Loan and property terms explained for you in alphabetical order:
Acceleration Clause – A clause in a mortgage defining that the entire outstanding balance can become due and payable should mortgage default occur. If the entire balance is not paid, the property will be foreclosed.
Adjustable Rate Mortgage (ARM) – Mortgage with interest rates that may be adjusted by the mortgage lender to reflect the most current lending rates set by the Federal Reserve. Most ARM’s have an interest cap or a limit of the amount the interest can go up or down at any given time.
Adjustment Date – The date on which an interest rate adjustment may occur on an adjustable rate mortgage (ARM). The adjustment date is usually the date of the next payment due after notification of rate adjustment. Adjustment dates normally do not occur more than once per quarter, once per year, or as stated in your mortgage documentation.
Amortization Schedule – A chart which defines how much of each payment goes toward paying interest and how much goes toward paying principal. In the case of most loans, the initial payments are mainly interest and very little is paid toward the principal. As payments continue, further in the schedule, the amounts paid toward principal will become greater than the amount paid toward interest. The amount of payment to interest ratio will depend largely upon the type of mortgage.
Annual Percentage Rate (APR) -- The current interest rate of a mortgage loan converted into actual annual percentage rate when compounded. Credit cards often indicate a monthly rate of 17% but when converted into APR, the rate is 21.5% due to interest compounding. At closing on any mortgage, both the basic interest rate and the APR should be clearly defined and documented.
Application for Mortgage -- The initial document filled out by the mortgage applicant when applying for consideration of a mortgage lender providing financing. These applications may be filled out at a local institution or at an Internet website for online lenders.
Appraisal – The value of a property determined by an appraisal expert who professionally determines value. Also, a value established by the Property Tax Assessor for taxation purposes which will not reflect the amount of mortgage or perhaps even the appraised value of the property.
Appraiser – A person who appraises property professionally. Most, if not all, states require appraisers to hold licenses establishing their credentials and qualifications.
Appreciation – The increase in value of a property or any other object that becomes more valuable as time passes. Appreciation results from an item or property becoming more desirable, inflation, or other factors. This is why people can buy homes and, as time passes, sell them for a great deal more than the mortgage amount held, making mortgage investments profitable.
Assumable Mortgage – A mortgage which allows the transfer of the mortgage from one mortgagee (debtor) to another without paying off the mortgage and initiating a brand new mortgage. This is also known as “take over payments”. Proper mortgage processing through the mortgage company allows the legal transfer of the property.
Balloon Mortgage / Balloon Payment – A mortgage with low monthly payments that requires a very large payment at the end of the mortgage or periodically during the mortgage as defined in the mortgage documents. Some mortgages have 5-year balloon payments; others have balloon payments due at other periods. While the monthly payment may be low, the balloon mortgage requirements mean that the home buyer must be prepared when balloon payments come due or they may suffer penalties such as default on the mortgage.
Bi-Weekly Mortgage – A mortgage requiring payments every two weeks rather than monthly mortgage payments. These mortgages involve 26 payments per year instead of 12 per year, as with monthly mortgages resulting in a shorter life of the mortgage or lower payments.
Bridge Loan – A short-term loan obtained to provide funding for a new home before the former home has sold. Upon sale of the former home, the bridge loan is paid off with the funds from the home sale.
Broker – A person whose profession involves locating the right mortgages for people who wish to obtain home financing. Mortgage Brokers match buyers and mortgages, perform research, and locate difficult to find mortgages or locate financing for difficult to finance people.
Cap – The maximum amount of increase or decrease of the interest or payment change of an Adjustable Rate Mortgage (ARM).
Cash-Out Refinance – When refinancing a home, taking a loan that is greater than the payoff required for the previous mortgage plus closing costs. This type of refinancing allows a home owner to have access to home equity as a liquid asset rather than held in equity.
Chain of Title – An examination of the history of the title to a property, determining who owned the property previously and for how long. This is performed as part of a title search to ensure that the title to a property is free and clear and no unknown liens are held against the property before transferring the title at closing.
Clear Title – A property title that has no liens or encumbrances against it. Clear title establishes that the property owner has no legal questions as to exactly who owns the property and that no judgments are held against the property and has the right to sell the property at a mortgage closing.
