Mortgage Glossary

  • Adjustable-rate loan – Also known as variable-rate loans, the interest rate on adjustment rate loans fluctuates throughout the life of the loan based on current market conditions. The interest rate is typically limited to moving within a band of allowable rates. Adjustable rate loans are popular when interest rates re expected to stay flat or decline because the initial interest rate is typically lower than the interest rate on fixed-rate loans.   Unlike with fixed-rate loans, the monthly mortgage payment on adjustable rate loans varies throughout the life of the loan as the interest rate changes.
  • Amortization – The process by which the principal balance is paid down on a monthly basis throughout the life of the mortgage. With amortizing loans, the monthly mortgage payment that goes toward paying down the principal balance increases throughout the term of the mortgage.
  • Annual percentage rate (APR) – Annual cost of borrowing. It includes all expenses associated with the mortgage, including the interest rate, points, broker fees, and other charges that are required to be paid by the borrower.
  • Appraisal –The process of establishing the fair market value at the time of the purchase. The appraisal is performed by a third party and is required by the lender to establish the value of the collateral.
  • Closing costs – Fees charged to homebuyers for a variety of purposes including: application fees; title examination/insurance and property survey fees; fees for preparing deeds, mortgages, and settlement documents; attorneys’ fees; recording fees; and notary, appraisal, and credit report fees. Closing costs are also referred to as transaction or settlement costs.
  • Construction mortgage – Mortgage provided for the purposes of building a home.
  • Conventional loan –Mortgages that are not insured by government agencies, such as the Federal Housing Administration, Veterans Administration, or Rural Development Services.
  • Debt-to-income ratio – Equals to a person’s total monthly debt obligations (e.g., mortgage payments, car loans, student loans, credit card payments, etc.) divided by gross monthly income. Lenders look at the debt-to-income ratio to assess the credit risk of an individual.  A lower debt-to-income ratio will improve one’s ability to obtain a mortgage.
  • Down payment – Amount of the purchase paid in cash. The down payment requirement is stipulated by the lender and is typically required to be anywhere from 5% to 20% of the purchase price.
  • Equity – The total fair market value of a home minus the principal balance of the mortgage. When a home is first purchased, the equity value is typically in line with the amount of the down payment.  The equity value will typically increase throughout the life of the mortgage as the principal balance is paid down.  The equity value will also increase/decrease due to changes in market conditions and home values.
  • Escrow –Process by which documents/funds are held by a neutral, third party before closing. Additionally, escrow accounts are often established subsequent to closing to hold payments for property taxes and insurance payments.
  • FHA 203(k) Loan – The FHA 203K loan is a federally insured home mortgage product that allows individuals an ability to repair a damaged home that would otherwise not be acceptable to the FHA mortgage insurance program. This loan choice requires a low downpayment and allows private mortgages to be used for home rehabilitation projects.
  • Fixed-rate mortgage – Loans in which the homebuyer is charged a flat interest rate throughout the life of the mortgage. Fixed rate loans are typically offered with a term of 15, 20, or 30 years.  Unlike with variable rate loans, the monthly mortgage payment for a fixed-rate mortgage stays constant throughout the life of the loan.
  • Good faith estimate –Provides the borrower with a summary of the terms of a mortgage, including the estimated fees and expenses. The purpose of a good faith estimate is to help the borrower compare offers, understand the real cost of a loan, and make an informed decision.  The good faith estimate is also known as a Loan Estimate.
  • Homeowner’s association (HOA) – An organization comprised of homeowners in a community that is responsible for maintaining common areas of a neighborhood and establishing rules that must be followed by all homeowners. Various rules established by the HOA includes: home colors, exterior landscaping, type and height of fences, etc.  When purchasing a home in a planned community, membership in the HOA is required and fees are paid by homeowners on a regular basis (often monthly).
  • Homeowner’s insurance – A form of property insurance that provides an individual with protection from damage to a home or the possessions within the home. Homeowner’s insurance is required by lenders, and the monthly insurance premiums are typically embedded in the mortgage payments.
  • Interest rate –Cost of borrowing funds. It is either fixed or variable depending on the type of mortgage (i.e., fixed or variable rate)
  • Loan origination fees –Fees charged by the lender to the homebuyer for processing the loan. These fees are typically based on a percentage of the loan amount.
  • Loan-to-value ratio –Percentage of the home value borrowed through the mortgage. The loan-to-value ratio typically ranges from 80% to 95%.  A higher loan-to-value ratio typically results in a higher interest rate on the mortgage.
  • Lock-in a rate – Locking in a rate allows the homebuyer to enter into a written agreement with the lender to receive a guaranteed interest rate on a loan. The homebuyer is often required to close the loan within a certain period of time (60 or 90 days) after locking in a rate.
  • Mortgage – Agreement entered into between a homebuyer and lender that provides the terms and conditions for borrowing funds from the lender. This document discuss the payment requirements throughout the life of the mortgage and provides the lender with the right to take possession of the home in the event that the borrower is unable to pay off the loan.
  • Negative Amortization – A minimum monthly loan payment is set at such a low requirement that you are not outpacing the speed at which interest is accrued each month. This may cause the amount you owe to go up dramatically each month.
  • Origination fee – Fee charged by lenders for processing a new loan application. Origination fees generally range from 0.5% to 1.0% of the loan amount and can be negotiated downward on larger loans.
  • Points – Fees paid to the lender for the loan that are often rolled into the total loan amount. A point is equivalent to 1% of the loan amount.
  • Principal – Outstanding balance on the loan. At the time of origination, the principal balance is the portion of the home’s value that was financed by the lender, plus any closing costs or transaction fees that were rolled into the mortgage.  The principal balance reflects the remaining amount of capital required to be paid to the lender to close out the mortgage, and is paid down throughout the life of the loan.
  • Private mortgage insurance (PMI) – Provides protection to the lender from a loss in value in the event that the borrower defaults on the loan. PMI is typically required if the loan-to-value ratio is greater than 80% when the mortgage is initiated.  In this instance, PMI payments continue until the principal balance is paid down to 80% of the appraised value.
  • Settlement costs – Fees charged to homebuyers for a variety of purposes including: application fees; title examination/insurance and property survey fees; fees for preparing deeds, mortgages, and settlement documents; attorneys’ fees; recording fees; and notary, appraisal, and credit report fees. Settlement costs are also referred to as transaction or closing costs.
  • Thrift institution – Savings banks and savings and loan associations.
  • Title insurance – Indemnity insurance that protects the homebuyer and lender against defects in the title to real property. Homebuyers are generally required to buy an owner’s policy and a lender’s policy to protect both parties from financial loss if someone were to challenge the title of the property.
  • Truth In Lending Act – Federal law enacted to protect consumers in their dealings with lenders.

 

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