Here are all the mortgage terms you’ll need to know on your home loan journey. If you have any
questions, feel free to reach out to one of our friendly Loan Officers for guidance!
Additional principal payment
Extra money included in the monthly payment to help reduce the principal and shorten the term of the
loan.
Adjustable-rate mortgage (ARM)
A loan with an interest rate that is periodically adjusted to reflect changes in a specified financial index.
Adjusted cost basis
The cost of any improvements the seller makes to the property. Deducting the cost from the original
sales price provides the profit or loss of a home when it is sold.
Adjustment period
The amount of time between interest rate adjustments in an adjustable-rate mortgage.
Agent
A person licensed by the state to conduct real estate transactions.
Alienation clause
A provision that requires the borrower to pay the balance of the loan in a lump sum after the property is
sold or transferred.
Allowances
Budgets offered by builders of new homes for the purchase of carpeting and fixtures.
Amortization
The process of paying the principal and interest on a loan through regularly scheduled installments.
Annual Percentage Rate (APR)
The cost of the loan expressed as a yearly rate on the balance of the loan.
Application
A document that details a potential borrower’s income, debt, and other obligations to determine credit
worthiness.
Application fee
The fee that a lender charges to process a loan application.
Appraisal
An independent third party opinion of the value of a property at a given point in time.
Appreciation
An increase in the value of a home or other property.
Assessed value
A tax assessor’s determination of the value of a home in order to calculate a tax base.
Assumable mortgage
A mortgage that can be transferred to another borrower.
Average price
The price of a home determined by totaling the sales prices of all houses sold in an area and dividing
that number by the number of homes.
Balloon Mortgage
A mortgage in which monthly installments are not large enough to repay the loan by the end of the
term. As a result, the final payment due is the lump sum of the remaining principal.
Balloon payment
The final lump sum payment due at the end of a balloon mortgage.
Basis Point
A basis point is one one-hundredth of one percentage point. For example, the difference between a loan
at 8.25 percent and a mortgage at 8.37 percent is 12 basis points.
Bill of sale
A document that transfers ownership of personal property.
Blanket insurance policy
A policy that covers more than one person or piece of property.
Broker
A person licensed by the state to deal in real estate.
Capital expenditure
The cost of making improvements on a property.
Cash-out refinance
The refinancing of a mortgage in which the money received from the new loan is greater than the
amount due on the old loan. The borrower can use the extra funds in any manner.
Closing
The final procedure in which documents are signed and recorded, and the property is transferred.
Closing costs
Expenses incidental to the sale of real estate, including loan, title, and appraisal fees.
Closing Disclosure
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).
Closing statement
A document which details the final financial settlement between a buyer and seller and the costs paid by
each party.
Commercial property
An area that is zoned for businesses.
Commission
The negotiable percentage of the sales price of a home that is paid to the agents of the buyer and seller.
Community Reinvestment Act
A federal law that encourages financial institutions to loan money in the neighborhoods where minority
depositors live.
Compound interest
The interest paid on the principal balance in a mortgage and on the accrued and unpaid interest of the
loan.
Condominium
Individual units in a building or development in which owners hold title to the interior space while
common areas such as parking lots, community rooms and recreational areas are owned by all the
residents.
Construction loan
Short-term loans a lender makes for the construction of homes and buildings. The lender disburses the
funds in stages.
Construction to permanent loan
The conversion of a construction loan to a longer-term traditional mortgage after construction has been
completed.
Contingency
A condition specified in a purchase contract, such as a satisfactory home inspection.
Conventional loan
A long-term loan a lender makes for the purchase of a home.
Convertible adjustable-rate mortgage
A mortgage which starts as an adjustable-rate loan but allows the borrower to convert the loan to a
fixed-rate mortgage during a specified period of time.
Cooperative project
A project in which a corporation holds title and sells shares representing individual units to buyers who
then receive a proprietary lease as their title.
Credit
The money a lender extends to a buyer for a commitment to repay the loan within a certain time frame.
Credit rating
The degree of credit worthiness assigned to a person based on credit history and financial status.
Credit report
A credit bureau report that shows a loan applicant’s history of payments made on previous debts.
Several companies issue credit reports, but the three largest are Trans Union Corp., Equifax, and
Experian (formerly TRW).
Deed
The legal document that transfers ownership of a piece of property.
Deed of trust
A document that gives a lender the right to foreclose on a piece of property if the borrower defaults on
the loan.
Default
The failure to fulfill a duty or promise or discharge an obligation, such as making monthly mortgage
payments.
