses or loss payee clauses.

Mortgage Insurance

Mortgage insurance is a type of insurance policy that helps to protect the lender or financial institution in case the borrower defaults on their mortgage payments. This type of insurance may be required if the borrower has a low down payment or a high loan-to-value ratio. It can either be provided by a private insurer or the federal government. Typically required on mortgages with less than 20% down.

Mortgage Life Insurance

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

Mortgagor

The borrower or homeowner.

Negative Amortization

Occurs when your monthly payments are not large enough to pay all the interest due on the loan. This unpaid interest is added to the unpaid balance of the loan. The danger of negative amortization is that the home buyer ends up owing more than the original amount of the loan.

Net Effective Income

The borrower’s gross income minus federal income tax.

Note

A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.

One year adjustable

Mortgage whose annual rate changes yearly. The rate is usually based on movements of a published index plus a specified margin, chosen by the lender.

Origination Fee

This fee covers the lender charges associated with originating, processing, underwriting and funding a home loan. It is often expressed as a percentage of the loan 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.

Permanent Loan

A long term mortgage, usually ten years or more. Also called an (end loan).

PITI

Principal, Interests, taxes and insurance combined to form your total mortgage payment. Used for qualification purposes.

Power of Attorney

A legal document authorizing one person to act on behalf of another.

Preapproval

The process of determining how much money you will be eligible to borrow before you apply for a loan.

Prepaid Expenses

Necessary to create an escrow account or to adjust the seller’s existing escrow account. Can include taxes, hazard insurance, private mortgage insurance and special assessments.

Prepayment

A clause in a mortgage permitting the borrower to make payments in advance of their due date.

Prepaid Interest Charges

Prepaid interest charges are fees paid in advance for a loan or a mortgage agreement. These charges cover the interest that is due for the period prior to the first payment. If you close on a mortgage in January, you will most likely make your first mortgage payment in March. The prepaid interest will cover time frame between closing and the first payment due date.

Prepayment Penalty

A prepayment penalty is a fee that some lenders charge if you pay off all or part of your loan before the agreed-upon date. This penalty is designed to offset the potential financial losses the lender may incur from early repayment of the loan. Not all mortgages have a prepayment penalty.

Points

Also called “discount points,” these are additional, optional fees that borrowers can pay to reduce, or “buy down” their mortgage rates. Because to get the lowest possible rate, you have to pay higher costs. A mortgage calculator can help you determine if it’s worth paying points to get a lower rate and payment. Each point is equal to 1 percent of the loan amount (e.g., two points on a $100,000 mortgage would cost $2,000).

Principal Balance

This is the amount you borrow. Over time, you pay this off with monthly payments.

Primary Mortgage Market

Lenders, such as savings and loan associations, commercial banks, and mortgage companies, who make mortgage loans directly to borrowers. These lenders sometimes sell their mortgages to the secondary mortgage markets such as to FNMA or GNMA, etc.

Private Mortgage Insurance (PMI)

Mortgage lenders often require borrowers to pay for PMI when they put less than 20 percent down on a property purchase or have less than 20 percent equity for a refinance. This policy protects the lender if you default (fail to repay your mortgage as agreed). When you have at least 20 percent equity, you can often drop this coverage. When you take a government-backed loan like the FHA mortgage, this insurance is called MIP, or mortgage insurance premium.

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.

Realtor®

A real estate broker or an associate holding active membership in a local real estate board affiliated with the National Association of Realtors.

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.

Recission

The cancellation of a contract. With respect to mortgage refinancing, the law that gives the homeowner three days to cancel a contract in some cases once it is signed if the transaction uses equity in the home as security.

Recording Fees

Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records.

Refinance

Obtaining a new mortgage loan on a property already owned. Often to replace existing loans on the property.

Renegotiable Rate Mortgage

A loan in which the interest rate is adjusted periodically. See adjustable rate mortgage.

RESPA

Short for the Real Estate Settlement Procedures Act. RESPA is a federal law that allows consumers to review information on known or estimated settlement cost once after application and once prior to or at a settlement. The law requires lenders to furnish the information after application only.

