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Mortgage Terms Glossary

  • ACCELERATION CLAUSE: A provision in a mortgage that gives the lender the right to demand payment of the entire outstanding balance under certain conditions.

    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 by installments, calculated to pay off the obligation at the end of a fixed period of time.

    AMORTIZATION SCHEDULE: A timetable for payment of a mortgage showing the amount of each payment applied to interest and principal and the balance remaining.

    ANNUAL PERCENTAGE RATE (APR): The total cost of a mortgage stated as a yearly rate; includes such items as the base interest rate, loan origination fee (points), commitment fees, prepaid interest, and other costs that may be paid by the borrower.

    APPRAISAL: A professional opinion or estimate of market value of a property.

    APPRECIATION: An increase in the value of a property due to changes in market conditions or other causes.

    ASSESSED VALUE: The valuation placed upon property by a public tax assessor used to calculate property taxes.

    ASSUMABLE MORTGAGE: A mortgage that can be taken over ("assumed") by the buyer when a home is sold.

  • CAP An ARM: loan provision that limits the increase or decrease of an interest rate adjustment.

    CASH RESERVE: A requirement of some lenders that buyers have sufficient cash remaining after closing equivalent to months' mortgage payments.

    CLEAR TITLE: A property deed that is free of liens or legal question as to ownership of property.

    CLOSING: A meeting at which the sale of a property is finalized by delivery of a deed from the seller to the buyer and by the buyer's signing the mortgage documents and paying closing costs. Also called "settlement."

    CLOSING COSTS: Expenses (over and above the price of the property) incurred by buyers and sellers in transferring ownership of a property. Also called "settlement costs."

    COMMITMENT LETTER: A formal offer by a lender stating the terms under which it agrees to lend money to a home buyer.

    CONDOMINIUM: A form of property ownership in which the home owner holds title to an individual dwelling unit, an undivided interest in common areas of a multiunit project, and sometimes the exclusive use of certain limited common areas.

    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.

    CONVERTIBLE ARM: An ARM that can be converted to a fixed-rate mortgage under specified conditions.

    COOPERATIVE: A type of multiple ownership in which the residents of a multiunit housing complex own shares in a corporation that owns the property, giving each resident the right to occupy a specific apartment or unit.

    COVENANT: A clause in a mortgage that obligates or restricts the borrower and which, if violated, can result in foreclosure.

    CREDIT REPORT: A report of an individual's credit history prepared by a credit bureau or consumer reporting agency and used by a lender in determining a loan applicant's creditworthiness.

  • DEED: The legal document conveying title to a property.

    DEED OF TRUST: The document used in some states instead of a mortgage that gives the lender a security interest in the property. Title is conveyed to a trustee by the borrower (who retains equitable title). When the debt is paid in full, title is reconvened to the borrower.

    DEFAULT: The failure to make a mortgage payment on a timely basis or to comply with other requirements of a mortgage.

    DELINQUENCY: A situation in which a loan payment has not been made by its due date.

    DEPOSIT: See EARNEST MONEY.

    DEPRECIATION: A decline in the value of property; the opposite of "appreciation."

    DISCOUNT POINTS: See POINTS.

    DOWN PAYMENT: The part 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 made by the potential home buyer to show that he or she is serious about buying the property.

    EASEMENT: A right of way giving persons other than the owner access to a property.

    EQUAL CREDIT OPPORTUNITY ACT: A federal law that prohibits lenders from discriminating on the basis of the borrower's race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs.

    EQUITY: A homeowner's financial interest in a property. Equity is the difference between the fair market value of a property and the amount still owed on mortgages.

    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 (or servicer) into which a homeowner pays money for taxes and insurance.

  • FAIR CREDIT REPORTING ACT: A consumer protection law that regulates the disclosure of consumer credit reports by consumer credit reporting agencies and establishes procedures for correcting mistakes on one's credit record.