Deferred maintenance
Any repair or maintenance of a piece of property that has been postponed, resulting in a decline in
property value.
Delinquent Mortgage
A mortgage that involves a borrower who is behind on payments. If the borrower cannot bring the
payments up to date within a specified number of days, the lender may begin foreclosure proceedings.
Disclosure
A statement to a potential buyer listing information relevant to a piece of property, such as the
presence of radon or lead paint.
Down payment
The amount of money a buyer agrees to give the seller when a sales agreement is signed. Complete
financing is later secured with a lender.
Draw
A payment made to subcontractors or suppliers from a construction loan.
Early occupancy
The condition in which buyers can occupy the property before the sale is completed.
End loan
The conversion from a construction loan to permanent financing a condominium buyer secures after all
units in a project have been completed.
Equity
A determination of the value of a property after existing liens are deducted.
Errors and omissions insurance
A policy that pays for any mistakes a builder or architect makes in a project.
Escrow
A neutral third party holds the documents and money involved in a real estate transaction and ensures
that all conditions of a sale are met. Escrow also refers to a special account that a lender establishes to
hold monthly installments from the borrower to cover property taxes and insurance.
Escrow closing
Escrow closes when all conditions of a real estate transaction are met, and the title of the property is
transferred to the buyer.
Estate
The total assets of a person, including real property, at the time of death.
Fair Credit Reporting Act
A federal law passed in 1971 that regulates the activity of credit bureaus. It is designed to prevent
inaccurate or obsolete information from staying in a consumer’s credit file and requires credit bureaus
to have reasonable procedures for gathering, maintaining, and disseminating credit information. The act
also requires credit bureaus to show a consumer their credit file if the consumer presents proper
identification, although the bureau reserves the right to charge a fee for doing so.
Fair Housing Act
Landmark federal law passed in 1965 and amended in 1988 that makes it illegal to deny rent or refuse to
sell to anyone based on race, color, religion, sex, or national origin. The 1988 amendment expanded the
protections to include family status and disability.
Fannie Mae
The official name of the Federal National Mortgage Association, it is a congressionally chartered,
shareholder-owned company that buys mortgages from lenders and resells them as securities on the
secondary mortgage market. Also known as a Government Sponsored Enterprise (GSE).
Federal Housing Administration (FHA)
This government agency operates a variety of home-loan programs. Its most popular is the Sec. 203(b),
program, which provides low-rate mortgages to buyers who make a down payment as small as 3
percent.
FHA loans
Mortgages that are insured by the Federal Housing Administration. The FHA’s 203(b) loan program
provides low-rate mortgages to buyers who make a down payment as small as 3.5 percent. The agency
also operates loan plans for investors and purchasers of rural property.
First mortgage
The primary mortgage on a property that has priority over all other voluntary liens.
Fixed installment
The monthly payment on a home loan.
Fixed-rate mortgage
A home loan with an interest rate that will remain at a specific rate for the term of the loan. About 75
percent of all home mortgages have fixed rates.
Flat fee
A set fee charged by a broker instead of a commission.
Flood insurance
Hazard coverage that is required in designated flood areas.
Forbearance
A course of action a lender may pursue to delay foreclosure or legal action against a delinquent
borrower.
Foreclosure
The legal process reserved by a lender to terminate the borrower’s interest in a property after a loan has
been defaulted. When the process is completed, the lender may sell the property and keep the proceeds
to satisfy its mortgage and any legal costs. Any excess proceeds may be used to satisfy other liens or be
returned to the borrower.
For Sale By Owner (FSBO)
The owner acts as the agent to avoid paying a sales commission.
Freddie Mac
The common name for the Federal Home Loan Mortgage Corporation, a congressionally chartered
institution that buys mortgages from lenders and resells them as securities on the secondary mortgage
market. Also known as a Government Sponsored Enterprise (GSE).
Fully amortized adjustable-rate mortgage
A mortgage that amortizes, or pays down, the balance of a loan.
Gift
A cash gift a buyer receives from a relative or other source. Lenders usually require a “gift letter” stating
that the money will not have to be repaid and proof of source of funds.
Grace period
A specified amount of time to make a loan payment after its due date without penalty.
Graduated-payment mortgage (GPM)
A mortgage that requires a borrower to make larger monthly payments over the term of the loan. The
payment is unusually low for the first few years but gradually rises until year three or five, then remains
fixed.
Guarantee mortgage
A loan guaranteed by a third party, such as a government institution.
