Mortgage Glossary

Looking to finance your newly built home? Don't let the lingo, confuse you. Use this mortgage glossary:

Key Mortgage Terms Defined for Your New Home Purchase

A

ABA Routing Number: Numbers at the bottom of checks or deposit slips that identify your bank and account.

Adjustable-Rate Mortgage (ARM): Loan with an interest rate that changes based on a financial index.

Adjustment Date: The date your ARM rate changes.

Adjustment Period: How often your ARM interest rate can change.

Amortization: Paying off a loan through scheduled payments of principal plus interest.

Amortization Term: How long it takes to pay off the loan (e.g., 30 years = 360 months).

Annual Percentage Rate (APR): Yearly cost of a loan, including interest, fees, and insurance.

Annual Percentage Yield (APY): Interest earned in a year on an account, calculated the same way across banks.

Application (1003 Form): Standard mortgage application with borrower and property details.

Appraisal: Professional estimate of a home’s value.

Appraiser: Qualified professional who determines property value.

Appreciation: Increase in property value over time.

Asset: Anything of value you own: property, cash, investments.

Assignment: Transfer of a mortgage from one party to another.

Assumable Mortgage: A loan that can be taken over by the buyer when a home is sold.

Assumption: The process of a buyer taking over a seller’s mortgage.

Assumption Clause: Mortgage clause that allows transfer of loan responsibility.

Assumption Fee: Fee charged to transfer an existing mortgage.

Automated Clearing House (ACH): Electronic network that securely moves money between banks.

B

Balance Sheet: Snapshot of assets, debts, and net worth at a given time.

Balloon Mortgage: Loan with small monthly payments but a large lump-sum due at the end.

Balloon Payment: The final lump sum due on a balloon mortgage.

Bankruptcy: Court process that cancels debts for someone who cannot pay.

Basis Point: One one-hundredth of 1%. Example: 50 basis points = 0.5%.

Before-Tax Income: Earnings before taxes are deducted.

Beneficiary: The person who receives funds from a trust, estate, or deed of trust.

Binder: Preliminary agreement to buy real estate, secured with an earnest money deposit.

Biweekly Mortgage: Loan with payments every two weeks, reducing interest and total payoff time.

Blanket Mortgage: Loan covering multiple properties, like a co-op project.

Bond: Debt investment with interest and a maturity date, sometimes backed by real estate.

Breach: Violation of a legal obligation.

Bridge Loan (Swing Loan): Short-term loan that lets you buy a new home before selling your current one.

Broker: Middleman who connects buyers and sellers for a fee.

Buydown Mortgage: Loan where upfront payments reduce interest rates temporarily or permanently.

C

Call Option: Mortgage clause allowing lender to demand full repayment at a set time.

Cap: Limit on how much your ARM interest rate can change.

Capital Improvement: Permanent upgrade that adds value to a property.

Cash-Out Refinance: New loan larger than your current mortgage – you pocket the difference.

Certificate of Deposit (CD): Savings account with fixed interest and a maturity date; penalties for early withdrawal.

Certificate of Eligibility (VA): Document proving a veteran’s eligibility for a VA loan.

Certificate of Reasonable Value (CRV): VA-issued appraisal that sets the maximum loan amount.

Certificate of Title: Document stating who legally owns a property.

Chain of Title: Record of all past property ownership.

Change Frequency: How often an ARM’s payment or rate can change.

Clear Title: Title with no legal disputes or liens.

Closing (Settlement): Final step of a home sale when documents are signed and funds are exchanged.

Closing Costs: Fees paid at closing – include lender fees, attorney fees, taxes, and insurance.

Closing Statement (HUD-1): Final breakdown of costs in a home purchase or loan closing.

Cloud on Title: Ownership issue revealed by a title search.

Collateral: Property or asset pledged to secure a loan.

Collection: Process of pursuing overdue mortgage payments.

Combination Loan (80/10/10): Two loans used to avoid private mortgage insurance (PMI).

Combined Loan-to-Value (CLTV): Total debt on a property divided by its appraised value.

Co-Maker: Someone who signs the loan note with the borrower and shares repayment responsibility.

Commission: Fee paid to a broker or agent for arranging a transaction.

Commitment Letter (Loan Commitment): Formal offer from a lender stating loan terms.

Common Areas: Shared spaces in condos or planned communities: pools, gyms, parking.

Community Home Improvement Loan: Loan that finances both the purchase and repairs of a home.

