Mortgage Glossary | New Homes Market Center

• Adjustable-rate mortgage (ARM):
  • A mortgage whose interest rate changes over a time based on an index plus a margin.
• Amortization:
  • The gradual repayment of a mortgage by making payment installments.
• Amortization schedule:
  • A timetable for repayment of a mortgage showing the amount of each payment applied to interest and principal and the remaining balance.
• Annual percentage rate (APR):
  • The total yearly cost of a mortgage stated as a percentage of the loan amount; includes the base interest rate, primary mortgage insurance, and loan origination fee (points).
• Appraisal:
  • A professional opinion of the market value of a property.
• Assumable mortgage:
  • A mortgage that can be taken over (“assumed”) by the buyer when a home is sold.
• Assumption:
  • The transfer of the seller’s existing mortgage to the buyer.
• Cap:
  • A provision of an ARM limiting how much the interest rate or mortgage payments may increase.
• Cash reserve:
  • A requirement of some lenders that buyers have sufficient cash remaining after closing to make the first two mortgage payments.
• Clear title:
  • A title that is free of liens and legal questions regarding ownership of the property.
• Contingency:
  • A condition that must be met before a contract is legally binding.
• Conventional mortgage:
  • Any mortgage that is not insured or guaranteed by the federal government.
• Deed:
  • The legal document conveying title to a property.
• Deed of trust:
  • The document used in some states instead of a mortgage; title is conveyed to a trustee rather than to the borrower.
• Discount points:
  • See Points.
• Down payment:
  • The portion of the purchase price that the buyer pays in cash and does not finance with a mortgage.
• Due-on-sale clause:
  • A provision in a mortgage allowing the lender to demand repayment in full if the borrower sells the property securing the mortgage.
• Earnest money:
  • A deposit given to the seller to show that a prospective buyer is serious about purchasing the house.
• Easement:
  • A right of way giving persons other than the owner access to or over a property.
• Equity:
  • The difference between the market value of a property and the homeowner’s outstanding mortgage balance.
• Equity loan:
  • A loan based on the borrower’s equity in his or her home.
• Escrow:
  • The holding of documents and money by a neutral third party prior to closing; also, an account held by the lender into which a homeowner pays money for taxes and insurance.
• FHA loan:
  • A mortgage that the Federal Housing Administration insures.
• First mortgage (lien):
  • This is the mortgage that has first claim in the event of default.
• Fixed-rate mortgage:
  • A mortgage in which the interest rate does not change during the entire term of the loan.
• Flood insurance:
  • Insurance required for properties in federally designated flood areas.
• Hazard insurance:
  • Insurance to protect the homeowner and the lender against physical damage to a property from fire, wind, vandalism, or other hazards.
• Homeowner’s insurance:
  • An insurance policy that combines liability coverage and hazard insurance.
• Interest:
  • The fee charged for borrowing money.
• Interest rate cap:
  • A provision of an ARM limiting how much interest the rate may increase per adjustment period. See also Lifetime cap.
• Lien:
  • A legal claim against a property that must be paid when the property is sold.
• Lifetime cap:
  • A provision of an ARM that limits the total increase in interest rates over the life of the loan.
• Loan servicing:
  • The collection of mortgage payments from borrowers and related responsibilities of a loan servicer.
• Loan-to-value ratio (LTV):
  • The relationship between the amount of a mortgage and the total value of the property.
• Lock-in:
  • A written agreement guaranteeing the homebuyer a specified interest rate provided the loan is closed within a set period of time. The lock-in also usually specifies the number of points to be paid at closing.
• Margin:
  • The set percentage the lender adds to the index rate to determine the interest rate of an ARM.
• 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 market.
• Mortgage broker:
  • A company that for a fee matches borrowers with lenders.
• Mortgage insurance:
  • See Private mortgage insurance.
• Mortgage insurance premium:
  • The fee paid by a borrower to FHA or a private insurer for mortgage insurance.
• Mortgage note:
  • A legal document obligating a borrower to repay a loan at a stated interest rate during a specified period of time; the agreement is secured by a mortgage.
• Origination fee:
  • A fee paid to a lender for processing a loan application; it is stated as a percentage of the mortgage amount, or points.
• Owner financing:
  • A purchase in which the seller provides all or part of the financing.
• Payment cap:
  • A provision of some ARMs limiting how much a borrower’s payments may increase regardless of how much the interest rate increases; may result in negative amortization.
• PITI:
  • Stands for principal, interest, taxes, and insurance – the components of a monthly mortgage payment.
• Points:
  • A one-time charge by the lender to increase the yield of the loan; a point is 1 percent of the amount of the loan.
• Prepayment penalty:
  • A fee 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 applying for a loan.
• Principal:
  • The amount borrowed or remaining unpaid; also, the part of the monthly payment that reduces the outstanding balance of a mortgage.
• Private mortgage insurance (PMI):
  • Insurance provided by non-government insurers that protect lenders against loss if a borrower defaults.
• Qualifying ratios:
  • Guidelines applied by lenders to determine how large a loan to grant a home- buyer.
• Rate lock:
  • See Lock-in.
• Refinancing:
  • The process of paying off one loan with the proceeds from a new loan secured by the same property.
• Second mortgage:
  • A mortgage that has rights that are subordinate to the rights of the first mortgage holder.
• Settlement sheet:
  • The computation of costs payable at closing which determines the seller’s net proceeds and the buyer’s net payment.
• Survey:
  • A drawing showing the legal boundaries of a property.
• Title:
  • A legal document establishing the right of ownership.
• Title company:
  • A company that specializes in insuring title to property.
• Title insurance:
  • Insurance to protect 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.
• Truth-in-Lending:
  • A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage including the APR and other charges.
• Underwriting:
  • The process of evaluating a loan application to determine the risk involved for the lender.
• * VA loan:
  • A loan that the Veterans Administration guarantees.

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