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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