Community Property: Joint ownership of property acquired during marriage (in some states).

Comparables (Comps): Recently sold similar properties used to estimate home value.

Compound Interest: Interest calculated on both principal and previously earned interest.

Condominium (Condo): Ownership of a unit plus shared interest in common areas.

Condo Conversion: Turning rental apartments into individually owned condos.

Conforming Loan: Mortgage within limits set by Fannie Mae and Freddie Mac.

Construction Loan: Short-term financing for building a home, paid as work progresses.

Consumer Reporting Agency: Company that provides credit history reports to lenders.

Contingency: Condition that must be met for a contract to be binding (e.g., inspection).

Contract: Written or oral agreement enforceable by law.

Convertibility Clause: Provision in some ARMs that allow borrow to change to a fixed-rate mortgage.

Conventional Mortgage: Loan not insured or guaranteed by the federal government.

Convertible ARM: ARM that can be switched to a fixed-rate loan under certain terms.

Co-Op (Cooperative): Housing where residents own shares in a corporation instead of individual units.

Corporate Relocation: Employer-assisted move for employees or operations.

Cost of Funds Index (COFI): Index used to adjust ARM rates, based on bank borrowing costs.

Covenant: Clause in a mortgage that restricts borrower actions; violation may trigger foreclosure.

Credit: Borrowing money with a promise to repay.

Credit History: Record of debts repaid over time.

Credit Report: Summary of credit history used to assess borrower risk.

Credit Repository: Database of financial records maintained by credit agencies.

D

Debt: Money owed.

Deed: Legal document transferring property ownership.

Deed of Trust: Document placing property as security for a loan.

Default: Failure to make loan payments on time.

Delinquency: Loan payment overdue but not yet in default.

Deposit (Earnest Money): Buyer’s funds held in escrow to show serious intent.

Depreciation: Decrease in property value over time.

Disclosure: Information a lender or seller must legally provide.

Discount Points: Upfront fees paid to reduce a loan’s interest rate.

Down Payment: Buyer’s cash contribution toward a home purchase.

Due-on-Sale Clause: Requires full loan payoff if property is sold.

E

Earnest Money: Deposit showing a buyer’s commitment to purchase.

Easement: Right to use part of another’s property (ex: utility access).

Effective Age: An appraiser's estimate of physical condition of a building.

Effective Gross Income: Normal annual income including overtime that is regular or guaranteed.

Electronic Funds Transfer (EFT): EFT allows account holders to transfer funds from an account electronically.

Encumbrance: Claim, lien, or restriction on property ownership.

Endorser: A person who signs ownership interest over to another party. Contrast with co-maker.

Equal Credit Opportunity Act (ECOA): Law prohibiting credit discrimination.

Equity: Difference between home value and what’s owed.

Escrow: Neutral third party holds money or documents until conditions are met.

Escrow Account: Lender-managed account for taxes and insurance.

Escrow Agent: Neutral party handling funds and documents in a transaction.

Escrow Analysis: Periodic review of your escrow account to ensure monthly deposits cover taxes, insurance, and other property expenses.

Escrow Collections: Funds the lender collects and holds in escrow to pay your property taxes, mortgage insurance, and hazard insurance.

Escrow Disbursements: Escrow funds used to pay taxes, insurance, and other property expenses when due.

Escrow Payment: Part of your monthly mortgage payment held by the lender to cover taxes, insurance, and other property-related expenses as they come due.

Estate: All property and assets a person owns.

Eviction: Legal removal of a tenant from a property.

Examination of Title: Review of ownership records to confirm clear title.

F

Fair Credit Reporting Act (FCRA): Law giving consumers rights to view and correct credit reports.

Fair Market Value: Price a willing buyer and seller agree on.

Fannie Mae (FNMA): Government-sponsored enterprise that buys and guarantees mortgages.

Federal Housing Administration (FHA): Agency that insures low-down-payment mortgages.

FHA Loan: Mortgage insured by the FHA, often for first-time buyers.

FHA Mortgage Insurance: Insurance protecting lenders against borrower default on FHA loans.

Finder's Fee: A fee or commission paid to a mortgage broker for finding a mortgage loan for a prospective borrower.

Finance Charge: Total cost of borrowing, including fees and interest.

First Adjustment: When you can expect the first rate adjustment in your ARM loan.

First Mortgage: Primary lien on a property, with repayment priority.