Hazard insurance
This provision of homeowners insurance covers damage by fire, wind or other disaster. It is required by
all lenders before a loan is approved.
Home equity conversion mortgage (HECM)
Loans made to older owners who want to convert equity into money. Because borrowers are qualified
on the basis of the value of their home, the loan is not the same as a home equity loan. Also known as
reverse mortgages.
Home equity loan (HELOC)
A loan that allows owners to borrow against the equity in their homes.
Home inspection
An examination of a home’s construction, condition and internal systems by an inspector or contractor
prior to purchase.
Homeowners’ association (HOA)
A group that governs a modern subdivision or planned community. An association collects monthly fees
from all owners to pay for maintenance of common areas, handle legal and safety issues, and enforce
the covenants, conditions and restrictions set by the developer.
Homeowners’ insurance
This insurance includes hazard coverage for any damages that may affect the value of a house, in
addition to personal liability and theft coverage.
Home warranty
A type of insurance that covers repairs to certain parts of a house and some fixtures.
Impact fees
Fees collected from developers of new homes to pay for schools, parks, and other facilities.
Impounds
A portion of the monthly mortgage payment that is placed in an account and used to pay for hazard
insurance, property taxes and private mortgage insurance.
Income property
Property that is not occupied by the owner but is used to generate income.
Index
Financial tables used by lenders to calculate interest rates on adjustable mortgages and on Treasury
bills.
Initial interest rate
The original interest rate on an adjustable mortgage.
Intent to Proceed (ITP)
An action by the borrower acknowledging their intent to proceed with the lender. The ITP must be
received before a borrower can be obligated to any fees for the loan, most commonly application or
appraisal fees.
Interest
The fee borrowers pay to obtain a loan. It is calculated based on a percentage of the total loan.
Interest accrual rate
The rate at which interest accrues on a mortgage.
Interest-only loan
The pays only the interest that accrues on the loan balance each month. Because each payment goes
toward interest, the outstanding balance of the loan does not decline with each payment.
Interest Rate
The sum, expressed as a percentage, charged for a loan. Interest payments on most home loans are tax deductible.
Interest rate buy-down plans
For cash-short buyers, some sellers are willing to advance funds from the sale of the home to buy down
the interest rate and reduce the buyer’s monthly obligation.
Interest rate caps
A limit on the amount that can be charged to the monthly payment of an adjustable-rate mortgage
during an adjustment period.
Interest rate ceiling
The highest interest a lender can charge for an adjustable-rate mortgage.
Investment property
Real estate that generates income, such as an apartment building or a rental house.
Jumbo mortgage
Loans that exceed limits set by Fannie Mae and Freddie Mac. The current limit is $417,000.
Late charge
A fee a lender imposes on a borrower when the borrower does not make a payment on time.
Lender
A bank, savings institution or mortgage company that offers home loans.
Liability insurance
A policy that protects owners against any claims of negligence, personal injury, or property damage.
Lien
A claim laid by one person or company on the property of another as security for money owed.
Life cap
A limit on the amount that a loan rate can move during the term of the mortgage. For example, the rate
on an adjustable-rate mortgage that begins at 5 percent and has a lifetime cap of 6 percentage points
cannot rise above 11 percent, even if rates on fixed-rate mortgages soar to 20 percent.
Loan application
The first step toward submitting a home loan requires the borrower to itemize basic financial
information.
Loan application fee
A fee charged by lenders to for making a loan application.
Loan commitment
A promise by a lender or other financial institution to make or insure a loan for a specified amount and
on specific terms.
Loan Estimate
A Loan Estimate tells you important details about a mortgage loan you have requested. Use this tool to
review your Loan Estimate to make sure it reflects what you discussed with the lender. If something
looks different from what you expected, ask why. Request multiple Loan Estimates from different
lenders so you can compare and choose the loan that's right for you.
Loan officer
An official representative of a lending institution who is empowered to act on behalf of the lender
within certain limits.
Loan origination fee
Most lenders charge borrowers an origination fee–or points–for processing a loan. A point is 1 percent
of the total loan amount.
Loan processing fee
A fee charged by some lenders for gathering information to enable the lender to process the loan.
Loan term
The amount of a time set by the lender for a buyer to pay a mortgage. Most conventional loans have 30-
year or 15-year terms.
Loan -to-value ratio
A technical measure used by lenders to assess the relationship of the loan amount to the value of the
property.
Low-documentation loan
A mortgage that requires only minimal verification of income and assets.