Closing – In most state, this is the meeting where all paperwork is signed and funds exchange hands to transfer ownership of a property. Some states to not consider the closing completed until the documents are all recorded in the local courthouse’s property recording office.
Closing Costs – Non-recurring closing costs are cost incurred as a result of purchasing a property and can include survey, inspection, recording fees, etc. Recurring closing costs are costs held in escrow from mortgage payments and include items such as property taxes, insurance payments, and the like. Not all mortgages will include recurring closing costs such as property taxes and homeowner's insurance.
Co-Borrower – The co-mortgagee or co-purchaser of a property. This may be a loan co-signer to ensure payment or it may be the spouse or other joint property owner and will appear on all the paperwork when submitting a mortgage application or closing a home sale or purchase.
Common Areas – When purchasing a condominium or a unit in a multifamily dwelling (such as a duplex) common areas are defined as those areas which all owners may use freely and have access freely. These common areas usually include public hallways, unassigned parking, laundry or maintenance facilities, clubhouses, swimming or recreational areas and are defined in the documents of the homeowner’s association or condominium association. All these facts must be presented to the buyer at mortgage closing.
Construction Loan – A short-term loan taken out to cover the cost of progress payments on the construction of a home. This short-term loan is normally not part of the house mortgage, but sometimes may be rolled into the mortgage.
Contract – A written or spoken agreement. In terms of home mortgages, the statement of intention to purchase a specific home.
Convertible ARM – An adjustable rate mortgage which provides an option to convert to a fixed-rate mortgage if this option is exercised in a specific period of time, often during the first five years.
Credit History – The record of credit payments from the past. This history is used by lenders to determine an applicant’s probability of repaying their mortgage on time.
Creditor – The party or parties to which a person owes money. In terms of mortgages, the creditor is the mortgage underwriter or lender and must accept your credit risk, which may vary depending on the type of mortgage and the interest rate charged. Those with bad credit may still obtain a mortgage from a creditor, but may pay a higher than current interest rate.
Debt – Money owed to another party or parties. In terms of mortgage, the amount of principal owed plus agreed upon interest to fully pay off a fixed rate mortgage.
Deed – The title to a property, whether land or land containing housing, or housing in which the land is held commonly (condominiums or duplexes). The deed is said to be “free and clear” once your house mortgage is fully paid and the lien has been cleared in legal records.
Default – Failure to make payments on time. In the case of a first mortgage, a grace period of 30 days is often allowed before the loan goes into default.
Delinquency – Failure to make mortgage payments on time. Often the term is used in stating the number of days since the due date of the payment, for example: a loan due on the 1st day of the month and has not been paid by the 10th of the month, is said to be 9 days into delinquency. If allowed to continue into delinquency, foreclosure will become imminent.
Deposit – An amount of money paid in advance to ensure a property is not sold to someone else. Often known as “earnest money”. This money may be given to “hold” a property until a contract can be signed and mortgage application made.
Depreciation – The decline in value of a property. This may occur for several reasons: failure to maintain property in good condition, market value changes, and economic changes. If your home depreciation becomes severe, you could have a mortgage to value ratio which causes you to owe more on a house mortgage than the property is worth – however, this is rare if maintenance is performed.
Discount points – A payment of 1% of the loan amount, reducing the amount of principal on which interest will be accrued.
Down Payment – The money paid down on a property at the time of closing. Usually a 20% down payment is required unless Private Mortgage Insurance is carried on the mortgage, in which case a down payment may be much lower. The down payment is not included in the amount of the mortgage and, therefore, becomes immediate home equity.
Earnest Money Deposit – A deposit of money ensuring the intention to purchase a property to provided the person(s) wishing to purchase the property time to proceed with mortgage application.Easement – An area of property defined for use by another party for access to that property. Utility easements and driveway easements are common forms of easements. This information will be provided in the survey included in a closing package.
Eminent Domain – The government’s ability to take ownership of property for public use upon paying the owner of record the fair market value of the property. Ensures that a home owner will not be thrown out of their home without compensation.
