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Glossary of Mortgage terms
What to expect

Shopping for a home can be exciting but also very confusing. You may have already discovered that there are many unfamiliar terms in the mortgage industry. The following are the most common terms used during the mortgage process.

GLOSSARY OF MORTGAGE TERMS

Adjustable Rate Mortgage (ARM) - A mortgage loan in which the interest rate can go up or down based on the market conditions. Changes in the interest rate are determined by a financial index. ARM loans have a cap or limit on how much the interest rate can change.

Adjustment Date - The date on which the interest rate changes for an adjustable-rate mortgage (ARM).

Adjustment Period - The period that elapses between the adjustment dates for an adjustable-rate mortgage (ARM).

Amortization - Repayment of a mortgage loan with equal periodic payments of both rincipal and interest. The payments are calculated so that the debt is paid off at the end of a fixed period of time.

Annual Percentage Rate (APR) - A term that expresses the cost of a mortgage as an annual rate. The APR is normally higher than the advertised interest rate because it includes interest, points, and other finance charges. The APR is used to compare different types of mortgages.

Appraisal - A report created by a quailified appraiser that is an estimate of the value of the property being financed.

Appreciation - An increase in the value of a property due to changes in market conditions or other causes. The opposite of depreciation.

Assessment - An assessed value given to property which is used solely for determining property taxes.

Asset - An item that has monetary value such as cash, stocks and real estate. Information about your assests is required when applying for a mortgage loan.

Assignment - The transfer of a mortgage from one person to another.

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.

Assumption Clause - A provision in an assumable mortgage that allows a buyer to assume responsibility for the mortgage from the seller. The loan does not need to be paid in full by the original borrower upon sale or transfer of the property.

Assumption Fee - The fee paid to a lender (usually by the purchaser of real property) resulting from the assumption of an existing mortgage.

Balloon Mortgage - A short-term mortgage loan of equal monthly payments in which a large final payment (balloon) is due on a specified date. The final payment is equal to the remaining balance of the loan.

Biweekly Mortgage - A mortgage loan in which payments are due every two weeks, totaling 26 (or possibly 27) payments each year.

Closing - The final step in the mortgage loan process which follows underwriting. The closing is a meeting between the homebuyer, seller and lender in which mortgage documents are signed and title to property passes from the seller to the buyer. At the same time, the homebuyer receives the funds needed to purchase the property and pledges the property as security for repayment of the debt.

Closing Costs - Fees paid by either buyer or seller at closing which are usually 3 to 6 percent of the mortgage amount. Some examples of closing costs are realator fees, attorneys' fees, appraisal fees and taxes.

Collateral - Property pledged as security for repayment of the mortgage loan.

Conventional Mortgage - A type of adjustable-rate mortgage loan that can be converted to a fixed-rate mortgage.

Discount Points - Also called "points". A one-time charge paid to the lender at closing to obtain a lower interest rate on the mortgage loan. One point is equal to 1 percent of the loan amount. For example, two points on a $100,000 mortgage would cost $2,000.

Escrow Account - An account often required by the lender to pay taxes and insurance. Every time a mortgage payment is made, a portion goes to the escrow account. When the taxes and insurance bills are due on your home, the lender pays the bills with funds from this account.

Equity - The amount of the home that you actually own. Equity is the difference between the market value of the home and what you still owe on it.

Federal Housing Administration (FHA) - An agency of the U.S. Department of Housing and Urban Development (HUD). Its main activity is the insuring of residential mortgage loans made by private lenders. The FHA sets standards for construction and underwriting but does not lend money or plan or construct housing.

FHA mortgage - A mortgage that is insured by the Federal Housing Administration (FHA). Also known as a government mortgage.
 
Good Faith Estimate - An estimate of charges which a borrower is likely to incur in connection with a settlement.

Hazard Insurance - Insurance protecting against loss to real estate caused by fire, some natural causes, vandalism, etc., depending upon the terms of the policy.

Home Equity Loan - A loan secured by a second deed of trust on a house, typically used as a home improvement loan.

Housing Ratio - The ratio of the monthly housing payment in total (PITI - Principal, Interest, Taxes, and Insurance) divided by the gross monthly income. This ratio is sometimes referred to as the top ratio or front end ratio.

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 Insurance (MI) - Insurance written by an independent mortgage insurance company protecting the mortgage lender against loss incurred by a mortgage default. Usually required for loans with an LTV of 80.01% or higher.

Mortgagee - The person or company who receives the mortgage as a pledge for repayment of the loan. The mortgage lender.

Mortgagor - The mortgage borrower who gives the mortgage as a pledge to repay.
 

Points - Charges levied by the mortgage lender and usually payable at closing. One point represents 1% of the face value of the mortgage loan.

Rate Cap - A limit on how much the interest rate can change, either at each adjustment period or over the life of the loan.

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

Title Insurance - Insurance against loss resulting from defects of title to a specifically described parcel of real property.

Title Search - An investigation into the history of ownership of a property to check for liens, unpaid claims, restrictions or problems, to prove that the seller can transfer free and clear ownership.

Total Debt-to-Income Ratio - Monthly debt and housing payments divided by gross monthly income. Also known as Obligations-to-Income Ratio or Back-End Ratio.

Truth-in-Lending Act - A federal law requiring a disclosure of credit terms using a standard form. This is intended to facilitate comparisons between the lending terms of different financial institutions.

Veterans Administration (VA) - A government agency guaranteeing mortgage loans with no down payment to qualified veterans.