Home Inspectors

Glossary of Mortgage Terms

Helpful Consumer Information

Adjustable rate Mortgage (ARM): A mortgage in which the interest rate fluctuates during the life of the laon according to general economic conditions. A financial “index” is the basis that the lendor uses to determine changes in the interest rate. There is typically a “cap” or limit on how much the interest rate can change annually and over the life of the loan.

Amortization: The process of repaying a mortgage loan gradually, with equal periodic payments combining principal and interest. Your payments are calculated so that the debt is paid off at the end of a predetermined period of time

Annual Percentage Rate (APR): A measure of the total cost of your mortgage expressed as a yearly interest rate. The APR is usually higher than the advertised interest rate as it includes interest, pints, and other finance charges. It is designed to help you compare and determine the relative cost of loans you are considering.

Appraisal: A professional estimate of the current market value of your property used by the lender in approving your mortgage loan

Assessment: A value given to the home and property which is used solely for determing property taxes

Asset: Anything you own that has monetary value including cars, household items, cash, stock and bonds, and real estate. You are required to provide an accounting of your assets when you apply for a loan.

Balloon Mortgage: Typically, a fixed rate mortgage with a 20-to-30 year amortization, that comes due with a lump sum (balloon) principal payment 3 to 7 years after closing. These loans are attractive because interest rates and monthly payments are lower than fixed rate loans, and payments usually remain the same over the life of the loan.

Biweekly Mortgage: Payments on this mortgage are due every two weeks. You would have a total of 26 or 27 payments per year.

Closing: After all negotiations on the price of the property have been accepted, a meeting is set up with the buyer, seller, and lender (an attorney is often present, also). At htis time, the buyer receives the mortgage loan amount needed to purchase the property and pledge the same as collateral or security for repayment of the debt. The mortgage documents are signed, and the tilte to the property passes from the seller to the buyer.

Closing Costs: A percentage of the mortgage amount (typically 3 to 6 percent) paid at closing. This amount can include the following costs: realtor fees, attorneys’ fees, appraisal fees and taxes.

Collateral: Property and/or other assets pledged as security to the lender (mortgagee) for repayment of your debt.

Conventional Loan: A term describing a mortgage loan made by an approved lender where the debt is not insured by a government agency such as the FHA or VA.

Convertible Mortgage: One version of an adjustable rate mortgage (ARM) that can be converted to a fixed rate mortgage providing certain criteria is met and the borrower feels it is advantageous.

Discount Points or Points: A one time charge paid by the borrower and used by the lender to reduce the interest rate charged for the mortgage loan. One Discount Point (or “Point”) is equal to 1 percent (1%) - so on a $1000,000 loan, 1 Point would equal $1,000.

Escrow Account: The lender may have the borrower establish this “savings account” to set money aside which is earmarked to pay taxes and insurance on the property. A portion of every mortgage payment goes into the escrow account. This account is not interest earning for the borrower. The lender is then responsible for paying the atx and insurance bills with these resrved funds.

Equity: The difference between the market value (appraisal) of the home and your remaining mortgage balance. As you pay down the mortgage balance, your equity or ownership in the home increases.

Federal Housing Administration (FHA): A division within the Federal Department of Housing and Urban Developmwent (HUD) that provides mortgage insurance - insuring the borrower’s ability to repay the debt - for residential mortgages. The FHA also sets standards for construction and underwriting.

FHA Loan: A mortgage loan made by an approved lender in which the borrower’s ability to repay is insured by the Federal Housing Administration.

Good Faith Estimate: A disclosure of estimated settlement costs. Federal regulations require that you receive this disclosure of estimated fees and other costs to close within three days of your initial loan application. This ensures that borrowers are provided with timely and thorough information on the nature and costs associated with obtaining a mortgage loan.

Gradutated Payment Mortgage (GPM): Beneficial for borrowers who expect that their income will increase over time, this mortgage is calculated with smaller initial payments which increase for a specified period of time, then become level.

