glossary of mortgage
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A
Accrued Interest
The amount of interest that has accumulated on a loan but has not yet been paid.
Adjustable-Rate Mortgage
A type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan.
Amortization
The process of gradually paying off a debt over time through regular payments of principal and interest. Each month, the mortgage payment is split into two parts: some of it goes toward paying down the amount borrowed (the principal), and some goes toward interest, which is the cost of borrowing the money. Early on, more of the payment goes toward interest, but over time, more will go toward reducing the loan balance.
Annual Percentage Rate (APR)
The total cost of borrowing a mortgage loan over a year. It includes not just the interest rate but also other fees like closing costs, points, and loan origination fees. This gives borrowers a clearer picture of the overall cost of the loan, making it easier to compare different mortgage offers.
Appraisal
An estimate of the current market value of a property, conducted by a licensed professional.
B
Balloon Mortgage
A mortgage with relatively low fixed payments during the term, followed by a larger lump-sum payment at the end.
Balloon Payment
A large, lump-sum payment that is due at the end of a loan term after a series of smaller periodic payments.
Basis Point
A unit equal to one one-hundredth of a percentage point, often used in discussing changes in interest rates.
Bridge Loan
A short-term loan used to bridge the gap between the sale of an existing home and the purchase of a new one.
C
Cash-Out Refinance
A refinancing of a mortgage where the new loan amount is greater than the existing loan amount, and the borrower receives the difference in cash.
Chain of Title
The documented history of property ownership, showing the transfer of title from one owner to the next.
Closing Costs
The closing costs for a mortgage include all of the expenses related to applying for the loan and finalizing a real estate sale. Some of the costs are related to the property, while others are related to the mortgage lender's services and the paperwork involved in the transaction.
Closing Disclosure
A document that outlines all the costs and terms of a mortgage loan, provided to the borrower at least three days before closing.
Co-Signer
An individual who signs a loan agreement along with the primary borrower and is equally responsible for repaying the debt.
D
Debt-to-Income Ratio (DTI)
A measure of a borrower's monthly debt payments compared to their gross monthly income, used to assess creditworthiness.
Deed
A legal document that transfers property ownership from one person to another.
Deed in Lieu of Foreclosure
A voluntary transfer of property ownership from the borrower to the lender to avoid foreclosure.
Discount Points
Fees paid at closing to reduce the interest rate on a mortgage loan.
Down Payment
The portion of the purchase price that a buyer pays upfront in cash, usually expressed as a percentage of the total price.
E
Earnest Money Deposit
A deposit made by a buyer to show serious intent to purchase a home, applied towards the purchase price at closing.
Encumbrance
A claim or liability on a property, such as a mortgage, lien, or easement, that may affect its transfer or value.
Equity
The difference between the market value of a property and the amount owed on the mortgage.
Escrow
A financial arrangement where a third party holds funds or documents and regulates the payment of funds until specific conditions in a real estate transaction are met.
Escrow Account
An account where funds are held by a third party on behalf of two parties to a transaction, often for paying property taxes and insurance.
F
Fair Market Value
The price that a property would sell for on the open market, assuming both buyer and seller act without undue pressure.
Fannie Mae
The Federal National Mortgage Association (FNMA), a government-sponsored enterprise that buys and guarantees mortgages.
Federal Housing Administration (FHA)
A U.S. government agency that provides mortgage insurance to approved lenders for homebuyers, particularly for first-time homebuyers and those with lower credit scores.
FHA Loan
A mortgage insured by the Federal Housing Administration, often requiring lower down payments and easier credit requirements.
FICO Score
A type of credit score created by the Fair Isaac Corporation used to assess a borrower’s credit risk.
G
Gift Letter
A document stating that funds given to a homebuyer from a relative or friend are a gift, not a loan, and does not need to be repaid.
Good Faith Estimate (GFE)
A document that provides an estimate of the costs and fees associated with a mortgage loan.
Gross Income
Total income before taxes and other deductions.
H
Home Equity Line of Credit (HELOC)
A type of loan in which the borrower uses their home equity as collateral, borrowing up to a predetermined limit over time.
Home Inspection
An assessment of a property's condition by a qualified inspector before purchase.
Homeowners Association (HOA)
An organization that manages a residential community and enforces rules, often collecting fees to maintain common areas and services.
HUD (Housing and Urban Development)
The U.S. government department responsible for national housing policies and programs.
I
Index
A benchmark interest rate that reflects market conditions, used to determine the interest rate of an adjustable-rate mortgage.
Installment Loan
A loan that is repaid over time with a set number of scheduled payments, including principal and interest.
Interest Rate
The cost of borrowing money, expressed as a percentage of the loan amount, typically charged annually.
Interest Rate Cap
A limit on the amount the interest rate can increase on an adjustable-rate mortgage.
Interest-Only Loan
A type of mortgage where the borrower pays only the interest for a specified period, after which principal payments begin.
