Get on the same page as your loan officer with these mortgage terms.
Below is a list of commonly-used terms that you may come across in the home buying process.
Abstract of title
A written history of ownership to a specific area of land. An abstract of title covers the period from the original source of title to the present time and summarizes all subsequent documents that have been recorded against that area.
Adjustable-rate mortgage (ARM)
A mortgage loan with an interest rate that changes. An adjustable rate mortgage is a loan that bases its interest rate on an index, which means the interest rate can fluctuate over the course of the loan.
The allocation, of each mortgage payment, whereby some of the money reduces the loan principal and some pays interest on the balance. While the earliest payments are mainly for interest, as the loan balance gets smaller less interest gets charged and more principal is retired.
Annual percentage rate (APR)
The APR represents the true cost of your loan: interest plus fees and any other one-time charges. Since different lenders have different interest rates and costs, the APR helps you compare apples to apples.
An opinion of value reached by a qualified independent third-party known as an appraiser based upon knowledge, experience, and a study of pertinent data.
The positive change in a property’s value (or negative change – depreciation). Factors can include changes in the condition of the property, improvements to the property and changes in the area where the property is located, including the valuation of nearby properties.
The value a local tax authority places on real estate or personal property for taxation purposes.
An existing mortgage that can be taken over by a qualified buyer when a home is sold.
A loan that provides lower-than-usual monthly payments for a set period of time followed by a payment larger than usual at the end of the loan repayment period. A balloon loan may lower monthly payments, but it can also mean higher interest payments over the life of the loan.
The lump-sum prepayment of all or a portion of your mortgage interest by a lender or homebuilder in order to lower your monthly mortgage payment, typically for a period of 1-3 years.
Cash to close
The amount a homebuyer needs in cash at the closing of the loan. This typically, this includes down payment and closing costs.
Also known as settlement costs, these are the costs incurred when obtaining a loan. These may include: title insurance, escrow fees, lender charges, real estate commissions, transfer taxes and recording fees, attorney’s fees, discount points, appraisal fees and credit report charges. They are often paid at closing or just before your loan closes.
A closing document which provides key information such as interest rate, monthly payments, and costs to close the loan. Consumers are required to receive this form no later than 3 business days before they close on the loan.
Additional named borrower(s) who contribute to qualifying for a loan and who are equally obligated to repay the principal balance with interest.
An asset, such as a car or a home, used for securing the repayment of a loan. The borrower risks losing the asset if the loan is not repaid.
A formal notification from a lender stating that the borrower’s loan has been conditionally approved and specifying the terms under which the lender agrees to make the loan.
A mortgage loan that has the standard features as defined by (and is eligible for sale to) Fannie Mae and Freddie Mac.
Any type of home loan that is not offered or secured by a government entity (FHA, VA, USDA, etc.)
An adjustable-rate mortgage (ARM) that can be converted to a fixed-rate loan under specified conditions.
A clause in a mortgage or deed that requires or prevents certain uses of the property that, if violated, may result in loss or foreclosure of the property.
Debt-to-income ratio (DTI)
Total monthly debt payments (for example: loans, credit cards and court-ordered payments) divided by gross monthly income before taxes and expressed as a percentage.
A percentage of the purchase price paid upfront at closing.
The period during which a borrower can obtain advances (also called draws) from an available line of credit.
A deposit made toward a down payment as a sign of good faith. The deposit is typically made when a purchase agreement is signed.
The difference between the fair market value (appraised value) of a home and the outstanding mortgage balances and other liens.
Funds that a lender, lawyer or escrow agent collects and holds in an account on behalf of a buyer to pay real estate taxes, homeowners insurance, mortgage insurance (if applicable) and other periodic debts against the property.
A home loan with a predetermined fixed interest rate for the entire term of the loan.
A loan rate which the lender has not “locked” or committed to. The floating rate and any discount points are not guaranteed, but are based on the market price available for the loan product at the time the interest rate is locked.
