Mortgage Glossary

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.

Amortization
The gradual repayment of a mortgage loan by installments.

Amortization Schedule
Timetable for payment of a mortgage showing amount of each payment applied to interest and principal and remaining balance.

Annual Percentage Rate (APR)
Cost of a mortgage stated as a yearly rate - includes items such as interest, loan origination fees (points), commitment fees, and other credit costs.

Appraisal
Professional opinion or estimate of the market value of a property.

Appreciation
An increase in the value of a property because of changes in market conditions or other causes.

Assessed Value
Valuation placed on property by a public tax assessor to calculate property tax.

Assumable Mortgage
Mortgage that can be taken over (assumed) by the buyer when the home is sold.

Assumption
Transfer of the seller’s existing mortgage to the buyer.

Binder
Preliminary agreement between buyer and seller that includes price and terms of the contract.

Cap
In an adjustable-rate mortgage, the limit on interest rates or mortgage payments as they may increase or decrease.

Cash Reserve
Requirement by some lenders that buyers have at least two months' mortgage payments in cash remaining after closing.

Clear Title
Title free of liens or legal questions about property ownership.

Closing
Meeting where property sale is finalized by delivery of deed from seller to buyer; this includes buyer’s signing mortgage documents and paying closing costs.

Closing Costs
Expenses, over and above the property price, incurred by buyer and seller in transferring ownership of the property. Also known as Settlement Costs.

Commitment Letter
Formal offer by lender stating terms under which it agrees to lend money to a homebuyer.

Condominium
Form of property ownership in which homeowner holds title to individual dwelling unit, an undivided interest in common areas of a multi-unit project, and sometimes, exclusive use of certain common areas.

Contingency
Condition that must be met before a contract is legally binding.

Conventional Mortgage
Mortgage not insured or guaranteed by federal government.

Convertible ARM
Adjustable-Rate Mortgage that can be converted to a Fixed-Rate Mortgage under certain conditions.

Covenant
Mortgage clause obligating or restricting borrower. Violated covenant can result in foreclosure.

Credit Report
Report of individual credit history prepared by credit bureau or consumer reporting agency used by lender to determine loan applicant’s credit-worthiness.

Deed
Legal document conveying title to a property.

Deed of Trust
Document used instead of a mortgage in some states. Title is conveyed to a trustee.

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

Delinquency
Failure to make mortgage payments when due.

Deposit
Deposit by a potential homebuyer to show he or she is serious about buying a house. Also known as Earnest Money.

Depreciation
Decline in property value.

Discount Points
This is a one-time lender charge for originating a loan. A point is 1 percent of the mortgage amount. Also known as Points.

Down Payment
Part of purchase price that buyer pays in cash and does not finance through a
mortgage.

Due-on-Sale Clause
Mortgage provision allowing lender to demand repayment in full if borrower sells the property that serves as mortgage security.

Earnest Money
Deposit by a potential homebuyer to show he or she is serious about buying a house.

Easement
Right of way giving people other than the owner access to, or over, a property.

Equal Credit Opportunity Act
Federal law prohibiting lenders from discriminating because of race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs.

Equity
Homeowner's financial interest in a property. The difference between fair market value of the property and amount still owed on the mortgage.

Escrow
The holding of documents and money by a neutral third party before a closing. Also, an account held by the lender into which a homeowner pays money for taxes and insurance.

Fair Credit Reporting Act
Consumer protection law regulating disclosure of consumer credit reports by credit
reporting agencies and establishing procedures for correcting mistakes on credit records.

First Mortgage
Mortgage that has first claim to a property in case of default.

Fixed-Rate Mortgage
Mortgage with an interest rate that doesn’t change during the loan’s entire term.

Foreclosure
Legal procedure by which a mortgaged property may be sold if a mortgage is in default.

Government Mortgage
Loan guaranteed by the US Department of Veterans Affairs. Also known as a VA Loan.

Graduated-Payment Mortgage
Mortgage starting with low monthly payments that increases at a predetermined rate for a specified time.

Hazard Insurance
Insurance coverage that compensates for physical damage to a property from fire, wind, vandalism, or other hazards.

Homeowner’s Insurance
Insurance policy that combines personal liability and hazard insurance coverage for a dwelling and its contents.

Homeowner's Warranty
Type of insurance covering repairs to specified parts of a house for a specific period of time. The builder or property seller provides this warranty as a condition of the sale.

HUD-1 Statement
Computation of costs payable at closing that determines the seller’s net proceeds and the buyer’s net payment. Also known as a Settlement Statement.

Interest
Fee charged for borrowing money.

Interest Rate Cap
ARM provision limiting the amount interest rates may increase in each adjustment period, or over the life of a mortgage. Also known as Lifetime cap.

Joint Tenancy
Form of co-ownership giving each tenant equal interest and equal rights in a property, including the right of survivorship.

Late Charge
Penalty a borrower must pay when a payment is made after the due date.

Lease-Purchase Mortgage Loan
Mortgage product that allows low- and moderate-income homebuyers to lease a home from a nonprofit organization 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 earmarked for deposit to a savings account in which money for a down payment will accumulate. Also known as Rent With Option To Buy.

Lien
Legal claim against a property that must be paid off when the property is sold.

Lifetime Cap
ARM provision that limits the total increase in interest rates over the life of a loan.

Loan Servicing
The collection of mortgage payments from borrowers and the related responsibilities of a loan servicer.