Equal Opportunity Housing Act – A government law preventing discrimination in housing based on race, color, sex, age, nation of origin, religion, marital status, or receipt of public assistance. This law applies to mortgage lenders, mortgage investors who rent property, and all rental property as well as the sale of property.
Equity – The portion of the value of a home which has been paid in full. Normally calculated as the fair market value minus the amount outstanding on the mortgage.
Escrow – An item of value, often money, held by the third party until certain conditions are met. In the case of a deposit to establish intent to purchase a property, the funds are placed in escrow until the mortgage closing.
Escrow Account – The account in which escrow money is held until conditions are met to use the funds, such as mortgage closing or payment of other mortgage expenses.
Escrow Disbursements – Money spent from the escrow account upon meeting the condition required for that portion of the funds to be spent, often includes insurance such as Private Mortgage Insurance (PMI) which protects the lender but is paid each month by the buyers in the mortgage payment.
Fair Credit Reporting Act – A consumer protection law providing the ability to have errors on a credit report corrected and the procedures required to obtain such changes. If you are applying for any type of mortgage, you should find out what is on your credit report because you can challenge reporting errors on credit reports thanks to this Act.
Fair Market Value – The highest price a buyer would probably pay for a property if not compelled to buy or the lowest price a seller would probably accept for a property if not compelled to sell. This amount has nothing to do with how much mortgage you can get but could be written into your homeowner’s insurance policy. Be sure that the replacement value is covered, not the Fair Market Value.
Fannie Mae (FNMA) -- Federal National Mortgage Association, chartered by congress and owned by shareholders that supplies home mortgage funds.
Federal Housing Administration (FHA) -- U.S. Department of Housing and Urban Development (HUD) agency which insures residential mortgage loans made by private lenders. Also, agency which sets standards for construction and underwriting. Does not lend money or construct housing in any way, including planning.
First Mortgage – The original mortgage on a property; the first mortgage in line to receive funds in the event the property is sold due to default of mortgage.
Fixed-Rate Mortgage – A mortgage with a set mortgage rate which will not change over the life of the mortgage, regardless of changes in the prime lending rates.
Flood Insurance – Insurance against water damage from rising waters. Usually required by mortgage lenders for homes which lie within flood plains, but often taken out in any area which could experience rising water. Rising water, such as hurricane tidal waves, rising rivers, or flash floods are not covered under homeowner’s insurance.
Foreclosure – When a mortgage goes into serious default, the process by which the mortgage underwriter or lender can repossess the property.
Government National Mortgage Association (Ginnie Mae) -- A government corporation in the U.S. Department of Housing and Urban Development (HUD) created by Congress in 1968. Ginnie Mae provides funds to lenders for home loans. GNMA performs the same role as Fannie Mae and Freddie Mac in providing funds to lenders for government home loans (VA and FHA loans).
Hazard Insurance – Insurance policy which covers the homeowner from loss due to fire, wind, vandalism, and other specific hazards. Does not include flood damage or liability coverage. Normally required by any type of mortgage to cover the risk of a property loss. It pays the homeowner for losses, ensuring the home will remain livable, so that the mortgage underwriter can feel safer that the property will not be merely abandoned.
Home Equity Conversion Mortgage – Similar to reverse mortgage, this mortgage does not require the mortgagee to make payments to a lender, but the lender actually makes payments to the mortgagee. Older home owners can convert equity in their homes into cash, most often paid in monthly payments. There is no income qualification but the mortgage is based solely on the value of the home being mortgaged by the HECM and the loan does not become due and payable until the borrower(s) no longer occupies the property. Often used by elderly to ensure quality of life income when there are no children who wish to inherit the house.
Home Equity Line of Credit – A loan, usually treated as a second mortgage from which can be accessed at any time up to a predefined sum, based on the equity in a home as collateral for the loan.
Home Inspection – Professional inspection of a dwelling or property to ensure the structural and mechanical stability of the home. Often home inspections are performed at the request of the home buyer to ascertain that costly defects do not exist in the property being considered for purchase. The home inspection ensures that those defects not apparent to the layperson are researched and protect a person from obtaining a large mortgage on a worthless property.
