Mortgage Glossary

Acceleration Clause - A provision in a mortgage contract that gives the lender the right to demand the entire outstanding balance of a loan if a monthly payment is missed.

Adjustment Interval - with an adjustable rate mortgage (ARM) it is the time between changes of the interest rate and/or monthly payment.

Adjustable Rate Mortgage (ARM) - A mortgage loan in which the interest rate and/or the payment can change periodically over the life of the loan. These changes are usually subject to a predetermined cap.

Amortization – The payment of a mortgage loan through monthly installments of the principal, interest and any escrow amount.

Annual Percentage Rate (APR) - The APR is the interest rate that will be paid on a loan while taking into consideration any one time fees. The APR is the fee that is paid to the lender expressed annually.

Appraisal - an estimation of a property’s fair market value based on analysis of the average selling prices of homes in the area.

Balloon Mortgage - A mortgage that offers lower rates for a specified period of time, initially, and then requires payment in full for the mortgage or requires the buyer to refinance at that time.

Cap - The limit on an adjustable rate mortgage (ARM) that stipulates the floor and ceiling of an interest rate for a ARM for each adjustment period.

Cash Reserve - Enough cash available after closing in order to make the first two mortgage payments.

Closing Costs - costs that must be paid by the borrow at closing time. These costs include: the down payment, origination fees, discount points, attorneys fees, homeowners insurance and property taxes.

Conforming Loan - A mortgage loan which meets all bank funding requirements.

Credit scoring - an unbiased analysis method that shows who should receive credit. Factors such as income, housing history, any debts and personal credit history are used to calculate how likely one would be to default on their mortgage.

Debt-to-Income Ratio - A ratio that is determined by dividing a borrowers monthly expenses as well as long term debts by the gross monthly income.

Deed - a legal document stating ownership of a property.

Default - The failure of meeting legal obligations within a contract. In terms of a mortgage, it’s failure to make the scheduled monthly payments.

Depreciation - a decline in the value of property

Discount Points - an amount paid to a lender by the borrower to lower the interest rate. Each points value is 1% of the amount borrowed, and in general each point on a 30 year mortgage will lower your interest rate one eighth of a percent.

Equity - the amount the borrower has in real estate over and above the amount owed to the lender.

Equity Loan - a loan against the equity built up in a home.

Escrow - The third party account holder for funds collected in a loan to pay expenses other than the principal and the interest.

Fannie Mae (FNMA) – Federal National Mortgage Association. Fannie Mae is the nation’s largest source of financing for home mortgages.

Federal Housing Administration (FHA) - a government agency which works to improve housing standards and stabilize the mortgage market.

Freddie Mac (FHLMC) - Federal Home Loan Mortgage Corporation . A privately owned corporation that buys mortgages on the secondary market and sells them to investors in the open market.

Good Faith Estimate - A written estimate of the costs a borrower is to pay at settlement.

Hazard Insurance - insurance that protects a home owner and the lender against physical damage to a property from natural acts such as wind and fire and also acts of vandalism. Generally a lender will require the borrower carry enough hazard insurance to cover the amount of the loan.

Homeowner’s Insurance - a policy for a borrower that combines liability and hazard insurance.

Jumbo Loan - Also referred to as a non conforming loan, a jumbo loan exceeds the purchase limits of Fannie Mae and/or Freddie Mac.

Loan to Value Ratio (LTV) - This is the amount of a loan divided by the appraised value of a property written out as a percentage.

Mortgage Backed Security (MBS) - a security backed by assets which has a cash flow derived from principal and interest payments of mortgage loans.

Mortgage Insurance - Generally required by lenders when the LTV ratio is higher than 80%, this is an insurance that is purchased by the buyer to protect the lender in case of default by the buyer.

Origination Fee - A fee that a lender charges the borrower for processing the loan.

PITI - Principal, Interest, Taxes, Insurance. These four items make up a monthly mortgage payment.

Prepayment Penalty - A fee that is charged to a borrower by a lender when a mortgage is partially or fully paid off early.

Title Insurance - an insurance that protects borrowers and lenders in case of a legal battle over the ownership of a property.

Underwriting - Analysis of a loan application for the risk involved for a lender with regards to a certain buyer and certain property.

VA Loan - A loan that requires a low down payment, or no down payment, which is made to honorably discharged veterans or widows and widowers of these veterans if they have not married again. These loans also typically offer lower interest rates.