It is important for you to be knowledgeable about the home mortgage process. Mortgage financing terminology can be confusing because much of the language is unique to the industry. This was written to provide a quick reference to most mortgage terms.

Adjustable Rate Mortgage (ARM):

A mortgage in which the interest rate is adjusted periodically according to the movement in a preselected index. Technically, ARMs do not include mortgages where the payments change for other reasons, such as buydowns, although the term is often used in this broader sense.

Amortize:

Reduce a debt by regular payments of both principal and interest. "Fully amortizing" means payments scheduled to pay off the debt completely during a set term.

Annual Percentage Rate (APR):

The total yearly cost of a mortgage stated as a percentage of the loan amount; it includes the base interest rate, private mortgage insurance, and loan origination fee (points).

Appraisal:

A professional opinion of the estimated current market value of a property.

Appreciation:

An increase in the value of a property due to changes in market conditions or other causes.

Assessed Value:

The valuation placed upon property by a public tax assessor for purposes of taxation.

Asset:

Anything you own that has monetary value including but not limited to cars, household items, cash, stocks, bonds, and real estate.

Balloon Mortgage:

Typically, a fixed-rate mortgage with a 20- to 30-year amortization and a lump sum (balloon) principal payment 3 to 7 years after closing. These loans have interest rates and monthly payments lower than fixed-rate loans.

Buydown:

Money advanced by an individual (builder, seller, etc.) to reduce monthly payments for a home mortgage during either the entire term or for an initial shorter term.

Cap:

See Interest Rate Cap.

Cash-out:

A loan transaction in which the borrower receives funds at the time of closing.

Closing:

After all negotiations on the price of the property have been accepted and the buyer has obtained approval for financing, a meeting is set with the buyer, seller, and lender. At this time, the buyer receives the mortgage loan amount needed to purchase the property and pledges the property as collateral or security for repayment of the debt. The mortgage documents are signed, and the title to the property passes from the seller to the buyer.

Closing Costs:

Expenses (over and above the price of the property) incurred by buyers and sellers in transferring ownership of a property. Also called "Settlement Costs."

Co-Borrower:

An additional borrower on a loan. Co-borrower obligations on a loan are the same as all other borrowers.

Collateral:

Property and/or other assets pledged as security to the lender for repayment of a debt.

Conventional Loan:

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

Convertible ARM:

An adjustable-rate mortgage that can be converted to a fixed-rate mortgage under specified conditions.

Debt-to-Income Ratio:

A formula used to determine if a mortgage loan is within monthly income range. This ratio compares all monthly debt payments, such as credit card and car loan payments, to monthly gross (pre-tax) income. Usually, total debt payments should be no more than approximately 36% of gross monthly income.

Deed:

A document by which the ownership of real property is transferred from one party to another.

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%). On a $100,000 loan, 1 point would equal $1,000.

Equity:

The difference between the market value of the property and the remaining mortgage balance. As you pay down the mortgage balance, the equity or ownership in the home increases.

Equity Loan:

A loan based on the borrower's equity in the property.

Federal Housing Administration (FHA):

A division of the Department of Housing and Urban Development. The FHA's main activity is the insuring of residential mortgage loans made by private lenders. It sets standards for construction and underwriting. The FHA does not lend money or plan or construct housing.

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.

FICO Score:

A rating system created by the Fair Issacs Company. FICO scores are based on information reported in consumer credit files. The formula used for FICO scores creates a standardized rating of a borrower's credit history.

First Mortgage:

The mortgage that has first claim in the event of default.

Fixed-Rate Mortgage (FRM):

A mortgage in which the interest rate does not change during the entire term of the loan.

Foreclosure:

The process by which a mortgaged property may be sold when a mortgage is in default.

Graduated Payment Mortgage (GPM):

A mortgage where the payments are scheduled to increase, usually annually, for a set number of years and then level off. A GPM can be used with either a fixed- or adjustable-interest rate and typically has a 30-year term.

Growing Equity Mortgage (GEM):

A fixed, graduated-payment mortgage with small initial payments that increase each year so that the loan pays off in a shortened term, usually 15 years.

Interest:

The fee charged for borrowing money.

Interest Rate:

A limit on the amount the interest rate charged to the borrower can be changed. Usually there are two caps. One is the "Periodic" cap, which limits the amount the interest rate may change at the end of each adjustment period. The second is the "Lifetime" cap, which sets the highest interest rate that can ever be charged. The Lifetime cap is often specified as "X"% above either the initial interest rate or the fully indexed accrual rate.

Liability:

A liability is an outstanding debt including but not limited to a credit card balance or car loan.

Lien:

A legal claim against a property that must be paid when the property is sold.

Lifetime Cap:

See Interest Rate Cap.

Loan-to-Value:

The loan-to-value ratio is the mortgage loan amount divided by the lower of the sales price or the appraised value.

Mortgage:

A conditional transfer of property security for a loan. The property remains in the possession of the borrower but may be claimed by the lender if the loan and interest are not paid according to the agreed terms.

Mortgage Banker:

A company that originates mortgages exclusively for resale in the secondary market.

Mortgage Broker:

A company that for a fee matches borrowers with lenders.

Mortgage Insurance:

Insurance required if a down payment is less than 20%. The borrower pays a fee for this insurance, which protects the lender should the borrower default on house payments.

Mortgage Insurance Premium (MIP):

The fee paid to FHA or a private insurer for mortgage insurance.

Mortgagee:

The lender in a mortgage agreement.

Mortgagor:

The borrower in a mortgage agreement.

Net Worth:

The value of all assets, less total liabilities. It is often used as an underwriting guideline to indicate an individual's creditworthiness and financial strength.

Origination Fee:

A fee paid to a lender for processing a loan application; it is stated as a percentage of the mortgage amount, or points.

Owner-Occupied:

The property is the owner's primary residence.

Periodic Cap:

See Interest Rate Cap.

PITI:

Principal, Interest, Taxes, and Insurance are components of a mortgage payment.

Pre-Qualification:

The process of determining how much money a prospective home buyer will be eligible to borrow before application for a loan.

Points:

See Discount Points.

Principal:

The mortgage amount borrowed or remaining unpaid; also, that part of the monthly payment that reduces the outstanding balance of a mortgage.

Private Mortgage Insurance (PMI):

Insurance provided by a non-government insurer that protects lenders against loss if a borrower defaults.

Processing:

Verification of the information provided on the loan application. This also includes ordering appraisals, credit reports, and other documentation.

Qualifying Ratios:

Guidelines applied by lenders to income and debt. They determine the maximum monthly mortgage payment a borrower is allowed.

Recording Fees:

The lender charges this fee for recording the signed mortgage documents making them a public record.

Second Mortgage:

A mortgage that has rights that are subordinate to the rights of the first mortgage holder.

Secondary Mortgage Market:

The buying and selling of existing mortgages.

Servicing:

A term for the services the lender provides in handling a mortgage. This includes collecting of payments and paying taxes and insurance if funds accumulate in an escrow account.

Settlement Cost:

See Closing Costs.

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 that insures the borrower against any errors in the title search. This fee is part of the closing cost.

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.

Truth-in-Lending (TIL):

A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the APR and other charges.

Underwriting:

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

VA Loan:

A long-term, low- or no-down payment mortgage loan in which the veteran's ability to repay is guaranteed by the Department of Veterans Affairs. Only veterans are eligible for this type of loan.