Mortgage Terms Defined

Confused by the alphabet soup of mortgage lingo? Use this glossary to easily find definitions of terms that will come up during the mortgage loan process.

Glossary on table

 

Mortgage Glossary

QUICK LINKS: |A|B|C|D|E|F|H|I|J|L|M|N|O|P|R|S|T|U|

A

Acceleration clause: a section in a contract that allows the lender to require the borrower to repay all of a portion of an outstanding loan if specific requirements are not met

Adjustable Rate Mortgage (ARM): a mortgage where the interest rate, after an initial period, can be changed by the lender

Adjustment Interval: the time between changes in the interest rate or monthly payment on an ARM

Affordability: the capacity at which a consumer can afford and purchase a home

Agreement of Sale: a contract signed by the buyer and seller after agreeing on terms and conditions

Annual percentage rate (APR): the annual rate charged for borrowing or made by investing; expressed as a single percentage number which represents the yearly cost of funds over the term of a loan

Application: a request for a loan

Appreciation: when the value of a property increases because of changes in market conditions

Appraisal: written estimate of a property’s current market value

Assessed value: the value that is associated with a property by a public tax assessor for taxation

Assumable mortgage: a mortgage contract that grants a credit worthy buyer to assume the mortgage contract of the seller

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B

Balance: the amount of money currently owed on a loan

Balloon mortgage: mortgages that are payable in full after a period that is shorter than the actual term

Balloon: the balance of a loan remaining when the contract calls for full payment

Blanket loan: a mortgage pertaining to numerous structures on one piece of land

Buyer broker: a commissioned agent who assists in negotiating contracts between buyers and sellers

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C

Cap: limits the amount of an interest rate or mortgage payments may increase; included in an adjustable-rate mortgage (ARM)

Cash reserve: a requirement by some lenders where buyers need a certain amount of cash remaining after closing in order to pay the first few mortgage payments

Clear title: a title without legal claims and legal questions when referring to ownership of the property

Closing: the final transaction in order to finalize a sale; also known as “settlement”

Closing costs: expenses required when transferring ownership of a property; also known as “settlement costs”

Contingency: a certain condition(s) that is required to be met before a contract is signed

Convertible ARM: any adjustable-rate mortgage which can be converted to a fixed-rate mortgage

Covenant: a specific clause in a mortgage that allows or prohibits the borrower; could result in foreclosure if violated

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D

Deed: the legal document giving title to a property

Deed of trust: a document used in certain states in place of a mortgage; the title is for a trustee as opposed to the borrower

Default: failure to make mortgage payments on time or failure to comply with other mortgage conditions

Depreciation: the decline in the value of a property; opposite of “appreciation”

Discount points: a lender’s one-time charge in order to lower a loan’s interest rate and monthly payment

Due-on-sale clause: when the lender demands repayment in full if the buyer sells the property securing the mortgage

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E

Earnest money: a deposit received by the seller in order to prove that a prospective buyer is serious about purchasing a property

Easement: a right-of-way allowing people other than the owner access to a property

Equal Credit Opportunity Act (ECOA): a federal law that does not allow lenders to deny mortgages based on the borrower’s race, color, religion, national origin, age, sex, marital status or income

Equity: the difference in market value of a property versus the home owner’s outstanding mortgage balance

Equity loan: a loan depending on the borrower’s equity in their home

Escalation Clause: an agreement from the sales contract which says that the buyer agrees to increase their offer on a property if there are other offers from interested buyers

Escrow: the holding of certain documents and money by a third party until closing

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F

Fair Credit Reporting Act: a consumer protection law which regulates the collection of credit information and access to credit reports

First mortgage: a mortgage in a first lien on the property which secures the mortgage

Fixed-rate mortgage: mortgage where the interest rate does not change during the length of the loan

Flood insurance: insurance that is required for homes located in designated flood areas

Forbearance: when the lender postpones foreclosure in order to give the borrower time to catch up on overdue payments

Foreclosure: a mortgaged property could be sold by the lender when a mortgage is in default

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H

Hazard insurance: insurance aimed to protect the homeowner and lender against physical damage to a property from fire, wind, vandalism, etc.

Home inspection: an examination of a potential property’s structure and mechanical systems in order to evaluate safety and pinpoint any needed repairs

Homeowners insurance: an insurance policy that combines liability coverage and hazard insurance

Homeowners warranty: insurance that will cover repairs to specific parts for a house for a certain amount of time

HUD: Is a standard form used to itemize services and fees charged to the borrower by the lender or broker when applying for a loan for the purpose of purchasing or refinancing real estate. HUD refers to the Department of Housing and Urban Development

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I

Interest-rate cap: a plan of an adjustable-rate mortgage that limit show much interest rates can increase every adjustment period

Inspection: a system to detect readily accessible major flaws or deficiencies in the significant components and systems of a home.

