Glossary of Mortgage Terms
Adjustable-Rate Mortgage (ARM)—A mortgage loan where the interest rate is not fixed for the entire term of the loan, and can change during the life of the loan in line with movements of an index rate.
Annual Percentage Rate (APR)—This is a measure of the cost of credit, expressed as a yearly rate. The APR takes into account the amount financed, the loan interest rate, and the finance charges (fees and points) and the amounts and timing of the payments.
Appraisal—A professional estimate of your property's current market value at a given point in time.
Appraisal Fees—The fee to be paid to the appraiser providing the appraisal service.
Balloon Payment—A large payment due in full at the end of the loan term equal to the remaining principal balance plus any interest and charges due or accrued.
Broker—An independent middleman who arranges deals between borrowers and lenders. A broker is compensated for his services by the borrower and/or by the lender.
Closed-End Home Equity Loan—A loan which is to be repaid in full (along with any interest and finance charges) by a specified future date.
Closing—For a home purchase, the time when loan documents are signed, legal title is transferred from the seller to the buyer, and funds are dispersed from the buyer and the lender to the seller. For a refinance, there is no transfer of ownership, but the closing includes repayment in full of all sums owed the old lender.
Closing Costs—Costs paid by the borrower in addition to the down payment to close a loan, including title insurance premiums, appraisal fees, lender fees, closing agent fees, recording fees, etc.
Credit Life Insurance—A type of insurance, often offered by lenders in which the amount of the policy matches the loan balance at any given time, designed so that the loan will be paid off in full in the event of the death of the borrower. No one is required to buy credit life insurance.
Credit Rating—A rating given to a person by credit bureaus (ex. Trans Union or Experian) based on experience managing credit (credit cards, mortgage, loans, etc.), reliability making loan payments current financial condition (income, savings, outstanding debt, etc.) and other factors. People with strong credit ratings tend to qualify for lower-cost loans, while people with weaker ratings might have to pay a higher interest rate.
Credit Report—A report put together by one of the three major independent credit agencies that shows your credit history. You can get copies of your credit report by contacting the three agencies: Experian (888-397-3742), Equifax (800-997-2493) and Trans Union (800-888-4213).
Debt Service—The combined principal and interest due on your loan each month over a period of time.
Direct Lender—A bank or lending institution that deals directly with its customers. Mortgage brokers or other middlemen are not involved.
Earned and Unearned Income—Income derived from an individual's personal efforts, from work, from services rendered or from goods produced and sold. It also includes pension and annuity income, which is based on income that was previously earned, income that is derived from sources not involving the individual's direct personal efforts such as interest, dividends, rental income, pension benefits, and the like.
Escrow—An item of value, money, or documents deposited with a neutral, third party to be delivered to another party to a transaction upon the fulfillment of a condition. For example, a buyer's earnest money deposit is put into escrow and is not delivered to the seller until the seller performs concurrent obligations such as transferring legal title into the buyer's name and placing the deed into escrow.
First Lien—In a home purchase transaction, a lien is a legal claim held by the lender against the property being purchased that must be paid off when the property is sold. A first lien is a claim holding the highest priority, usually in favor of the lender, which must be paid first, ahead of other liens against the same property, when the property is sold.
Fixed-Rate Mortgage—A loan with an interest rate and monthly payment that stays the same over the entire term of the loan.
Home Equity—An owner's financial interest in a property at a specific moment in time. Equity is calculated by subtracting the amount still owed on all outstanding loans against the property from the then fair market value of the property.
Home Equity Lines of Credit (HELOC)—A mortgage, usually secured as a second or junior lien against the property, set up as a line of credit against which a borrower can draw up to a maximum amount, as opposed to a loan for a fixed dollar amount. For example, using a standard mortgage you might borrow $150,000, which would be paid out in its entirety at closing. Using a HELOC, you receive the lender's promise to advance you up to $150,000, in an amount and at a time of your choosing. You can draw on the line by writing a check, using a special credit card, or in other ways permitted by the lender.
Home Improvement Loan—A loan made for the purpose of paying for improvements to your home such as remodeling a kitchen or bathroom. This loan may or may not be secured the property.
Index Rate—The base rate used by a lender to measure the difference between the current interest rate charged on an adjustable-rate mortgage (ARM) and that earned by other types of investments. This difference is then used to adjust the interest rate a lender will charge on an ARM. The base rate is externally set. Examples include LIBOR, the Prime Rate and Treasury indices.
Interest Rate—The amount of money you are being charged to borrow money expressed as an annual percentage. When you make your loan payments every month, you are paying back the amount you borrowed (the principal) plus interest. For example, if you borrow $1,000 for one year and have a 10 percent simple interest rate, you will end up repaying your lender $1,100.
Loan-to-Value Ratio—A percentage computed by dividing the loan amount by the lesser of the selling price or the appraised value of the property.
Non-Conforming or "Subprime" Loan—A loan in which the interest rate charged exceeds that available for a conventional loan of the same amount. The typical subprime borrower is unable to qualify under the strict lending guidelines required for conventional loans because of many reasons: a low credit score; an inability to provide a sufficient down payment amount; a high ratio of total expense (including debt payments) to income; difficulty or inability to document income and assets; recent change to self-employed status; prior credit history problems; and other factors. Ratings for conforming or conventional loans are "A", while for non-conforming loans they are "A-"; "B"; "C"; and "D." Consumers with an "A-" rating have good credit histories while those with a "D" are considered to be a higher credit risk.
Origination Fees or Points—The fees or points a lender charges to set-up and process a loan and which is usually paid at closing. Usually based on the amount of the loan, one point equals one percent of the loan amount.
Points—An upfront fee that the borrower pays the lender to get the loan. Each point equals 1 percent of the total principal amount borrowed.
Pre-Payment Penalty—A charge imposed by the lender if the borrower pays off the loan early. The charge is usually expressed as a percent of the loan balance at the time of prepayment, or a specified number of months interest.
Principal—The amount of money you are borrowing, not including any fees, costs or interest.
Private Mortgage Insurance (PMI)—A type of insurance which protects the lender in the event the borrower defaults on the loan. PMI is generally required where a borrower is unable to produce a down payment equal to at least 20% of the total purchase price. The premium for PMI is paid by the borrower and is included in each monthly mortgage payment.
Refinance Loan—The process of obtaining a new loan to pay off an existing loan. Refinancing is done for many reasons including, but not limited to: replacing higher-interest debt with a loan that has a lower interest rate; to switch from a fixed to variable rate loan, or vice versa; or to eliminate a balloon payment. A cash-out refinancing is one that involves you paying off your loan and borrowing an additional amount which you actually receive in hand to spend as you deem fit. In a refinance, the entire new loan amount is usually always secured by a lien on your home.
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