Loan-to-Value Percentage
Relationship between the principal balance of a mortgage and the appraised value (or sales price, if it is lower) of a property.

Lock-in
Written agreement guaranteeing a specified interest rate if a mortgage is closed within a set time period. The lock-in usually specifies the number of points to be paid at closing. Also known as Rate Lock.

Mortgage
Legal document that pledges a property to the lender as security for payment of a debt.

Mortgage Banker
Company that originates mortgages exclusively for resale on the secondary market.

Mortgage Broker
Individual or company that acts as intermediary between borrower and lender, typically for a fee.

Mortgagee
Lender in a mortgage agreement.

Mortgage Insurance
Mortgage insurance provided by nongovernment insurers that protects lenders against loss if a borrower defaults. Most lenders generally require PMI (Private Mortgage Insurance) for loans with a loan-to-value ratio of over 80 percent.

Mortgage Insurance Premium
Fee paid by a borrower to the FHA or a private insurer for mortgage insurance.

Mortgagor
Borrower in a mortgage agreement.

Negative Amortization
Gradual increase in mortgage debt that occurs when the monthly payment is not large enough to cover the entire principal and interest due. The amount of the shortfall is added to the remaining balance.

Notice of Default
Formal written notice to a borrower that a default has occurred and that legal action may be taken.

Origination Fee
Fee paid to lender for processing a loan application. This fee is stated in the form of points (as a percentage of the mortgage amount).

Owner Financing
Property purchase transaction in which the seller provides all or part of the financing.

Payment Cap
Provision of some ARMs limiting the amount the interest rate can increase or decrease during any adjustment period, regardless of any index increase. Also
known as a Cap.

PITI
Principal, interest, taxes, and insurance - the components of a monthly mortgage payment.

Planned Unit Development (PUD)
Project or subdivision that consists of common property owned and maintained by a homeowners' association for the benefit and use of the individual unit owners.

Points
One-time lender charge for originating a loan; a point is 1 percent of the mortgage amount. Also known as Discount Points.

Prepaids
Fees collected at closing to cover items such as setting up escrow accounts for property taxes, homeowner’s insurance, and mortgage insurance premiums.

Prepayment Penalty
Fee that may be charged to a borrower who pays off a loan before it is due.

Pre-Qualification
Before applying for a loan, the process of determining how much money a prospective homebuyer is eligible to borrow.

Principal
Amount borrowed or remaining unpaid. That part of the monthly payment which reduces the outstanding balance of a mortgage.

Private Mortgage Insurance (PMI)
Mortgage insurance provided by non-government insurers that protects lenders against loss if a borrower defaults. Most lenders generally require PMI for loans with a loan-to-value ratio of over 80 percent.

Purchase and Sale Agreement
Written contract signed by the buyer and seller stating terms and conditions under which a property will be sold.

Qualifying Ratios
Guidelines applied by lenders to determine how large of a loan to grant a homebuyer.

Radon
Invisible, odorless gas found in some homes. In sufficient concentrations, radon may cause health problems.

Rate Lock
Written agreement guaranteeing a specified interest rate if a mortgage is closed within a set time period. The lock-in also usually specifies a number of points to be paid at closing. Also known as a Lock-in.

Real Estate Agent
Person licensed to negotiate and transact the sale of real estate on behalf of the property owner.

Real Estate Settlement Procedures Act
Consumer protection law, which requires, among other things lenders to give borrowers advance notice of closing costs.

Refinancing
Process of paying off one loan with the proceeds from a new loan, using the same property as security.

Rent With Option To Buy
Mortgage product that allows low- and moderate-income homebuyers to lease a home from a nonprofit organization 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 earmarked for deposit to a savings account in which money for a down payment will accumulate. Also known as Lease-purchase mortgage loan.

Second Mortgage
Mortgage on a property that already carries a mortgage.

Secondary Mortgage Market
The buying and selling of existing mortgages.

Seller Take-Back
Agreement in which property owner provides financing, often in combination with an assumed mortgage.

Settlement
Meeting where property sale is finalized by delivery of deed from seller to buyer. This includes buyer’s signing mortgage documents and paying closing costs. Also known as Closing.

Settlement Statement
Computation of costs payable at closing that determines the seller’s net proceeds and the buyer’s net payment. Also known as a HUD-1 statement.

Survey
Drawing or map showing precise legal boundaries of a property, and location of improvements, easements, rights of way, encroachments, and other physical features.

Tenancy by Entirety
Type of joint ownership of property that provides right of survivorship and is available only to a husband and wife.

Tenancy in Common
Type of joint ownership in a property without right of survivorship.

Title
Legal document evidencing a person's right to, or ownership of, a property.

Title Company
Company specializing in examining and insuring titles to real estate.

Title Insurance
Insurance protecting the lender (lender's policy) or buyer (owner's policy) against loss arising from disputes over ownership of property.

Title Search
Examination of public records to ensure that the seller is the legal owner of the property and that no liens or other claims are outstanding.

Transfer Tax
State or local tax payable when title passes from one owner to another.

Truth-in-Lending Act
Federal law requiring lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the APR and other charges.

Underwriting
Process of evaluating a loan application to determine the lender’s risk. It involves analyzing the borrower's creditworthiness and the quality of the property itself.

VA Loan
Loan guaranteed by the US Department of Veterans Affairs. Also known as a government mortgage.

Mortgage Glossary

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