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Mortgage Terms Glossary

Adjustable rate mortgage (ARM) - A loan that allows the interest rate and usually the payment to adjust periodically during the life of the loan. Most ARMs start at a lower than market interest rate and then adjust based on a prevailing index plus margin.

Amortization - The continuous regular payment of a set amount on a loan, which will reduce and pay it off in a given period of time.

Annual percentage rate (APR) - The interest rate on a credit as expressed by a combination of the loan interest rate and certain loan costs. The Truth-in-lending statement of Regulation Z of the Federal Reserve requires the APR to be quoted.

Appraisal - An expert judgment or estimate of the quality or value of real estate as of a given date.

Balloon payment - When a debt is paid off in less than the set amortization period by paying the remaining principal balance, a balloon payment of the loan has been made. A loan with a 30 year amortization payment with the remaining principal to be paid off in five years is a balloon payment.

Biweekly Mortgage - A mortgage which requires a payment for half the monthly amount every two weeks. As a result the loan amortizes much faster than a loan with normal monthly payments.

Blanket Mortgage - A mortgage covering at least two pieces of real estate as security for the same mortgage.

Caps - A limit on how much the interest rate or the monthly payment can change, either at each adjustment or during the life of the mortgage. Most ARM's have an interest rate caps to protect you from enormous increases in monthly payments.

Closing cost - The sum of all costs in relation to the purchase and or loan closing, excluding the down payment.

Collateral - The security for a loan. Something of value against which the loan is secured. A mortgage is secured by real estate.

Construction loan - A short-term, temporary loan, made by a lender to pay the cost of constructing a building, which is paid off upon completion by cash or permanent mortgage.

Creditor - A lender or someone who lends money to a borrower.

Credit Scores - Automated credit system which determines the quality of a borrower's credit.

Debt to Income Ratio - The total of monthly financial obligations - including housing expense - divided by the total gross monthly income.

Deed - The document that shows ownership in real property.

Deed of trust - A mortgage that secures the note by the real property and appoints a third party trustee to act in the lender's behalf, without having to go to court to proceed with foreclosure when the borrower defaults on the loan.

Default - A condition of the mortgage that occurs any time the borrower is not in compliance with the term of the loan. A late payment is a default. A default that is not corrected will result in the loan being called for payment in full.

Depreciation - When the value of property goes down. Some depreciation is taken as a tax write-off and is considered to be a paper loss because the actual value has not diminished.

Desktop Underwriting (DU) - Fannie Mae's automated computer underwriting system.

Equity - The value of property beyond any lien against it. That portion that is owned without liability.

Escrow - Money held by the lender to pay future claims. Taxes and insurance are normally added into the monthly payment and held in escrow until they are due to be paid.

Fair-market value - The value a purchaser will pay for a property; on an appraisal it is value as determined by comparing the property to similar properties that have sold in the community.

Federal National Mortgage Association (FNMA) - A secondary market investor that was originally a government agency and is now a private corporation whose stock is traded on the NY Stock Exchange. It buys and sells mortgages that meet its guidelines. Also known as Fannie Mae.

First mortgage - A first lien on real estate, or a loan that has priority over other mortgages on the same property.

Fixed rate mortgage (FRM) - A mortgage with an interest rate that does not change or adjust.

Flood Insurance - Insurance that compensates for physical property damage resulting from flooding. It is required for properties located in federally designed flood areas.

Foreclosure - Legal action by the lender upon default to have the property sold to pay the securing mortgage.

Grace period - The time between the due date and the past-due date of a loan during which there is no late charge.

Hazard Insurance - Protects against damages caused to property by fire, windstorms, and other common hazards. Hazard insurance is also referred to as ASI Homeowners Insurance.

HUD 1 Settlement Statement - A standard form that shows all charges imposed on borrowers and sellers in connection with the settlement.

HELOC - Home Equity Line of Credit

Index - A figure, normally compiled from other indicators, that is used to establish rates on ARMs.

Jumbo loans - Nonconforming loans that are higher than the loan amounts acceptable to FNMA and FHLMC.

Late charge - The penalty imposed when a late payment is made or received after the grace period of a loan.

Lien - A debt that is secured by something of value. A mortgage is a lien on real estate.

Loan to value (LTV) - The amount of the total value of the property that is secured by the mortgage. An $80,000 mortgage on a $100,000 property has 80% loan to value. Total loan-to-value (TLTV) is the sum of all liens on a property.

Margin - The interest added onto the index of an ARM to determine the adjustment of the interest rate.

Mortgage - A legal instrument that makes real estate security for a loan.

Mortgagee - The holder of a mortgage loan.

Mortgagor - The borrower of a mortgage loan.

Mortgage Insurance (MI) or Private Mortgage Insurance (PMI) - Insurance on a mortgage that protects the lender against losses due to default and/or foreclosure. It is required on all conventional loans with less than 20% down payment. It is not life insurance.

Note - The legal instrument that shows the borrower is obligated to pay the loan.

Points - 1 point = 1% of the loan amount. Points can be used to "buy down" the interest rate. Points are also charged as fee income to the lender.

Principal - The amount of the loan.

Second mortgage - Secondary financing behind or after the primary or first mortgage.

Secondary market - Investors who buy and sell large numbers of mortgage loans from the primary lenders. Fannie Mae, or the Federal National mortgage Association (FNMA); and Freddie Mac or the Federal Home Loan Mortgage Corporation (FHLMC) are two of the largest.

Servicing - The job of collecting the monthly house payments from a loan and making sure that they are properly credited. The loan servicer must make sure that the loans stay current, that the taxes and insurance are paid, and that the borrower is notified of the loan status and any changes.

Title - To hold title to property is to show ownership. A deed is evidence of holding title to property.

Title insurance - Insurance that insures against any defects in the title that would give less than clear title to the property. Normal exceptions are mortgages, easements, and right of ways. The borrower normally pays for this as a normal closing cost. However, the seller or other third party can pay the insurance premium.

Total loan-to-value (TLTV) - Also known as Combined loan-to-value (CLTV). The total of all mortgagees on the property expressed as a percentage of the value. Such as, a $100,000 house with an $80,000 first mortgage and a $10,000 second mortgage = 90% TLTV.

Underwriter - A person who either approves or rejects a loan based on the bank's established guidelines pertaining to that loan.

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