J
Judicial Foreclosure
A foreclosure process that is handled through the court system.
Jumbo Loan
A mortgage that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac, often used to finance luxury properties.
K
Kickback
Illegal payments made to someone as a reward for facilitating a transaction, typically a violation of the Real Estate Settlement Procedures Act (RESPA).
L
Late Charge
A fee charged when a borrower fails to make a scheduled loan payment by the due date.
Lease Option
An agreement that gives a tenant the option to purchase the property at the end of a lease term.
Legal Description
A formal, detailed description of a property's boundaries and location, used in legal documents.
Lien
A legal claim against a property as security for a debt, usually in the form of a mortgage.
Loan Commitment
A lender's formal offer to provide a loan under specific terms, typically after reviewing the borrower’s financial information.
M
Mortgage Broker
A professional who arranges mortgage loans between borrowers and lenders, usually earning a commission.
Mortgage Insurance
Insurance that protects the lender against losses if a borrower defaults on the loan, often required for loans with low down payments.
Mortgage Interest Deduction
A tax deduction that allows homeowners to reduce their taxable income by the amount of interest paid on a mortgage.
Mortgage Note
A legal document obligating the borrower to repay the mortgage loan, specifying the terms of repayment.
N
Nonconforming Loan
A mortgage that does not meet the guidelines of Fannie Mae and Freddie Mac, typically because of loan size or credit quality.
Notice of Default
A formal notice filed by a lender indicating that a borrower has missed payments and is in default on their loan.
O
Occupancy Rate
The percentage of occupied units in a building or property, often used to assess the performance of rental or commercial properties.
Option ARM
An adjustable-rate mortgage that allows the borrower to choose from multiple payment options, including interest-only and minimum payments.
Origination Fee
A fee charged by a lender for processing a new loan application, typically a percentage of the loan amount.
Owner Financing
A property sale where the seller provides financing to the buyer, allowing them to make payments directly to the seller instead of obtaining a traditional mortgage.
P
Per Diem Interest
Daily interest that accrues on a loan from the closing date until the first mortgage payment is due.
PITI
An acronym for Principal, Interest, Taxes, and Insurance – the four components of a typical monthly mortgage payment.
Planned Unit Development (PUD)
A type of community that includes a mix of residential, commercial, and recreational properties, with shared amenities and common areas managed by a homeowners association (HOA).
Points
Fees paid directly to the lender at closing in exchange for a reduced interest rate, also known as discount points.
Prepayment Penalty
A fee charged to a borrower who pays off their loan before the scheduled maturity date.
Q
Qualifying Ratios
Financial ratios used by lenders to determine a borrower's ability to repay a loan, including the debt-to-income ratio.
Quitclaim Deed
A legal document used to transfer a person's ownership interest in a property without any warranties or guarantees about the title's status.
R
Rate Lock
An agreement between borrower and lender that locks in the interest rate for a specified period during the loan application process.
Recording Fee
A fee charged by a local government for registering a real estate transaction, such as the recording of a deed.
Refinance
The process of replacing an existing mortgage with a new loan, usually to secure a lower interest rate or better terms.
Reverse Mortgage
A loan available to homeowners 62 years or older, allowing them to convert part of their home equity into cash without selling the home.
S
Sales Contract
A written agreement between buyer and seller outlining the terms of a property sale.
Second Mortgage
A loan taken out in addition to the first mortgage, using the home's equity as collateral.
Settlement Statement
A document that itemizes all costs and fees associated with the closing of a real estate transaction.
Short Sale
A sale of a property where the proceeds are less than the amount owed on the mortgage, with the lender's approval.
Subprime Mortgage
A mortgage offered to individuals with lower credit scores or limited credit history, typically at a higher interest rate due to increased risk.
T
Tax Lien
A legal claim by the government against a property for unpaid property taxes.
Title
A legal document that indicates ownership of a property, evidenced by a deed.
Title Insurance
Insurance that protects the buyer and lender against losses arising from disputes over property ownership or defects in the title.
Truth in Lending Act (TILA)
A federal law requiring lenders to provide clear and detailed information about the terms and costs of a loan, designed to help consumers make informed decisions.
U
Underwriting
The process of evaluating the risk of insuring a home loan, determining the borrower’s ability to repay, and the terms of the loan.
Usury
The illegal practice of lending money at unreasonably high interest rates.
V
VA Loan
A mortgage loan guaranteed by the U.S. Department of Veterans Affairs, available to eligible veterans and service members.
Variable Rate
An interest rate that can change over time based on market conditions, often associated with adjustable-rate mortgages (ARMs).
W
Warranty Deed
A deed in which the seller guarantees that they hold clear title to a property and have the right to sell it.
Wraparound Mortgage
A type of secondary financing where a new mortgage includes both the unpaid balance of the original loan and an additional loan amount.
Z
Zoning
Laws and regulations governing how land and property can be used in specific areas.