Reverse Mortgage

A reverse mortgage is a loan for senior homeowners, 62 or older that allows them to convert part of their home equity into cash. With a reverse mortgage, the borrower does not need to make regular loan payments, but instead will receive funds from the lender in a lump sum, monthly payment, or line of credit. Reverse mortgages can be a good financial planning tool for those who wish to remain independent and age in place.

Right of recission

A right of rescission is a legal right that allows a person to cancel a contract and restore the parties involved to their original positions. This right typically exists for a certain period of time, 3 days for mortgage transactions. It offers consumers the right to cancel certain types of loans.

Reverse Annuity Mortgage (RAM)

A form of mortgage in which the lender makes periodic payments to the borrower using the borrower’s equity in the home as collateral for and repayment of the loan.

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.

Satisfaction of Mortgage

The document issued by the mortgagee when the mortgage loan is paid in full. Also called a (release of mortgage).

Second Mortgage

A mortgage made subsequent to another mortgage and subordinate to the first one.

Secondary Mortgage Market

The place where primary mortgage lenders sell the mortgages they make to obtain more funds to originate more new loans. It provides liquidity for the lenders.

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

All the steps and operations a lender performs to keep a loan in good standing, such as collection of payments, payment of taxes, insurance, property inspections and the like.

Settlement/Settlement Costs

See Closing costs.

Short Sale

A short sale is a transaction in which the seller’s mortgage lender allows the seller to sell the property for less than what is owed on the existing mortgage loan. The lender will generally agree to a short sale if the seller is unable to continue making their mortgage payments and can demonstrate financial hardship. It is a type of loss mitigation.

Simple Interest

Interest which is computed only on the principle balance.

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.

Survey

A measurement of land, prepared by a registered land surveyor, showing the location of the land with reference to known points, its dimensions, and the location and dimensions of any buildings.

Sweat Equity

Equity created by a purchaser performing work on a property being purchased.

Term

Different loan terms are available based on product and need. A 30 year fixed rate mortgage is the most widely used. Other available fixed rate terms are 25 year, 20 year, 15 year and 10 year are also common.

Uncommon loan terms are associated with a hybrid loan such as an adjustable rate mortgage that converts over to a fixed rate loan. Other uncommon terms are where a lender will allow you to tailor your loan term. An example of this is a 23 year fixed rate mortgage. This loan term is tailored to and requested by the individual borrower.

2/1 Buydown

A 2/1 buydown is a feature of a mortgage, not all mortgage products offer this. It is a concession that is offered by a seller or a builder. The buyer will get a payment rate reduction equal to 2% lower than your interest rate for the first 12 months. The payment rate reduction becomes 1% less than your interest rate for the second 12 months. It is not an interest rate reduction, but a payment rate reduction. The seller covers the cost of the payment rate reduction for the two years. There are variations as well, 3-2-1 buydown, etc.

Title

A document that gives evidence of an individual’s ownership of property.

Title Insurance

Title insurance protects you and your lender from legal issues that may pop up that compromise your ownership of a property. For example, if you bought a foreclosure home, and it turns out the lender had no right to foreclose, you might lose your home. Most lenders require that you buy a lender’s policy to protect its interest. You can protect your own equity by also purchasing an owner’s policy.

Title Search

An examination of municipal records to determine the legal ownership of property. Usually is performed by a title company.

Total Expense Ratio

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

Truth in Lending

A federal law requiring disclosure of the Annual Percentage Rate to home buyers shortly after they apply for the loan. Also known as Regulation Z.

Underwriting

The decision whether to make a loan to a potential home buyer based on credit, employment, assets, and other factors and the matching of this risk to an appropriate rate and term or loan amount.

Usury

Interest charged in excess of the legal rate established by law.

VA Loan

A long term, low-or-no down payment loan guaranteed by the Department of Veterans Affairs. Restricted to individuals qualified by military service or other entitlements.

Verification of Deposit (VOD)

A document signed by the borrower’s financial institution verifying the status and balance of his/her financial accounts.

Verification of Employment (VOE)

A document signed by the borrower’s employer verifying his/her position and salary.

Warehouse Fee

Many mortgage firms must borrow funds on a short term basis in order to originate loans which are to be sold later in the secondary mortgage market (or to investors). When the prime rate of interest is higher on short term loans than on mortgage loans, the mortgage firm has an economic loss which is offset by charging a warehouse fee.