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J

Joint tenancy: a form of co-ownership; each owner has equal interest and rights in the property

Jumbo mortgage: loan amounts exceeding $417, 000 and higher than the maximum county loan limit

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L

Lease-purchase mortgage loan: a financing option where home buyers are allowed to lease a home with an option to buy

Lien: a legal claim against a property that is required to be paid when the property is eventually sold

Lifetime cap: an arrangement of an ARM that limits the total increase in interest rates throughout the lifetime of the loan

Loan servicing: the process where a company collects interest, principal, and escrow payments form the borrower

Loan-to-value ratio (LTV): the relationship/ratio between the amount of a mortgage and the actual value of a property

Lock: guarantees a specific interest rate and/or discount points, various standard settlement fees for a period of time before closing, and the terms of a loan as stated in the application

Lock-in: written agreement that guarantees the home buyer a specific interest rate as long as the loan is closed within a set period of time

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M

Margin: the set percentage added by a lender to the index rate in order to determine the interest rate of an adjustable-rate mortgage

Mortgage: a loan used to finance the purchase of a property, usually within a specified payment period and interest rates

Mortgage broker: a company that matches borrowers with lenders for a fee

Mortgagee: the lender in a mortgage deal

Mortgage insurance premium (MIP): the fee paid by a borrower to Federal Housing Administration (or private insurer) for mortgage insurance

Mortgage note: a legal document that requires a borrower to repay a loan with a specific interest rate during a period; the agreement is part of and secured by a mortgage

Mortgagor: the borrower in a mortgage agreement

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N

Negative amortization: payment terms where the borrower’s monthly payments do not cover the interest rate that is due; the loan balance increases as a result

Notice of default: a written notice to a borrower that a default has occurred; legal action may be taken

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O

Origination fee: a fee paid to a lender after processing a loan application

Owner financing: a purchase where the seller is responsible for providing all or a portion of the financing

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P

Payoff amount: balance plus interest due and any fees

Payment cap: a plan of some adjustable-rate mortgages that limits how much a borrower’s payments may increase regardless of how much the interest rate increases; could result in negative amortization

PITI: principal, interest, taxes, and insurance; components of a monthly mortgage

Points: a one-time fee required by the lender in order to lower the interest rate of a mortgage

Prepayment penalty: a fee charged to a borrower when they pay off a loan before it is due

Preapproval: a tentative commitment from the lender for mortgage funding. It is not, however, a guarantee that you will be approved for a mortgage

Prequalification: an initial evaluation where the lender has reviewed your financial status and thinks you are ready for a loan

Principal: the amount borrowed or the amount of a loan remaining

Private mortgage insurance (PMI): insurance from nongovernmental insurers that works to protect lenders against a loss if a borrower defaults

Purchase and sale agreement: a written contract that is signed by the buyer and the seller that lists the terms and conditions when a property is sold

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R

Real Estate Settlement Procedures Act: requires that a loan originator issue a Good Faith Estimate within three days following application

Refinancing: the process of paying off a loan with the proceeds from a new loan secured by the same property

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S

Second mortgage: a mortgage discussing rights that are dependent to those of the first mortgage holder

Secondary financing: a loan secured by a mortgage or trust deed where the lien is secondary to a separate mortgage or trust deed

Settlement sheet: the collection of costs payable at closing which determines the seller’s net proceeds and the buyer’s net payment

Super Conforming mortgage: loan amounts exceeding $417, 000 up to the maximum county loan limit available in high-cost areas

Survey: a map showing the legal boundary lines of a property

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T

Tenancy by entirety: when spouses are allowed to own property together as a single entity

Tenancy in common: joint ownership without the right of survivorship in a property

Title: a legal document stating the right of ownership

Title company: a company who specializes in insuring title to property

Title insurance: insurance intended to protect the lender or the buyer against loss because of disputes over ownership of a property

Title search: a check of the title records in order to ensure that the seller is the legal owner of the property and that no other liens or claims are outstanding

Transfer tax: state or local tax that is payable when the title passes from one owner to another

Truth-in-lending: a federal law requiring lenders to disclose in writing the full terms and conditions of a mortgage

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U

Underwriting: the process of evaluating a loan application in order to determine the risk factor for the lender

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