    FHA MORTGAGE: A mortgage that is insured by the Federal Housing Administration. Also referred to as a "government" mortgage.

    FHA TITLE I HOME IMPROVEMENT LOAN: A loan that may be used to finance modest home improvements when homeowners have little equity in their property. This loan is generally based on the creditworthiness of the borrower, rather than the equity in the home.

    FIRST MORTGAGE: A mortgage that has first claim to the secured property 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 that compensates for physical property damage resulting from flooding. It is required for properties located in federally designated flood areas.

    FORBEARANCE: The lender's postponement of foreclosure to give the borrower time to catch up on overdue payments.

    FORECLOSURE: The legal process by which a mortgaged property may be sold when a mortgage is in default.

  • GRADUATED-PAYMENT MORTGAGE: A mortgage that starts with low monthly payments that increase at a predetermined rate for a specified time. The initial monthly payments are set at an amount lower than that required for full amortization of the debt.

  • HAZARD INSURANCE: Insurance coverage that compensates for physical damage to a property from fire, wind, vandalism, or other hazards.

    HOMEOWNER'S INSURANCE: An insurance policy that combines personal liability coverage and hazard insurance coverage for a dwelling and its contents.

    HOMEOWNER'S WARRANTY: A type insurance that covers repairs to specified parts of a house for a specific period of time. It is provided by the builder or property seller as a condition of the sale.

    HUD-1 STATEMENT: See SETTLEMENT STATEMENT.

  • INSURANCE BINDER: A document issued by an Insurance Company evidencing that appropriate property insurance has been obtained.

    INTEREST: The fee charged for borrowing money.

    INTEREST RATE CAP: A provision of an ARM limiting how much interest rates may increase per adjustment period or over the life of a mortgage. See also LIFETIME CAP.

  • JOINT TENANCY: A form of co-ownership giving each tenant equal interest and equal interest, and equal rights in the property' including the right of survivorship.

  • LATE CHARGE: The penalty a borrower may pay when a payment is made after the due date.

    LEASE-PURCHASE MORTGAGE LOAN: A mortgage product that allows low-and moderate-income home buyers to lease a home from a non-profit organization with an option to buy. Each month's rent payment consists of principle, interest, taxes and insurance (PITI) payments on the first mortgage, plus an extra amount that is earmarked for deposit to a savings account in which money for a down payment will accumulate.

    LIEN: A legal claim against a property that must be paid off 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 COMMITMENT: See COMMITMENT LETTER.

    LOAN-TO-VALUE PERCENTAGE: The relationship between the unpaid principal balance of the mortgage and the appraised value (or sales price if it is lower) of the property.

    LOCK-IN: A written agreement guaranteeing the home buyer 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.

  • 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: An individual or company that for a fee acts as intermediary between borrowers and lenders.

    MORTGAGE INSURANCE: See PRIVATE MORTGAGE INSURANCE

    MORTGAGE INSURANCE PREMIUM: The fee paid by a borrower to the FHA or a private insurer for mortgage insurance.

    MORTGAGE MARGIN: The set percentage the lender adds to the index value to determine the interest rate of an ARM.

    MORTGAGE NOTE: A legal document obligating a borrower to repay a loan at a stated interest rate during a specified period of time: the mortgage note is secured by a mortgage.

    MORTGAGEE INTEREST RATE: The rate of interest in effect for the monthly payment due.

    MORTGAGEE: The lender in a mortgage agreement.

    MORTGAGOR: The borrower in a mortgage agreement.

  • NEGATIVE AMORTIZATION: A gradual increase in the mortgage debt that occurs when the monthly payment is not large enough to cover the entire amount of principal and interest due. The amount of the shortfall is added to the unpaid principal balance, which results in "negative" amortization.

    NOTICE OF DEFAULT: A formal written notice to a borrower that a default has occurred and that legal action may be taken.

  • ORIGINATION FEE: A fee paid to a lender for processing a loan application; it is stated as a percentage of the mortgage amount.

