Mortgage Glossary
Read this simple glossary for definitions of common mortgage terminology.
A-F
Adjustable-Rate Mortgage (ARM)
A mortgage loan with an interest rate that can change periodically based on changing market conditions.
Amortization
A set agreement that determines the payment schedule required to pay off a mortgage loan. In a typical mortgage loan, the principal is scheduled to be paid off, or fully amortized, over the full term of the loan. Amortization terms are generally set in five-year increments, from ten to forty years.
Annual Percentage Rate (APR)
A standardized method of determining the cost of money borrowed, stated as a yearly percentage rate. The annual percentage rate includes items such as interest, mortgage insurance, points and credit costs.
Appraisal
A formal report by a licensed appraiser that states the current fair market value of a specific property. Appraisals are considered unbiased estimates and typically compare similar homes within a given area in order to substantiate the value of the property.
Balloon Mortgage
A home mortgage that requires the remaining balance to be paid in full at the end of a preset term. A five-year balloon mortgage might be amortized over a thirty-year period, but the remaining balance is due, in full, at the end of five years.
Bridge Loan
A short-term loan used to access equity from one property in order to make a down payment on another property. These are designed to be short-term and paid off when the original property sells.
Cash Out Refinance
A mortgage that is refinanced in order to take equity out of a home in the form of cash. The new principal (the borrowed amount) exceeds the outstanding principal of the original loan by at least 5%, putting the additional money in your pocket.
Consumer Financial Protection Bureau (CFPB)
The governing authority for creditors including mortgages, credit cards and student loans. The CFPB was created as part of the original Dodd-Frank Wall Street Reform ACT.
Closing Costs
One-time expenses involved during the process of buying and selling a home, or obtaining a new mortgage by refinancing. Closing costs often include property taxes, escrow payments, title insurance and an origination fee.
Closing Disclosure
A final settlement document provided to the borrower three days prior to the scheduled closing date. This document restates the final terms of the loan including the down payment, total fees, monthly payment and interest charges.
Collateral
Property that is owned by the borrower and pledged to the lender as security in case the borrower defaults on the loan. When a lender extends a mortgage loan, they use the property as collateral.
Conforming Loan
A conventional conforming loan is a Fannie Mae or Freddie Mac loan that is equal to or less than the maximum allowable loan limits established by Fannie Mae and Freddie Mac. These limits are changed annually and may differ by state.
Conventional Loan
A mortgage loan that uses guidelines established by Fannie Mae or Freddie Mac and is issued and guaranteed by lenders.
Credit Report
A report that shows the credit history of an individual, as well as the individual’s property addresses and any public records.
Credit Score
A standard number derived from an individual’s credit history and used to determine credit risk. Generally, a higher credit score means less risk for the lender. Individuals with a higher credit score may be able to secure a lower interest rate or improved mortgage terms.
Debt-to-Income Ratio (DTI)
A financial measure that compares an individual’s monthly debt payments against their monthly income. A debt-to-income ratio (DTI) is one way mortgage lenders measure risk when considering an individual’s ability to manage payments.
Deed
A physical document that establishes new ownership when a property is sold or transferred. The deed will include the details of the property, identify the seller and buyer for a specific transaction, and provide evidence to show the transfer of ownership.
Discount Points
Also called points, discount points are represented as a percentage of a loan amount. One point equals one percent of a loan balance. Borrowers may choose to prepay interest to the lender in the form of discount points to reduce their mortgage interest rate. Typically each discount point paid up front reduces the interest rate by ¼ percent.
Down Payment
The amount of money paid by the borrower up front to secure a home loan. The down payment is a portion of the property’s final purchase price not included in the loan amount financed by the mortgage.
Equity
The positive balance between the appraised value of a home and any outstanding loans recorded against the house. When the value of a home exceeds the mortgage balance, that amount is considered equity and may be available to the homeowner.
Escrow
An account reserved for money that is temporarily held by a third party until a particular condition has been met. Escrow accounts are typically used during the transfer of home ownership between buyers and sellers.
Fair and Accurate Credit Transactions Act (FACTA)
A new law that replaces the Fair Credit Reporting Act (FCRA). This act governs how consumer information can be stored, shared and monitored for privacy and accuracy.
Federal Home Loan Mortgage Corporation (FHLMC)
The FHLMC, or Freddie Mac, is a corporation established in 1968 and owned by the U.S. government in order to buy mortgages from lenders that adhere to Freddie Mac guidelines.
Federal Housing Administration (FHA)
Now a division of the Federal Housing Finance Agency (FHFA), the FHA was formed in 1934 and provides loan guarantees to lenders who make loans under FHA guidelines.
Federal Housing Finance Agency (FHFA)
Established as the result of the Housing and Economic Recovery Act of 2008, this agency controls Fannie Mae, Freddie Mac, HUD and the Federal Home Loan Banks.
Federal National Mortgage Association
The FNMA, or Fannie Mae, was originally established in 1938 by the U.S. government to buy FHA mortgages and provide liquidity in the mortgage marketplace. It is similar in function to Freddie Mac. In 1968, the Fannie Mae charter was changed and the association now purchases both conventional and government mortgages.
Federal Reserve Board
The head of the Federal Reserve Banks that sets overnight lending rates for banking institutions. Also known as The Fed, the Federal Reserve Board does not set mortgage rates.
