Mortgage GlossaryGet Informed While we prefer to keep it simple by charging zero fees and speaking in plain English, this is definitely not the norm in the mortgage industry. In case you want to brush up on adjustable-rate mortgages or cash-out refinances, below is a mortgage glossary of common terms. Adjustable Rate Mortgage (ARM) A mortgage where the interest rate is periodically adjusted based on an index. In the U.S. the rate the lender charges the borrower is determined by the general interest rate market and the borrower’s risk profile. It is the opposite of a Fixed-Rate Mortgage. Adjustment Date The date on which interest will begin to accrue on the mortgage. Typically, this is the first day of the month following the dispersal of the mortgage loan. Keep in mind, this adjustment may occur before the borrower makes their first monthly payment. Also known as Interest Adjustment Date. Amortization Schedule A graph or table showing breakdown of the mortgage. This includes the amount paid, the amount applied to interest, the amount applied to principal, and the remaining balance on the mortgage for every month of the term. See Mortgage Amortization. Appraisal A professional opinion of the value of a property that takes into account other recent sales of similar homes, current market trends, and the specific features of this property (square footage, amenities, upgrades, etc.). An appraisal is a key component of the purchase and sale of real estate, and is also sometimes used during refinancing. The borrower orders the appraisal during the underwriting stage of a mortgage process, after they qualify for the loan. Also known as Property Valuation or Real Estate Appraisal. Key Points to NoteTypically, it is the borrower who pays the appraisal fee, which is in the neighborhood of $350–500While we can make recommendations, appraisals cannot be conducted or contracted by the lending party directly. Instead, they must be carried out by an independent, third-party appraiser in order to safeguard the borrower from collusion or fraudIf the appraisal returns a quote that is lower than expected, it can delay and even nullify the transaction Appraised Value The fair market value of a property as determined by a licensed and qualified appraiser. Annual Percentage Rate (APR) The real interest rate a borrower pays, which factors in all the costs of securing a loan. These include closing costs, rebates, discount points, private mortgage insurance, and more. Key Point to Note:Interest rate refers to the cost of borrowing the principal on your loan, while the APR includes all the other fees as wellAPR is usually higher than the interest rateThe Truth in Lending Act mandates that all loan agreements present the APR in addition to the interest rate for the protection of borrowers Asset Simply put, an asset is anything you own that has value. When it comes to securing a mortgage, lenders only care about higher ticket items that they can use if you default on your repayment promise.These IncludeCash Assets: money in your bank accounts, market accounts, certificates of deposit (CDs), etc.Physical Assets: other properties owned, cars, boats, art, jewelry, etc.Non-physical Assets: IRAs, 401(k)s, bonds, stocks, etc.Liquid Assets: non-physical assets that can easily be turned into cash, such as bonds or stocksEquity Assets: stocks or mutual funds, a retirement account, ownership is a business, etc.Fixed-income Assets: funds you’ve lend out that collect interest, such as government bonds, some securities, etc.Fixed Assets: physical assets that have high value but that make take time to convert into cash, such as antiques, furniture, etc. Assumable Mortgage When a homeowner sells their home, they are sometimes able to transfer their mortgage to the new owner without changing the terms of the original mortgage. However, if the price the seller is asking for is more than the assumable mortgage amount, the buyer will have to come up with the difference through other means. Bi-Weekly Mortgage Payments A payment schedule wherein the borrower splits their monthly mortgage payment in half and sends a payment every two weeks. In doing so, the payment date will always fall on a different calendar date. If a borrower chooses to make bi-weekly payments, they will make 26 payments a year. Bridge Loan A temporary loan that provides immediate financing when a borrower awaits the release of other financing or until they repay an existing debt obligation. These type of loans can help bridge the gap in real estate transactions where the purchase of a new home requires funds from the sale of an existing home. Also known as Interim Financing. Cash-Out Refinance A mortgage loan that allows homeowners to convert the equity of their home into cash. (the value of the home minus what is still owed on it) into cash, which can then be used to renovate the property, pay off debt, or purchase a secondary or investment property. Closed-End Mortgage Known colloquially as a closed mortgage, this is a restrictive type of mortgage that cannot be paid off, renegotiated, or refinanced for a certain period of time. It also has a locked interest rate, which means the rate cannot increase or decrease. Generally, if a borrower breaks a closed-end mortgage, they will be required to pay three months’ interest payments as a penalty. The most common term for a closed mortgage is five years. Closing Costs Costs associated with and due upon the completion