Mortgage Glossary

Mortgage Glossary 2015-09-01T19:32:42+00:00

Get To Know Commonly Used Mortgage Broker Terms!

With so many unique terms used during a typical loan application, it is sometimes difficult to know and fully understand the process. With the help of our glossary of terms, you can research at your own pace so that you select the loan, and make the decision that best fits your needs.

Adjustable Rate

An interest rate that changes periodically in relation to an index. Payments may increase or decrease accordingly.

Amortization

A repayment method in which the amount you borrow is repaid gradually through regular monthly payments of principal and interest. During the first few years, most of each payment is applied toward the interest owed. During the final years of the loan, payment amounts are applied almost exclusively to the remaining principal.

Amortization Term

The amount of time required to amortize the loan. The amortization term is expressed as a number of months. For example, for a 15-year fixed-rate mortgage, the amortization term is 180 months.

Annual Percentage Rate (APR)

The cost of credit on a yearly basis, expressed as a percentage. Required to be disclosed by the lender under the federal Truth in Lending Act, Regulation Z. Includes up-front costs paid to obtain the loan, and is, therefore, usually a higher amount than the interest rate stipulated in the mortgage note. Does not include title insurance, appraisal, and credit report.

Application Fee

Fees that are paid upon application. An application fee may frequently include charges for property appraisal ($200-$400) and a credit report ($30-50). See also Glossary of Closing Costs.

Appraisal

A fee charged by an appraiser to render an opinion of market value as of a specific date. Required by most lenders to obtain a loan.

Appraisal Report

A written report by an appraiser containing an opinion as to the value of a property and the reasoning leading to that opinion.

Balloon Payment

A lump sum payment for the unpaid balance of the loan.

Cap

The maximum allowable increase, for either payment or interest rate, for a specified amount of time on an adjustable rate mortgage. See Adjustable Rate Mortgages for a complete guide.

Cash Out

Receiving money back when refinancing your present mortgage.

Ceiling

The maximum allowable interest rate over the life of the loan of an adjustable rate mortgage.

Certificate of Title

A statement provided by an abstract company, title company, or attorney stating that the title of real estate is legally held by the current owner.

Clear Title

A title that is free of liens or legal questions as to ownership of the property.

Closing

The time and place at which all documents for your loan are signed, dated and notarized.

Closing Costs

Any fees paid by the borrowers or sellers during the closing of the mortgage loan. This normally includes an origination fee, discount points, attorney’s fees, title insurance, survey, and any items which must be prepaid, such as taxes and insurance escrow payments.

Collateral

An asset that guarantees the repayment of a loan. The borrower risks losing the asset if the loan is not repaid according to the terms of the loan contract.

Combined Loan to Value

The relationship between the unpaid principal balances of all the mortgages on a property and the property’s appraised value.

Credit Limit

The maximum amount that you can borrow under a home equity plan.

Credit History

A record of an individual’s open and fully repaid debts. A credit history helps a lender to determine whether a potential borrower has a history of repaying debts in a timely manner.

Credit Report

A report of an individual’s credit history prepared by a credit bureau and used by a lender in determining a loan applicant’s creditworthiness.

Credit Repository

An organization that gathers, records, updates, and stores financial and public records information about the payment records of individuals who are being considered for credit.  Debt Amount owed to another.

Debt Service

The total amount of credit card, auto, mortgage or other debt upon which you must pay.

Debt-to-Income Ratio

The ratio, expressed as a percentage, which results when a borrower’s monthly payment obligation on long-term debts is divided by his or her gross monthly income.

Deed of Trust

Used in many western states, the agreement used to pledge your home or other real estate as security for a loan. Similar to a mortgage.

Default

Failure to make mortgage payments on a timely basis or to comply with other requirements of a mortgage.

Delinquency

Failure to make mortgage payments when mortgage payments are due.

Discount Points (or Points)

The amount paid either to maintain or lower the interest rate charged. Each point is equal to one percent (1%) of the loan amount (i.e., two points on a $100,000 mortgage would equal $2,000).

Down Payment

The difference between the purchase price and that portion of the purchase price being financed. Most lenders require the down payment to be paid from the buyer’s own funds. Gifts from related parties are sometimes acceptable, and must be disclosed to the lender.

Due on Sale

A clause in a mortgage agreement providing that, if the mortgagor (the borrower) sells, transfers, or, in some instances, encumbers the property, the mortgagee (the lender) has the right to demand the outstanding balance in full.

Effective Interest Rate

The cost of credit on a yearly basis expressed as a percentage. Includes up-front costs paid to obtain the loan, and is, therefore, usually a higher amount than the interest rate stipulated in the mortgage note. Useful in comparing loan programs with different rates and points.