Homeowner’s Association – A non-profit organization of home owners in a deed-restricted subdivision or condominium which manage common areas, assess maintenance fees, and may hold the title to the common areas of the development. These persons make the rules which all must agree to follow if they are live in that neighborhood or building. Maintenance fees are usually paid to the Association for common maintenance in addition to monthly mortgage payments if you purchase a condominium. Be aware of all fees and restrictions before closing a mortgage on such property.
Homeowner’s Insurance – Insurance policy that covers the homeowner from liability as well as hazards and covers contents of the home. Proof of homeowner’s insurance is required by the mortgage lender.
Homeowner’s Warranty – Insurance purchased by the home buyer, if desired, to cover such items as appliances, air conditioning, heating and other expensive household systems should they require replacement or repair during the warranty coverage period. This is a great way to protect yourself from large expenditures in the first years of owning your mortgage, especially great for first time home buyers.
Judicial Foreclosure – Foreclosure proceeding performed in some states which is performed in the same way as a civil law suit. Other states use non-judicial foreclosure methods.
Jumbo Mortgage – A very large mortgage, often known as California Mortgage; usually refers to mortgages in excess of $200,000.
Late Charge – A fee charged for making a mortgage payment past the due date.
Lender – Party providing funds for a mortgage or home loan.
Liabilities – Debts owed. Liabilities or unpaid credit is considered in the income to credit ratio used when obtaining mortgage approval.
Liability Insurance – Covers the homeowner against claims that the home owner was negligent and caused an injury or harm due to the neglect; often carried as part of the homeowner’s insurance policy but may be carried separately. This insurance protects the homeowner only and not the mortgage lender.
Lien – Legal claim stating that money, such as an outstanding mortgage, is owed against a property and must be paid before property can be transferred to another party.
Loan – The lending of money, as in a mortgage or home loan, bridge loan, second mortgage, or any legally binding agreement where money is provided to a person or persons who sign a binding contract to repay the monies based on a specific schedule, usually including specific fees or interest.
Loan Officer -- The employee at the lending institution which acts as your representative when dealing with the lender. Similar to a liaison in that they act as a go-between for the mortgagee and the mortgage holder.
Loan Origination – The process of obtaining a new loan. A loan origination fee is commonly, but not always, charged when obtaining or originating a new loan. This is not a mortgage application fee, but is a fee based on beginning the loan and taken from the escrow account at closing.
Loan-to-Value (LTV) ratio – The amount of a mortgage compared to the value of the property.
Lock-in – To agree to a set interest rate for a specific amount of time at a specific cost.
Lock-in Period – The period in which the lock-in interest rate and purchase price will be valid. If the sale is not closed within the lock-in period, the interest rate or sale price may differ.
Mortgage – A long-term legally documented loan used to purchase property.
Mortgagee – The party or parties obtaining a mortgage of any type to purchase property.
Mortgage Insurance (MI) – Insurance covering the lender for some of the losses which could occur from mortgage default. Better known as Private Mortgage Insurance (PMI) The premium is paid by the mortgagee but benefits only the mortgage holder. Required on loans where extremely low down payments are accepted until the equity in the home equals 80% of the value of the home.
Mortgage Insurance Premium (MIP) – Premium paid for mortgage payment insurance, which is also known as Mortgage Life and Disability” or “Credit Life”. Protects mortgage holder’s family should disability or death occur.
Mortgage Life and Disability Insurance – Insurance called “mortgage payment insurance” or “mortgage protection insurance” which is purchased by a home owner to cover mortgage payments in event of their death or disability. Sometimes called “credit life insurance”.
Mortgagor -- Party or parties lending the funds for a mortgage.
Multi-dwelling Units – Condominiums, duplexes, and other building in which are designed for more than one family to use as residences. These dwellings can be easily mortgaged using any of the common types of mortgages.
Negative Amortization – In the case an ARM which has a set payment but adjustable interest rate, the amount owed on principal can actually increase because the payment does not cover the cost of the interest fully.
No-Cost Loan – Always inquire what is meant by this term when advertised by a mortgage lender. It can be no loan origination fee, no recording fees, the seller will pay closing costs or several other definitions. Check what exactly is meant by the term in the case where you encounter this wording.