Float Down Option: Option to choose a lower rate within 30 days before loan closing and “float down” to a lower rate than the previously locked-in rate.

Flood Insurance: Insurance that compensates for physical property damage resulting from flooding.

Foreclosure: Legal process where lender takes property for nonpayment.

Freddie Mac (FHLMC): Government-sponsored enterprise that buys and securitizes mortgages.

Fully Amortized ARM: An adjustable-rate mortgage with monthly payments that fully pay off the loan balance covering both interest and principal over the loan term.

G

Good Faith Estimate (GFE): Estimate of closing costs provided by the lender.

H

Hazard Insurance: Insurance covering property damage from fire, storms, or other hazards.

Home Equity Line of Credit (HELOC): Revolving credit line secured by home equity.

Home Equity Loan: Loan using home equity as collateral, with fixed payments.

Housing Expense Ratio: Percentage of income spent on housing costs.

HUD (Department of Housing and Urban Development): Federal agency overseeing housing programs.

I

Index: Benchmark interest rate that determines ARM adjustments.

Impound Account: Another term for escrow account used for taxes and insurance.

Interest-Only Loan Option: Loan with no principal component

J

Jumbo Mortgage: Mortgage that exceeds Fannie Mae and Freddie Mac limits.

L

Lender: Bank, credit union, or entity that provides a loan.

Lien: Legal claim against a property for unpaid debt.

Lifetime Cap: Maximum interest rate increase allowed over the life of an ARM.

Loan to Value Ratio (LTV): Loan amount divided by property value, expressed as a percentage.

Lock Period: Time a lender agrees to honor the locked rate.

Lock-In: Lender’s guarantee of a specific interest rate for a set time.

M

Margin: Fixed amount added to an ARM index to set the interest rate.

Manufactured House: Factory built house on a permanent steel chassis transported to a permanent location.

Maturity Date: Date when a loan must be fully repaid.

Mortgage: Loan secured by real estate.

Mortgage Disability Insurance: Policy that pays mortgage for a specific period during a covered disability.

Mortgage Insurance (MI): Insurance protecting the lender if the borrower defaults.

Mortgagee: The lender in a mortgage agreement.

Mortgagor: The borrower in a mortgage agreement.

N

Negative Amortization: When loan payments don’t cover interest, causing the balance to grow.

Non-Conforming Loan: See Jumbo Loan.

Note: Written promise to repay a loan under stated terms.

O

Origination Fee: Fee charged by a lender to process a loan.

Owner Financing: When the seller finances the buyer’s purchase directly.

P

Periodic Cap: Limit on how much an ARM payment can increase.

PITI: Principal, Interest, Taxes, and Insurance — main components of a mortgage payment.

Planned Unit Developments (PUD): Community with individually owned homes and shared common areas.

Point: Fee equal to 1% of the loan amount.

Prepaids: Upfront costs like insurance and taxes collected at closing.

Prepayment Penalty: Fee for paying a loan off ahead of schedule.

Principal: The original loan amount or the remaining unpaid balance.

Private Mortgage Insurance (PMI): Insurance that protects lenders when borrowers put down less than 20%.

Q

Qualifying Ratios: Formulas lenders use to measure a borrower’s ability to repay.

R

Rate: The annual rate of interest on a loan, expressed as a percentage of 100.

Rate Cap: Limit on how much an ARM’s interest rate can increase.

Rate Lock-In: Lender’s guarantee of a specific interest rate for a set time.

Rebate: Refund to borrow from lender.

Refinance: Replacing an existing mortgage with a new one.

Residential Mortgage Credit Report (RMCR): Report from national credit bureaus for loan application.

S

Seller Carry Back: When a seller provides financing to the buyer.

Simple Interest: Amount earned on account holder's principal.

Stated/Documented Income: Stating the source of income with or without supporting documentation.

Subordination: When one debt takes a lower repayment priority than another.

Survey: Detailed map of property boundaries and improvements.

T

Tenants in Common: Ownership by two or more people without survivorship rights.

Term: Length of time to repay a loan.

Title: Legal evidence of property ownership.

Title Insurance: Policy protecting against losses from title defects.

Title Search: Review of public records to confirm property ownership.

Total Expense Ratio: All monthly debts divided by gross monthly income.

Truth in Lending Act: Federal law requiring lenders to disclose loan costs.

V

Variable Rate: Interest rate that can change over time.

Veterans Administration (VA): A government agency guaranteeing mortgage loans with no down payment to qualified veterans.