Mortgage Loans

Glossary of Mortgage Terms

Adjustable-Rate Mortgage (ARM) – A mortgage with an interest rate that may change during the life of the loan according to movements in an index rate. Sometimes called AMLs (adjustable mortgage loans) or VRMs (variable-rate mortgages).

Annual Percentage Rate (APR) – The cost of credit, expressed as a yearly rate including interest, mortgage insurance, and loan origination fees. This allows the buyer to compare loans. APR should not be confused with the actual interest rate.

Appraisal – A written analysis prepared by a qualified appraiser and estimating the value of a property.

Appraised Value – An opinion of a property’s fair market value, based on an appraiser’s knowledge, experience, and analysis of the property.

Closing – A meeting held to finalize the sale of a property. The buyer signs the mortgage documents and pays closing costs. Also called “settlement.”

Closing Costs – Expenses – over and above the price of the property- that are incurred by buyers and sellers when transferring ownership of a property. Closing costs normally include an origination fee, property taxes, charges for title insurance and escrow costs, appraisal fees, etc. Closing costs will vary according to the area country and the lenders used.

Credit Report – A report detailing an individual’s credit history that is prepared by a credit bureau and used by lender to determine a loan applicant’s creditworthiness.

Down Payment – Part of the purchase price of a property that is paid in cash and not financed with a mortgage.

Equity – The amount of financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on the mortgage.

Escrow – An item of value, money, or documents deposited with a third party to be delivered upon the fulfillment of a condition. For example, the deposit of funds or documents into an escrow account to be disbursed upon the closing of a sale of real estate.

Escrow Payment – The part of a mortgagor’s monthly payment that is held by the servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due.

Fixed-Rate Mortgage (FRM) – A mortgage interest rate that is fixed and will not change throughout the term of the loan.

Housing Expense Ratio – The percentage of gross monthly income budgeted to pay housing expenses.

Initial Interest Rate – This refers to the original interest rate of the mortgage at the time of closing. This rate changes for an adjustable-rate mortgage (ARM). It’s also known as “start rate” or “teaser.”

Interest – The fee charged for borrowing money.

Line of Credit – An agreement by a financial institution to extend credit up to a certain amount for a certain time.

Loan-to-Value (LTV) Percentage – The relationship between the principal balance of the mortgage and the appraised value (or sales price if it is lower) of the property. For example, a $100,000 home with an $80,000 mortgage has an LTV of 80 percent.

Lock-In Period – The guarantee of an interest rate for a specified period of time by a lender, including loan term and points, if any, to be paid at closing.

Mortgage Insurance – A contract that insures the lender against loss caused by a mortgagor’s default on a government mortgage or conventional mortgage. Mortgage insurance can be issued by a private company or by a government agency.

Net Worth – The value of all of a person’s assets, including cash.

Origination Fee – A fee paid to a lender for processing a loan application. The origination fee is stated in the form of points. One point is 1 percent of the mortgage amount.

Points – A point is equal to one percent of the principal amount of your mortgage. For example, if you get a mortgage for $165,000 one point means $1,650 to the lender. Points usually are collected at closing and may be paid by the borrower or the home seller, or may be split between them.

Pre-Approval – The process of determining how much money you will be eligible to borrow before you make an offer.

Prime Rate – The interest rate that banks charge to their preferred customers. Changes in the prime rate influence changes in other rates, including mortgage interest rates.

Principal – The amount borrowed or remaining unpaid. The part of the monthly payment that reduces the remaining balance of a mortgage.

Principal, Interest, Taxes, and Insurance (PITI) – The four components of a monthly mortgage payment. Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the monthly cost of property taxes and homeowners insurance, whether these amounts that are paid into an escrow account each month or not.

Private Mortgage Insurance (PMI) – Mortgage insurance provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults. Most lenders generally require PMI for a loan with a loan-to-value (LTV) percentage in excess of 80 percent.

Qualifying Ratios – Calculations used to determine if a borrower can qualify for a mortgage. They consist of two separate calculations: a housing expense as a percent of income ratio and total debt obligations as a percent of income ratio.

Rate Lock – A commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified interest rate and lender costs for a specified period of time.

Refinance – Paying off one loan with the proceeds from a new loan using the same property as security.

Servicer – An organization that collects principal and interest payments from borrowers and manages borrowers’ escrow accounts. The servicer often services mortgages that have been purchased by an investor in the secondary mortgage market.

Truth-in-Lending – A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the annual percentage rate (APR) and other charges.

Underwriting – The process of evaluating a loan application to determine the risk involved for the lender. Underwriting involves an analysis of the borrower’s creditworthiness and the quality of the property itself.