Encumbrance

A claim against a property by another party which usually affects the ability to transfer ownership of the property.

Equal Credit Opportunity Act (ECOA)

A federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs.

Equity

The difference between the fair market value (appraised value) of your home and your outstanding mortgage balance.

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.

First Mortgage

A mortgage which is in first lien position, taking priority over all other liens (which are financial encumbrances).

Fixed Rate

An interest rate which is fixed for the term of the loan. Payments as well are fixed at one amount.

Flood Insurance

Insurance that compensates for physical property damage resulting from flooding. It is required for properties located in federally designated flood areas.

Good Faith Estimate

A written estimate of closing costs which a lender must provide you within three days of submitting an application.

Grace Period

A period of time during which a loan payment may be paid after its due date but not incur a late penalty. Such late payments may be reported on your credit report.

Gross Income

For qualifying purposes, the income of the borrower before taxes or expenses are deducted.

Home Equity Line of Credit

A loan providing you with the ability to borrow funds at the time and in the amount you choose, up to a maximum credit limit for which you have qualified. Repayment is secured by the equity in your home. Simple interest (interest-only payments on the outstanding balance) is usually tax-deductible. Often used for home improvements, major purchases or expenses, and debt consolidation.

Home Equity Loan

A fixed or adjustable rate loan obtained for a variety of purposes, secured by the equity in your home. Interest paid is usually tax -deductible. Often used for home improvement or freeing of equity for investment in other real estate or investment. Recommended by many to replace or substitute for consumer loans whose interest is not tax-deductible, such as auto or boat loans, credit card debt, medical debt, and education loans.

Hazard Insurance

A contract between purchaser and an insurer, to compensate the insured for loss of property due to hazards (fire, hail damage, etc.), for a premium.

HUD I Settlement Statement

A form utilized at loan closing to itemize the costs associated with purchasing the home. Used universally by mandate of HUD, the Department of Housing and Urban Development.

Index

A number, usually a percentage, upon which future interest rates for adjustable rate mortgages are based. Common indexes include the Cost of Funds for the Eleventh Federal District of banks or the average rate of a one-year Government Treasury Security.

Interest Rate

The periodic charge, expressed as a percentage, for use of credit.

Lender

The bank, mortgage company, or mortgage broker offering the loan.

Lien

The right to take and hold or sell the property of a debtor as a security or payment for a debt.

Margin

An amount, usually a percentage, which is added to the index to determine the interest rate for adjustable rate mortgages.

Minimum Payment

The minimum amount that you must pay, usually monthly, on a home equity loan or line of credit. In some plans, the minimum payment may be “interest only,(simple interest). In other plans, the minimum payment may include principal and interest (amortized).

Mortgage

A legal document that pledges to the lender as security for payment of a debt.

Mortgage Loan

A loan which utilizes real estate as security or collateral to provide for repayment should you default on the terms of your loan. The mortgage or Deed of Trust is your agreement to pledge your home or other real estate as security.

Mortgagee

The lender in a mortgage loan transaction.

Mortgagor

The borrower in a mortgage loan transaction.

Note

A written agreement containing a promise of the signer to pay to a named person, or order, or bearer, a definite sum of money at a specified date or on demand.

PITI

Principal, interest, taxes and insurance, which comprise your monthly mortgage payment.

Qualifying Ratios

Comparisons of a borrower’s debts and gross monthly income.Rate

The annual rate of interest on a loan, expressed as a percentage of 100.

Right to Rescission

The legal right to void or cancel your mortgage contract in such a way as to treat the contract as if it never existed. Right of rescission is not applicable to mortgages made to purchase a home, but may be applicable to other mortgages, such as home equity loans.

Security Interest

An interest that a lender takes in the borrower’s property to assure repayment of a debt.

Servicing a Loan

The ongoing process of collecting your monthly mortgage payment, including accounting for and payment of your yearly tax and/or homeowners insurance bills.

Title

The written evidence that proves the right of ownership of a specific piece of property.

Title Insurance

Protection for lenders or homeowners against financial loss resulting from legal defects in the title.

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 Ratio

Monthly debt and housing payments, divided by gross monthly income, to prove that the seller can transfer free and clear ownership.

Truth-In-Lending Act

A federal law requiring a disclosure of credit terms using a standard format. This is intended to facilitate comparisons between the lending terms of different financial institutions.

Underwriting

The process of verifying data and approving a loan.

Variable Rate
An interest rate that changes periodically in relation to an index. Payments may increase or decrease accordingly. See Adjustable Rate Mortgages for a complete guide.

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