Home equity line of credit (HELOC)
A line of credit, often used for home improvements, debt consolidation or other major expenses, secured by the borrower’s residence. The typical HELOC term is 30 years: a 10-year draw period followed by a 20-year repayment period.
Insurance to protect a home against damage from fire, hurricanes and other catastrophes. Usually, homeowners insurance also covers against theft and vandalism, as well as personal liability in case someone is hurt or injured on the property.
A published interest rate, such as the prime rate, that lenders use to determine interest rates charged on an adjustable-rate mortgage or variable-rate home equity line of credit.
The annual cost of a loan to a borrower, usually expressed as a percentage of the loan amount. The interest rate does not include fees charged for the loan.
A legal claim by one party on the property of another as security for a debt, such as unpaid taxes or utility bills.
Loan Estimate (LE)
A document delivered or mailed to customers by a lender within 3 business days of mortgage application. The Loan Estimate provides an estimate of closing costs and fees as well as the loan terms.
An agreement to revise the terms of a mortgage, often used to help qualified customers bring their mortgage current or reduce their mortgage payment.
Loan-to-value (LTV) ratio
The current loan amount divided by the value of the property, expressed as a percentage. For example, a loan amount of $150,000 for a home valued at $200,000 would have an LTV ratio of 75%.
A set number of days prior to closing during which the interest rate is secured and not subject to market fluctuation.
The set percentage the lender adds to the index rate (such as the prime rate) to determine the interest rate of an adjustable-rate mortgage or variable-rate home equity line of credit.
A legal document giving a lender a lien on real estate to secure repayment of a loan.
Insurance written by a private company protecting the mortgage lender against loss resulting from a mortgage default.
The entire process of obtaining a mortgage from the moment an application is taken, through underwriting, to final loan closing.
A preapproval letter shows that a mortgage applicant has been preapproved for a specified mortgage amount based on a preliminary review of credit information and other documents.
Prepayment fee or penalty
A penalty assessed by some lenders if a loan is paid off before the specified term.
An estimate of the amount a prospective homebuyer may be able to borrow prior to submitting a formal application. A prequalification does not include a credit check and should not be confused with preapproval.
The amount borrowed or the remaining unpaid balance of a loan excluding unpaid accrued interest; also refers to the portion of the monthly payment that reduces the outstanding balance of a loan.
The amount owed on a loan, not including interest, fees, or taxes.
The portion of a monthly payment that goes toward reducing the principal balance on a loan.
Guidelines used by lenders when determining how much a homebuyer can borrow. Qualifying ratios include the housing expense ratio, income/expense ratio, and debt-to-income ratio.
A commitment issued by a lender to a borrower guaranteeing a specific interest rate for a specified period of time.
The repayment of a debt from the proceeds of a new loan using the same property as security.
For a standard home equity line of credit (HELOC), the point at which a borrower must begin to make payments that will completely repay the outstanding balance during a certain period of time.
Collateral or property given, deposited, or pledged to secure the repayment of a loan.
The time period in which a loan or home equity line of credit must be repaid.
A document that shows current ownership of a property, plus a history of previous owners.
Title (insurance) company
A company that confirms the legal claims to a property and insures a homeowner and lender against a loss that could result from a title dispute.
An insurance policy that protects against any loss resulting from a title error or dispute. Two types of title insurance exist: lender and owner. Lenders usually require homebuyers to have lender’s title insurance. Having owner’s title insurance protects the homebuyer against future claims.
The lending team member who reviews the application, documentation, and property information before making a loan decision.
The lender’s process of deciding whether to make a loan to a potential borrower based on credit, employment, assets and other factors, and the matching of this risk to an appropriate rate, term and loan amount.
Uniform Residential Loan Application (URLA)
The standard loan application form published by the Federal National Mortgage Association (Fannie Mae) and used by most lenders.