FHA Loan
A government-backed mortgage loan issued by qualified lenders and insured by the Federal Housing Administration (FHA).
Fixed Rate Mortgage
A mortgage loan with an interest rate that will remain fixed for the complete life of the loan. A fixed rate mortgage secures the rate, monthly payment, and terms of the loan typically for 15 years or 30 years.
Foreclosure
When a mortgage loan isn’t paid on time and a borrower defaults on the terms of the loan, lenders begin the process of foreclosure. A mortgage loan uses the property as collateral against the loan, which means the lenders will recover the property as payment for the defaulted loan. The borrower will lose the home.
G-Z
Gift (Gift Funds)
When the down payment and closing costs for a home are given to the borrower instead of the funds coming from their own accounts. Usually such gifts can only come from family members or foundations established to help new homeowners.
Good Faith Estimate (GFE)
A statement from a lender estimating closing costs for a specific mortgage transaction. This estimate is provided to the loan applicants within three business days after receipt of a mortgage application by the lender or broker.
Home Equity
The positive difference between the current value of a property and the amount financed (owed) on the property’s mortgage.
Home Equity Line Of Credit (HELOC)
An open line of credit secured by the equity in your home. A HELOC operates similar to a credit card in that a borrower can access funds only when they need. The credit line uses your property as collateral.
Home Equity Loan
A loan that is secured by the equity in your home and limited to a lump-sum payout. A home equity loan will have separate terms from your mortgage, and will be established with its own rate and payment schedule.
Homeowners Insurance
An insurance policy that covers not just hazard items, but also other things such as liability or personal property.
Interest-Only Mortgage
An adjustable-rate mortgage that allows borrowers to pay only the interest for a specified period of time.
Interest Rate
The lending term used to measure and determine the cost of borrowing money.
Jumbo Loan
A mortgage with a loan amount that exceeds current conforming loan limits and guidelines set by Fannie Mae or Freddie Mac.
Lease-Purchase Agreement
An option where a buyer leases a home until the buyer has saved up enough money for a down payment to qualify for a conventional mortgage; also referred to as rent-to-own.
Lien
A legal claim or prior interest on the property about to be purchased.
Loan-To-Value Ratio (LTV)
A percentage comparing the loan amount to the purchase price of a property. If a home was appraised at $100,000 and the loan amount was $70,000, then the LTV would be 70%.
Market Value
The market value of a property is both the highest the borrower is willing to pay and the least the seller is willing to accept at the time of contract. Property appraisals help justify market value by comparing similar home sales in the area.
Mortgage
A home loan offered in agreement with the property being pledged as collateral. The mortgage is retired when the loan is paid in full.
Nonconforming Loan
Mortgage loans that exceed the current purchase limits set by Fannie Mae or Freddie Mac limits. See also Jumbo Loan.
Origination Fee
A fee charged to cover costs associated with finding, documenting, and preparing a mortgage application, and usually expressed as a percentage of the loan amount.
Principal, Interest, Taxes, Insurance (PITI)
The combined elements of a mortgage payment. Principal is the on-going balance of the loan; interest is the fee you pay to the lender for borrowing money; taxes are the property taxes due; insurance refers to property insurance and private mortgage insurance.
Prepaid Interest
Daily interest collected from the day the loan closes to the first of the following month, or the first day your regular mortgage payment is due.
Principal
The outstanding balance owed on a mortgage loan, not including any interest or fees that may be due.
Points
Some borrowers pay “discount points” to reduce the interest rate on a new loan. Some lenders charge “origination points” to cover expenses incurred to issue the mortgage loan.
Private Mortgage Insurance (PMI)
An insurance policy that protects the lender against default on a mortgage loan. This insurance is paid by the borrower, and provides a way for mortgage companies to recover costs of foreclosure.
Realtor
A member of the National Association of Realtors. Not all real estate agents are realtors.
Refinance
A new mortgage to replace the current home loan. Refinancing offers an opportunity to pay off the current mortgage, and establish a new mortgage with more favorable terms such as a lower interest rate, cash out, or a faster payoff.
Second Mortgage
A second mortgage is an additional home loan taken on a property that still has a balance on the first mortgage. Typically borrowers use a second mortgage to extend borrowing power. If the home goes into foreclosure, the first mortgage would be settled before the second could lay claim.
Seller Concession
A seller concession is when the seller of a property offers the buyer an incentive to motivate the sale. For example, the seller may offer to pay a portion of the closing costs.
Short Sale
A short sale is when a lender has agreed to accept a final sale amount that is less than the balance due on the outstanding mortgage. In a short sale, the seller is released from all future obligations to repay the mortgage and any delinquent amounts.
Title Insurance
A form of insurance that protects buyers and lenders against any financial loss incurred from defects or previous claims to the specific property being transferred.
Title
A formal document recognizing legal ownership of a specific property.
Underwriting
The analysis of the risk a lender would assume if a particular mortgage loan application is approved; based on borrower credit, income, and other factors.
VA Loan
A mortgage loan program guaranteed by the U.S. Department of Veterans Affairs. The VA Loan program is designed to help veterans, active military personnel and their families to secure home loan financing.
Verification of Deposit (VOD)
A form mailed to a bank or credit union that asks the institution to verify that a borrower’s bank account exists, how much money is in the account, how long the borrower has had the account, and what the average balance was over the previous two months.
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