Notice of Default – An official letter from a mortgage holder stating that the mortgage has gone into default and foreclosure is imminent.
Original Principal Balance – The original amount of the mortgage loan before any fees, interest or other charges are added.
Origination Fee – A fee charged when initiating a new mortgage loan. This fee is paid by the parties seeking a loan to the lender or lender’s agent. It is not a mortgage application fee, as many believe, but a fee to prepare necessary paperwork for a mortgage.
Owner Financing – When a home owner chooses to transfer title of property with themselves listed as lien holder and a legal mortgage is closed where payments are made to the former home owner rather than to a lending institution. One form of private mortgage.
Periodic Payment Cap – The maximum amount a payment on an adjustable rate mortgage can go up or down during one change or, in some cases, over the life of the loan.
Periodic Rate Cap – The maximum interest change, either higher or lower, that an adjustable rate mortgage can experience during a defined period.
Point – 1% of the amount of loan principal.
Power of Attorney – Legal authorization for another party to act on the part of another person. For example, an out-of-state home owner can “virtually” be at the home closing by assigning power of attorney to someone they trust to attend the sale closing.
Pre Approval – When persons who plan to buy a property seek approval from a lender in advance of choosing the property to purchase. Very good negotiating tool since it proves the persons will be able to readily obtain financing.
Prepayment – Paying off a mortgage before the end of the mortgage life, or making payments on the principal of a loan before due. Some mortgages have better than current interest rates because they have a prepayment clause preventing early payoff or charging a penalty for prepayment.
Pre-Qualification – See Pre Approval
Prime Rate – The rate set by the Federal Reserve as the rate at which banks borrow from one another. The prime rate is usually a good indicator of home mortgage rates since mortgage rates will be a few points higher than the prime.
Principal – The amount of money borrowed in a loan such as a mortgage of any type.
Principal Balance – The amount of money remaining unpaid from the original amount of the loan, not including any interest. Normally the payoff of a house mortgage is the principal balance plus other charges.
Private Mortgage Insurance (PMI) – Insurance required by law on most mortgages where 20% down payment is not made. Some exceptions apply; see Mortgage Insurance (MI) for details.
Recording – Filing at the Property Recorder’s office of the city or county in which the sale of property occurred, the details of a property sale. Usually performed after the closing meeting, but some states do not consider the sale closed until this recording is completed.
Remaining Balance – The amount left to pay on a mortgage or loan including principal and interest.
Remaining Term – The number of payments left on a mortgage or loan if the payments are paid per the payment schedule
Right of First Refusal – A contractual agreement that someone gets the right to be offered a property before anyone else. They may refuse the property, but they get the first chance to agree to buy or decline to buy. If they choose to purchase the property, a set period of time will be allowed for mortgage approval; if a mortgage is not obtained, the property will again be for sale.
Right of Ingress or Egress – Where property lines meet, the right of other property owners to come and go along the easement lines established in the property survey. It is illegal to prevent ingress or egress of other property owners. The areas to which this applies are incorporated into the mortgage closing statement or package.
Second Mortgage – A mortgage taken out on the property that already carries an original or first mortgage. This mortgage would be second in line to recoup funds in the event of loan default and therefore interest rates will probably be higher than for first mortgages.
Survey – Professional establishment of property lines performed by a survey company and included as proof of exactly what property is being sold or bought or considered up for mortgage closing.
Sweat Equity – Increase in value of a property resulting from improvement made to the property, often on the part of the home owner. Adding a deck, landscaping, and other items which make the property much more attractive and therefore more valuable are all considered “sweat equity”.
Title Search – A title company will search the chain of title history to ensure no liens that are unknown are held against a property being bought or sold; must be performed prior to mortgage closing.
Transfer of Ownership – The point at which “sale closure” occurs, usually a closing meeting where monies change hands and house keys also exchange hands. In some states, this process is not considered complete until the transfer is recorded in the property recorder’s office.
VA Mortgage – Veteran’s Administration mortgage provided for those persons who have served their country through military service.
Mortgage Equity Defined
Mortgage Payment Insurance
Mortgage Payment Options
The Mortgage Pre-Approval Process