of the mortgage transaction. Closing costs typically include title insurance, appraisal fees, and homeowner’s insurance. Borrowers may also have to pay origination fees, processing fees, broker/brokerage fees, and other miscellaneous fees. Closing Date The day that ownership of a home transfers from the seller to the buyer. This must be stated and agreed to by all parties on the sale contract. Sale Contract and Purchase Agreement Contract. Collateral What is pledged as security for the repayment of debt which is to be reclaimed in the event of default. In the case of real estate, the house is the collateral. Condo Fee A monthly fee charged by the condominium association. Covers a resident’s portion of the expenses for maintenance, repair, security, and upkeep of their own property. The cost may depend on the size of the condominium unit with larger units paying more in condo fees. Conventional Loan A loan that is NOT backed or insured by a government entity. Usually available through private lenders, the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac). This type of loan includes conforming loans, non-conforming loans, jumbo loans, and portfolio loans. Credit Bureau A private, non-governmental reporting agency that gathers credit information and compiles it into a credit report. The three credit bureaus in the U.S. are Equifax, TransUnion, and Experian. Credit Report History of an individual’s credit, including the names of companies that have extended them credit and/or loans, and the amount available to them in credit and loan amounts. This is used during the mortgage application process to determine the borrower’s debt-to-income ratio (DTI). Any delinquent accounts, bankruptcies, foreclosures or lawsuits will also be included in the credit report. Credit Score The numerical grade associated with the borrower’s credit situation and credit history. Typically between 300 (being the worst) and 850 (being the best). For the purposes of a mortgage loan, the median score from the three different credit bureaus determines the “average.” Also known as FICO score, FICO credit score. Debt Consolidation A means of combining several debts into one debt that has one monthly payment. By rolling separate, high-interest debts into a single, low-interest debt, borrowers can reduce the amount they will have to pay in interest and pay off their debt faster. Debt-To-Income Ratio (DTI) The borrower’s total monthly debt payments divided by their gross monthly income. One criteria lenders look at to determine an individual’s creditworthiness. Deed Of Trust See Mortgage Deed. Default Failure to pay debt as agreed. Can occur if the homeowner is unable to make payments on time or if they miss, avoid, or stop making payments on their mortgage. Discount Points Also known as Mortgage Points, these are fees that the borrower may choose to pay in order to bring their interest rate down. This is known as “buying down your rate” and occurs once, at closing. Down Payment The amount of cash that the buyer puts towards purchasing the property, expressed as a percentage of the property’s market price. The remainder must be covered by the mortgage loan. The down payment for first-time home buyers is typically between 3%–20% on conforming loans. The minimum down payment for a secondary or an investment property is normally 5%. Equity The total value of the house minus the debt still owed on it. This will fluctuate as the property’s market value changes and as the homeowner pays off more of their principal balance. Can be used to withdraw cash from during a refinance. See Cash-Out Refinance. Federal Housing Administration (FHA) Government entity that guarantees loans from FHA-approved lenders so if the borrower defaults on their payment, the FHA will pay a claim to the lender. The largest mortgage insurer in the world. Does not lend any money itself. Federal Housing Administration Loans (FHA Loans) A government-backed loan that is insured by the Federal Housing Administration (FHA) and that has more flexible lending requirements. Mortgage Insurance Premiums (MIP). Fair Market Value The price a ready, willing, and able buyer with knowledge of all pertinent facts is willing to pay for a certain property. First Mortgage The first or original mortgage taken out on a property. In the event of default, the first mortgage takes precedent (must be dealt with first) before any potential other liens/mortgages. Fixed Rate Mortgage A mortgage for which the interest rate does not increase or decrease for the life of the loan. It is the opposite of an adjustable rate mortgage. See Adjustable Rate Mortgage (ARM). Foreclosure The legal process in which the mortgage lender sells the property because the borrower has defaulted on their mortgage loan. See Default. Gift Letter or Letter Of Gift A letter stating that the gift giver (usually a family member, friend, or business associate) is making a gift of a certain amount for the down payment of a home. It confirms that the gift is genuine and that there is no expectation of repayment. Home Equity Line Of Credit (HELOC) Also known as a second mortgage, a HELOC is a line of credit that is secured by the equity the homeowner has in their property. This is different from a Home Equity Loan in that it is a loan limit rather than an actual loan (similar to a credit card). Cash-Out Refinance is another financial instrument that allows you to take equity out of your home. However, as with all