Growing Equity Mortgage (GEM): A type of mortgage wher payments increase yearly and each increase is directly applied against the mortgage principal. This allows the borrer to ncrease their equity quickly and pay off the mortgage sooner

Housing-to-Income Ratio: This formula helps you and the loan officer determine if a mortgage laon is within your income range. It compares all your monthly housing expenses to your monthly income. Usually, housing expenses should not exceed approximately 28 percent of your monthly gross (pre-tax) income.

Liability: A liability is an outstanding debt such as a credit card balance or car loan. You are required to list all your laibilities when applying for a mortgage loan.

Mortgage: A conditional transfer of property (land, house, etc.) as security for a loan. The property remains in the possession of the borrower but may be claimed by the lender if the laon and interest are not paid according to the agreed terms.

Mortgage Broker: A real estate financing professional middleman who assists the buyer and seller with the arrangement of financing and contract negotiations.

Mortgage Insurance: This insurance is required if your downpayment is less than 20 percent. You would be required to apy a fee for this insurance which protects the lender should you default on house payments.

Mortgage Note: A promissory note that you sign at closing which states your pledge to apy a specified amount at a set interest rate within a fixed period of time

Mortgagee: A creditor who receives a mortgage (the lender)

Mortgagor: A debtor who pledges his/her property in a mortgage (the borrower).

Origination: The completion of a loan application which details your financial position and begins the mortgage loan process (origination). As part of this first step, you will be required to provide past W-2s, paystubs and other supporting documentation of your income. Within three days, your loan officer must provide you with a Good Faith Estimate and a Truth-in-Lending disclosure.

Origination Fee: A fee that the lender may charge the homeowner for the service of creating the mortgage loan. This fee is usually stated as a percentage of the loan.

Points: See “Discount Points” definition.

Prequalification: The process that determines your qualification to receive a mortgage loan and the loan’s maximum amount.

Principal: The outstanding balance owed on a loan, excluding interest. The sum of money on which interest is charged.

Private Mortgage Insurance (PMI): If your downpayment is less than 20 percent, you will be required to pay PMI - a fee for mortgage insurance. This insurance, provided by a private mortgage insurance company, protects the lender should you default on your house paymenst.

Processing: Following origination, processing is verification of the information provided on your loan application. This also includes ordering appraisals, credit reports and other documentation.

Recording Fees: The lender charges this fee for offically recording the signed mortgage documents which makes them a public record.

Servicing: An overall term for the services the lender provides in handling your mortgage. This includes collecting your payments, and paying taxes and insurance if you have funds in an escrow account.

Title: Often called the deed, this is the document containing the evidence of someone's legal ownership of a specific property

Title Insurance: A policy which insures the borrower against any errors in the title search. This fee is part of the closing costs.

Title Search: A necessary part of obtaining a mortgage, this is an official examination of public records to determine legal ownership of the desired property.

Total Debt-to-Income Ratio: A formula used by the loan officer to determine if a mortgage loan is within your monthly income range. This ratiocompares all your monthly debt payments, such as credit and car loan payments to your monthly gross (pre-tax) income. Usually, total debt payments should be no more than approximately 36 percent of yor monthly income.

Truth-in-Lending Disclosure: This requires creditors to provide information to consumers about the conditions, terms, and costs of a loan. The intent of this act is to help you make an informed decision when comparing loans offered by differant lending institutions through the use of common terminology such as APR (annual percentage rate) and finance charge.

Underwriting: After processing, the documents in your laon file are evaluated to determine if the requested loan should be approved, denied, or approved with conditions.

Veterans Administration (VA): Only veterans are eligible for this type of loan administrated by the Department of Veterans Affairs within the Federal Government.

VA Loan: A long-term, low or no-downpayment mortgage loan in which the veteran’s ability to repay is guaranteed by the administration.