    OWNER FINANCING: A property purchase transaction in which the property seller provides all or part of the financing.

  • PAYMENT CAP: A provision of some ARMs limiting the amount by which a borrower's payments may increase regardless of any interest rate increase; may result in negative amortization. See ADJUSTABLE-RATE MORTGAGE.

    PITI: Stands for principal, interest, taxes, and insurance -- the components of a monthly mortgage payment.

    PLANNED UNIT DEVELOPMENT (PUD): A project or subdivision that consists of common property that is owned and maintained by an owner's association for the benefit and use of the individual unit owners.

    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 mortgage.

    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: A fee that may be charged to a borrower who pays off a loan before it is due.

    PRE-APPROVAL: A pre-approval is a lender's preliminary evaluation of your credit history, income, and assets. During the pre-approval process, the lender will order a credit report for you and will obtain an underwriting analysis and recommendation.

    If you are pre-approved, you will receive a letter that you can show to potential home sellers. The letter identifies the amount you may be able to borrow and indicates to the seller that the lender is likely to approve your request for a mortgage.

    Remember that a pre-approval is not an absolute commitment by the lender. Before you can receive the actual mortgage loan, you will need to provide verification of some of the information you provided during the pre-approval process. You may also need to meet several other terms and conditions.

    PRE-QUALIFICATION: The process of determining how much money a prospective home buyer will be eligible to borrow, subject to certain conditions, before a loan is applied for.

    PRINCIPAL: The amount borrowed or remaining unpaid; also, that part of the monthly payment that reduces the outstanding balance of a mortgage.

    PRIVATE MORTGAGE INSURANCE (PMI): Insurance provided by non-government insurers that protects lenders against loss if a borrower defaults.

    PURCHASE AND SALE AGREEMENT: A written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold.

  • QUALIFYING RATIOS: Guidelines applied by the lenders to determine how large a loan to grant a home buyer.

  • RADON: An invisible, odorless gas found in some homes that in sufficient concentrations may cause health problems.

    RATE LOCK: See LOCK-IN.

    REAL ESTATE SALES PROFESSIONAL: A person licensed to negotiate and transact the sale of real estate on behalf of the property owner.

    REAL ESTATE SETTLEMENT PROCEDURES ACT: A consumer protection law that requires lenders to give borrowers advance notice of closing costs.

    REFINANCING: The process of paying off one loan with proceeds from a new loan using the same property as security.

    RENT WITH OPTION TO BUY: See LEASE PURCHASE MORTGAGE LOAN

  • SECOND MORTGAGE: A mortgage that has a lien position subordinate to the first mortgage.

    SECONDARY MORTGAGE MARKET: The buying and selling of existing mortgages.

    SELLER TAKE-BACK: An agreement in which the owner of a property provides financing, often in combination with an assumed mortgage.

    SETTLEMENT: see CLOSING.

    SETTLEMENT STATEMENT: The computation of costs payable at closing that determines the seller's net proceeds and the buyer's net payment (referred to as a HUD-1).

    SURVEY: A drawing or map showing the precise legal boundaries of a property and the location of improvements, easements, rights of way, encroachments, and other physical features.

  • TENANCY BY ENTIRETY: A type of joint ownership in a property without rights of survivorship.

    TITLE: A legal document evidencing a person's right to or ownership of a property.

    TITLE COMPANY: A company that specializes in examining and insuring real estate titles.

    TITLE INSURANCE: Insurance to protect the lender (lender's policy) or the buyer (owner's) policy against loss arising from disputes over ownership of the property.

    TITLE SEARCH: An examination of the public records to ensure that the seller is the legal owner of the property and that there are no liens or other claims outstanding.

    TRANSFER TAX: State or local tax payable when title passes from one owner to another.

    TRUTH-IN-LENDING ACT: 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. It involves an analysis of the borrower's creditworthiness and the quality of property itself.