refinances, you close your original mortgage in exchange for a new one under different terms. This means that fees that are added as a percentage of your loan amount are applied over the total loan amount, not just the difference between your old and your new mortgage. By contrast, a HELOC only applies fees and interest on the additional amount you take out. HELOCs are often a great option if you’re able to repay the loan quickly while a cash-out refinancing is often cheaper if you carry the loan for a longer term. Home Equity Loan Commonly referred to as a Second Mortgage, a Home Equity Loan is a loan based on the equity the homeowner accrued in their property. The rates and terms for these loans are often higher because there is greater risk associated with them, but they are applied over a smaller amount. See HELOC also. Home Insurance Insurance that covers the physical home in the event of loss due to fire, theft, natural elements, etc. Coverage will depend on what kind of policy the homeowner has and how comprehensive it is. It may also cover the contents of the home as well as other losses the homeowner may suffer due to destruction of the property, in whole or in part. Also known as Homeowners Insurance. Different from Mortgage Insurance. Homeowners Association Fees (HOA) A monthly charged by an association of homes that covers the residents’ expenses for maintenance, repair, security, and upkeep of common areas. The cost is usually uniform for each lot owner. Interest Rate The percentage of the loan that the borrower must pay in addition to the amount they borrowed (the principal). This is often paid on a monthly or bi-monthly basis, and does not include other fees, such as Homeowners Association Fees or Home Insurance, which may be included in the mortgage bill. Job Letter Also known as a Letter of Employment, this is a letter that confirms the applicant’s employment situation, which includes their title, pay and pay structure, how long they’ve held this position, etc. See Verification of Employment (VOE). Jumbo Loan This is a type of non-conforming mortgage that exceeds the loan limit that government entities like Fannie Mae and Freddie Mac are willing to guarantee. Lender An individual, group, or financial institution that makes funds available to a person or group under specific repayment conditions. See Mortgage Lender. Liability Another word for “Debt”, a liability is money that you owe to a person or institution. It is subtracted from your assets to determine your net worth.For a mortgage application, the things that count as liabilities include:car loansstudent loanspersonal debt that you don’t pay off each monthanother mortgagepayday loanschild supportalimonyetc. Lien A legal claim against a property made to guarantee the repayment of a debt. Loan Money that a person, group, or institution provides to a qualified candidate on the legally binding promise that they will repay it over a set term. Usually, borrowers have to repay their loans in regular, pre-set intervals, with interest accruing over the balance of the debt. Also see Mortgage. Loan Officer A trained and accredited agent, acting on their own behalf or that of a financial insitution, who is certified to originate loan applications for others. Loan Term The amount of time during which the borrower will make monthly payments towards their home loan. The loan term is subject to change depending on the borrower’s payment habits and possible refinancing of the mortgage. Loan-to-Value Ratio (LTV) The loaned amount in relation to the home’s appraised value (or purchase price, whichever is less). For example, if someone purchased a home for $100,000 and put in $20,000 as a down payment, the mortgage loan would be $80,000, or 80% of the value of the home. Therefore, it has an 80% LTV. Market Value or Open Market Value Hypothetically, the highest price a buyer would pay and the lowest price a seller would accept on a property. Market value is typically more dynamic than price because it depends on a confluence of other factors. In contrast, market price is the amount someone will pay for a property. Also see Fair Market Value and Market Price. Market Price What a willing, ready, and able buyer will pay for a property, and what the seller will accept for it. See Market Value. Maturity Date The date on which the loan term ends. So long as the borrower made all of their mortgage payments, this would mark the date they would have paid off the total amount owed (both principal and interest) and become mortgage-free. Mortgage Funds that a lender advances to a borrower for the purposes of procuring a home. Typically, the lenders set specific terms and conditions under which they agree to provide the money. The borrower, then repays the lender over time, accruing interest each month on the unpaid balance. The home is collateral on these loans, meaning that if the borrower stops paying, the lender is free to claim the property. Also known as Mortgage Loan. Mortgage Amortization The process of breaking up a mortgage loan into smaller payments over a specific period of time. Typically, repayment requires paying more interest and less principal in the beginning, and then, over time, more principal and less interest. See Amortization Schedule. Mortgage Application A document submitted by one or more individuals in order to contend for a mortgage loan. Typically, a mortgage application includes a breakdown of each borrower’s