Low-down-payment loan
A home loan that requires the borrower to make only a small down payment before obtaining the
financing needed to purchase a house.
Margin
The lender’s “retail markup” on the mortgage. For example, if the index rate for an adjustable-rate
mortgage is 5 percent but the lender has a 2.5 percentage-point margin, the rate the borrower will pay
is 7.5 percent.
Market value
The price that a piece of property sells for at a particular point in time.
Mechanic’s lien
Subcontractors or suppliers sometimes will file an encumbrance, or mechanic’s lien, against a property
to seek payment.
Mortgage
A legal document specifying a certain amount of money to purchase a home at a certain interest rate,
using the property as collateral.
Mortgage acceleration clause
A clause which allows a lender to demand that the entire balance of the loan be repaid in a lump sum
under certain circumstances. The acceleration clause is usually triggered if the home is sold, title to the
property is changed, the loan is refinanced or the borrower defaults on a scheduled payment.
Mortgage banker
A company that funds home loans in their own name using their own funds or warehouse lines of credit.
The loans are usually bundled and sold to investors like Fannie Mae and Freddie Mac.
Mortgage broker
A company that matches lenders with prospective borrowers who meet the lender’s criteria. The
mortgage broker does not make the loan but receives payment from the lender for services.
Mortgage insurance
Required by lenders in some loans to protect them from a possible default. All conventional loans with
less than a 20 percent down payments require private mortgage insurance, or PMI.
Multiple listing service (MLS)
The service combines the listings for all available homes in an area, except For-Sale-By-Owner (FSBO)
properties, in one directory or database.
Negative amortization
The situation occurs when a borrower’s monthly payment is not large enough to cover both the
principal and interest of a loan. As a result, the outstanding balance of the loan actually grows larger
with each payment rather than smaller. Most fixed-rate loans are not subject to negative amortization,
but many adjustable-rate mortgages are susceptible.
Non-assumption clause
A loan provision that prohibits the transfer of a mortgage to another borrower without lender approval.
Non-recurring closing costs
Costs that are one-time only fees for such items as an appraisal, loan points, credit report, title
insurance and a home inspection.
Note
The legal document that requires a borrower to repay a mortgage at a certain interest rate over a
specified period of time.
Note rate
The interest rate specified in a mortgage note.
Notice of default
A lender’s initial action when a mortgage payment is late and attempts to reconcile the issue out of
court have failed.
Origination fee
A fee charged by most lenders–also called points–for processing a loan. A point is 1 percent of the total
loan amount.
Owner financing
A transaction in which the seller of a property agrees to finance all or part of the purchase.
PITI (Principal, Interest, Taxes, Insurance)
When a buyer applies for a loan, the lender will calculate the principal, interest, taxes, and insurance.
The figure is designed to represent the borrower’s actual monthly mortgage-related expenses.
Point
Fees charged by lenders at the time a loan is originated. A point is equal to 1 percent of the total loan
amount.
Prepaid expenses
The costs for taxes, insurance and assessments paid before the due date.
Prepaid interest
Interest paid before it is due. For example, at the close of a real estate transaction, borrowers usually
pay for the interest on their loan that falls between the closing period and the first monthly payment.
Prepayment penalty
Lenders can impose a penalty on a borrower who pays a loan off before its expected end date.
Pre-Qualification
Many lenders will prequalify a borrower who is shopping for a loan by completing a preliminary
assessment of the buyer’s ability to pay for a home.
Pre-Qualification letter
A letter from a lender that informs a seller about the amount of money that a potential buyer may
qualify for.
Principal
The amount of money that the borrower owes on a mortgage.
Private mortgage insurance (PMI)
A special type of loan insurance that many lenders require borrowers to purchase if the borrower’s
down payment is less than 20 percent of the home’s purchase price.
Property tax
Property taxes are calculated at about 1.5 percent of the current market value.
Property value
The value of a piece of property is based on the price a buyer will pay at a certain time.
Purchase agreement
A document which details the purchase price and conditions of the transaction.
Qualifying ratios
Lenders compute qualifying ratios to determine how much a potential buyer can borrow.
Quit-claim deed
A document that releases a party from any interest in a piece of real estate.
Rate-improvement mortgage
A loan with a clause that entitles a borrower to a one-time cut in the interest rate without going through
refinancing.
Rate lock
When interest rates are volatile, many borrowers want to “lock in” an interest rate and many lenders
will oblige, setting a limit on the amount of time the guaranteed interest rate is in effect.
Real estate
Land and anything permanently affixed to it, including buildings, fences and other items attached to the
structure.