income, liabilities, residential information, employment history, and more. Mortgage Broker Traditionally a mortgage broker is an intermediary between lenders and borrowers. Unlike a mortgage banker, a broker does not use their own funds to close the mortgage. Instead, they help an applicant become eligible by verifying their application, securing supporting documents, and presenting the borrower with a few options from a roster of preferred lenders they have a relationship with. Typically, the broker charges an origination fee for their service, which they collect once the loan is funded. Mortgage Deed A legal document designating the property as collateral for the mortgage loan. Mortgage Holder The individual or entity who owns the mortgage loan and who enforces the terms of the mortgage. In some cases, this is the lender, while in other cases, it may be the party that bought the mortgage in the secondary market. Mortgage Insurance Insurance that a borrower pays in case of a default. This protects the lender, making them more willing to lend to higher-risk applicants. For conventional loans, mortgage insurance is typically required if a borrower puts down less than 20% for their down payment or has a loan-to-value ratio greater than 80%. Mortgage Insurance Premiums (MIP) Also known as a Qualified Mortgage Insurance Premium, this is a monthly fee that all homeowners pay when they take out a Federal Housing Administration (FHA) loan. The FHA uses Mortgage Insurance Premiums as a way of protecting themselves against high-risk borrowers. This is especially important since borrowers are able to qualify with as little as 3.5% down and a credit score in the 500s. However, even if a borrower is able to produce a larger down payment, MIP would still be required for the life of the loan. In addition, there is also an Upfront Mortgage Insurance Premium (UFMIP) that borrowers must pay at closing. See FHA Loans and Upfront Mortgage Insurance Premium (UFMIP). Mortgage Lender An entity that provides financing for the purchase of real estate. They advance the total funds in return for repayment by the borrower over time. May be a chartered bank, a credit union, a trust company, or any other financial institution providing mortgage loans. Mortgage Payment A periodic (usually monthly) bill that a borrower pays to their mortgage lender for repayment of their loan. Typically, a portion goes towards paying off the principal while another portion goes towards paying off the accrued interest. Mortgage Principal See Principal. Mortgage Rate See Interest Rate. Mortgage Statement Monthly letter sent by the borrower’s mortgage lender, which includes such information as the property address, outstanding principal balance, monthly payment, interest rate, loan term, etc. Mortgagee The party providing the loan. See Mortgage Lender. Mortgagor The borrower or borrowing party. The person(s) taking a loan for the purchase of a property. Offer Letter A physical representation of a prospective buyer’s intentions to buy a home. As the name suggests, it is a letter informing the seller of a property of the buyer’s intent. Open-End Mortgage A mortgage that allows the borrower to draw additional funds up to a specific limit, under the original loan agreement. The borrower will only pay interest on the money taken out. Open-end mortgage interest rates are usually higher than closed-end mortgage interest rates since lenders risk missing out on payments in the event of an early repayment. A HELOC is an example of an open-end mortgage. Origination Points Also known as Origination Fees, this is what the lenders charge borrowers in order to process a mortgage application. This fee typically ranges from 1%–3% of the loan amount. Pay Stub Traditionally, a document an employee receives from their employer along with their paycheck stating for that pay period their gross earnings, the amount of income taxes deducted, net income, etc. The pay stub should also state the amounts of income(s) and deductions the employee has received year-to-date. Points See Discount Points. Pre-Approval The process of verifying a borrower’s eligibility for a loan by determining the maximum loan amount they could qualify for. This process takes into account their income, liabilities, and credit score. Typically, a pre-approval is free for the borrower and takes between 1–3 days to procure. Pre-Approval Letter The result of a pre-approval process, a Pre-Approval Letter states the highest loan amount available to the borrower. This letter can demonstrate the potential buyer’s eligibility and commitment to both sellers and realtors. Prepayment Penalties A possible condition of a mortgage agreement. If there is a prepayment penalty clause in a mortgage, repaying your mortgage sooner will constitute “breaking the agreement” and will be punishable by a fee. In the U.S., such penalties are rare, but can still be found on portfolio loans. Most prepayment penalties apply for up to three years. Principal The amount of money still owed on a mortgage loan. This does not include the amount accrued and paid through interest. Primary Residence The main home a person inhabits. Not a secondary residence or an investment property. Prime Rate This is the lowest commercial interest rate that banks charge each other to borrow overnight. Each bank may have a different prime rate, which they use as a basis for evaluating individual borrowers. Also known as Prime or Prime Lending Rate. Private Mortgage Insurance (PMI) Insurance that protects the lender in case the borrower stops making payments on their loan. Conventional loans where the down payment is less than 20% usually require PMI in order to protect the lender. Borrowers typically pay PMI monthly, on top of interest, principal, and any other applicable fees. Not the same as Mortgage Insurance Premiums (MIP). Property Tax A real estate tax that the borrower pays to their local government in for public services rendered. Property Tax Assessment A method of placing value on real estate. A property tax assessment determines how much the homeowner will have to pay in property taxes. Purchase Agreement A legally-binding document that details the conditions under which a buyer and seller agree to complete a real estate transaction. These conditions often include financing, a home inspection, etc. Home sellers often refer to this as a Sale Contract. See Sale Contract. Qualified Mortgage Insurance Premium See Mortgage Insurance Premium MIP. Rate and Term Refinance A refinance in which the objective is to lower the rate or change the loan terms. See Refinance. Rate Lock Refers to an agreement between a mortgage lender and a borrower to “fix” or lock a certain interest rate for a set number of days. This gives the borrower time finalize a real estate transaction and/or loan without the risking rate increase. A borrower can only lock-in their rate once they’ve been approved for a loan. Real Estate Agent The person whose business it is to arrange the selling, buying, or renting of real estate. Also see Realtor. Real Estate Appraisal See Appraisal. Realtor A real estate agent who is a member of the National Association of Realtors. See Real Estate Agent. Refinance The process of replacing the existing mortgage with a new one in order to renegotiate the terms. The most common reasons to refinance are to take cash out of the house, change to a preferable rate or term, or change your mortgage type. You can refinance your mortgage with your existing lender or try a different one. See also Cash-Out Refinance and Rate and Term Refinance. Learn about 6 common pitfalls of refinancing. Reverse Mortgage A type of mortgage available to homeowners 62 years and older, which allows them to turn the existing equity in their home into cash. It’s typically used to supplement income once a homeowner retires. After passing, the equity that has been collected must be repaid in full in order for the next of kin to gain ownership. Unless this happens, the home becomes the property of the mortgagee. Sale Contract A written agreement between a buyer and seller, setting forth the terms of the sale and specifying the rights and duties of each party in the real estate transaction. This document is drafted after the seller accepts the buyer’s offer, but before the transaction is complete. The buyer refers to this as the Purchase Agreement / Contract. See Purchase Agreement Contract. Second Mortgage An additional, second mortgage taken out on a property for reasons such as securing the down payment for another home, debt repayment, or renovations. In the event of default, the second mortgage will have second-place claim, meaning it will be dealt with after the first mortgage has been completely repaid. See First Mortgage. Security Something pledged as collateral for a loan. In the event of a default, the lender would use the property to secure what they’re owed. Also see Collateral. Semi-Monthly Mortgage Payments A mortgage repayment structure where the borrower pays smaller amounts, twice a month. Typically, this is done on the 1st and the 15th, or the 16th and the last of each month. Sweat Equity Equity that results from a homeowner performing valuable upkeep or renovations on a property. Term See Loan Term. Title A legal document that includes specifics on the purchase property such as who owns it, how they own it, etc. Usually in the form of a deed. Insurance A form of insurance which protects the holder in the case of defects in the title to the property. Underwriting The process wherein the financial institution responsible for the loan determines —based on credit, employment, assets, and other factors— if a home buyer meets the lender’s requirements for the loan. This process happens after an applicant selects a loan offer but before they formally accept it. Upfront Mortgage Insurance Premiums (UFMIP) Part of all FHA loans, this is an upfront fee that the borrower have to pay at closing. It’s usually 1.75% of the loan amount and is required in addition to mortgage insurance. See Mortgage Insurance Premiums (MIP). U.S. Department of Agriculture (USDA) Created to “improve the economy and quality of life in rural America”, the USDA provides loans for low-to-median income people. U.S. Department of Agriculture Loan (USDA Loan) USDA loans are backed by the U.S. Department of Agriculture and require no down payment along with other more lenient standards of qualification for eligible areas. Variable Rate Mortgage See Adjustable Rate Mortgage. Verification of Employment (VOE) A document that verifies a borrower’s employment. Veteran Affairs (VA) The Department of Veteran Affairs provides benefits and vital services to eligible military personnel and their spouses. Veteran Affairs Loan (VA Loan) A mortgage made by private lenders and backed partially by the Department of Veteran Affairs. Has more lenient requirements such as no minimum down payment.