Real estate agent
A real estate agent has a state license to represent a buyer or a seller in a real estate transaction in
exchange for a commission. Most agents work for real estate brokers.
Real estate broker
A real estate agent who is licensed by the state to represent a buyer or seller in a real estate transaction
in exchange for a commission. Most brokers also have agents working for them and are entitled to a
portion of their commissions.
Real estate investment trusts (REITs)
The trusts are publicly traded companies that own, develop, and operate commercial properties.
Real Estate Settlement Procedures Act (RESPA)
A federal law designed to make sellers and buyers aware of settlement fees and other transaction related costs. It also defined what information constitutes an application (RESPA 6), as well as outlaws kickbacks in the real estate business (RESPA 8).
Recording fee
A fee charged by real estate agents for conveying the sale of a piece of property into the public record.
Refinancing
The process of replacing an older loan with a new mortgage that has better terms.
Regulation Z
The federal code issued under the Truth-in-Lending Act which requires that a borrower be advised in
writing of all costs associated with the credit portion of a financial transaction.
Rehabilitation mortgage
A mortgage that provides for the costs of repairing and improving a resale home or building.
Remaining balance
The amount of unpaid principal on a home loan.
Remaining term
The original loan term minus the number of payments made.
Resale value
The future value of a piece of property that can be affected by many factors, including the surrounding
neighborhood, school scores, and economic and housing market conditions.
Reserve fund
All homeowners’ associations set aside a certain amount of money for major repairs or improvements.
Restructured loan
A mortgage in which new terms are negotiated.
Return on investment
The amount of profit a property generates.
Reverse mortgage
A special type of loan available to homeowners 62 and over on their primary residence. Repayment is
not necessary until the borrower sells the property or passes away.
Right of first refusal
An agreement by a property owner to give another person the right to buy or rent the property before it
goes on the open market.
Right to rescission
A provision in the federal Truth-in-Lending Act that allows borrowers to cancel certain kinds of refinance
transactions within three days of signing.
Second mortgage
A second loan placed upon a piece of property that is subordinate to the primary mortgage.
Secured loan
Any loan backed by collateral.
Servicer
A firm that collects mortgage payments and manages borrowers’ escrow accounts.
Settlement statement
A document that details who has paid what to whom.
Shared-appreciation mortgage
A loan that allows a lender or other party to share in the borrower’s profits when the home is sold.
Shared-equity transaction
A transaction in which two buyers purchase a property, one as a resident co-owner and the other as an
investor co-owner.
Special assessment
When a homeowners’ association needs or wants extra funds, it levies a special assessment upon the
owners.
Step-rate mortgage
A loan that allows a gradual increase in the interest rate during the first few years of the loan.
Subordinate loan
A second or third mortgage.
Sweat equity
The non-cash value put into a piece of property by the owner, such as do-it-yourself home
improvements.
Title
The actual legal document conferring ownership of a piece of real estate.
Title company
Firms that ensure that the title to a piece of property is clear and provide title insurance.
Title insurance
A policy issued to lenders and buyers to protect any losses because of a dispute over the ownership of a
piece of property.
Total expense ratio
The percentage of monthly debt obligations relative to gross monthly income.
Townhouse
An attached home that is not a condominium.
Tract home
Another term for a production home, a mass-produced house constructed by one builder in a project.
Transfer of ownership
Any legal means by which a piece of real estate changes hands.
Truth-in-Lending Act
A federal law that protects consumers in a variety of ways. One of its key provisions allows a consumer
to cancel a home-improvement loan, second mortgage or other loan if the home was pledged as
security (except for a first mortgage or first trust deed) until midnight of the third business day after the
contract was signed.
Underwriting
The process that lenders go through to evaluate the risks posed by a particular borrower and to set
appropriate conditions for the loan.
U.S. Department. of Housing and Urban Development (HUD)
A federal agency that oversees the Federal Housing Administration and a variety of housing and
community development programs.
Verification of deposit
Part of the loan process, in which a lender will ask a borrower’s bank to sign a statement verifying the
borrower’s account balances and history.
Verification of employment
Part of the loan process, in which a lender asks the borrower’s employer for confirmation of the
borrower’s position and salary.
Veterans Administration (VA)
The U.S. Department of Veterans Affairs operates a variety of programs to help veterans. One of the key
plans it oversees is the VA loan program, which allows most veterans to purchase a house without a
down payment.
VA loan
A program that allows most veterans to purchase a house without a down payment.
