Mortgage Glossary of Terms

• ADDITIONAL PRINCIPAL PAYMENT:

An amount paid by a borrower of more than the scheduled principal amount due. This type of payment reduces the remaining balance and shortens the term of the loan. Also called a “principal curtailment.”

• ARM (ADJUSTABLE-RATE MORTGAGE) INDEX:

A benchmark interest rate to which an adjustable rate mortgage is tied. An adjustable-rate mortgage’s interest rate consists of an index value plus a margin. Also referred to as the “fully indexed interest rate.”

• AMORTIZATION:

The gradual reduction of the mortgage debt through regularly scheduled payments over the term of the loan.

• AMORTIZATION SCHEDULE:

A timetable for payment of a mortgage loan. An amortization schedule shows: the amount of each payment; the amount to be applied to principal and interest; and the remaining principal balance after each payment is made.

• AMORTIZE:

To repay a mortgage with regular payments that cover both principal and interest.

• ANNUAL PERCENTAGE RATE (APR):

The measure of the cost of credit stated as a yearly rate; includes such items as the stated interest rate, plus certain charges.

• APPRAISAL:

A written estimate or opinion of a property’s value prepared by a qualified appraiser.

• ASSESSED VALUE:

Typically the value placed on property for the purpose of taxation.

• ASSET:

Anything of monetary value that is owned by a person or company. Assets include real property, personal property, stocks, mutual funds, etc.

• ASSUMABLE MORTGAGE:

A mortgage loan that can be taken over (assumed) by the buyer when a home is sold. An assumption of a mortgage is a transaction in which the buyer of real property takes over the seller’s existing mortgage; the seller remains liable unless released by the lender from the obligation. If the mortgage contains a due-on-sale clause, the loan may not be assumed without the lender’s consent.

• BALLOON PAYMENT:

The final lump-sum payment that is made at the maturity date of a balloon mortgage.

• CLEAR TITLE:

Ownership that is free of liens, defects, or other legal encumbrances.

• CLOSING:

The process of completing a financial transaction. For mortgage loans, the process of signing mortgage documents, disbursing funds, and, if applicable, transferring ownership of the property. In some jurisdictions, closing is referred to as “escrow,” a process by which a buyer and seller deliver legal documents to a third party who completes the transaction in accordance with their instructions. Also see “Settlement”.

• CLOSING AGENT:

The person or entity that coordinates the various closing activities, including the preparation and recordation of closing documents and the disbursement of funds. (May be referred to as an escrow agent or settlement agent in some jurisdictions.) Typically the closing is conducted by title companies, escrow companies or attorneys.

• CLOSING COSTS:

The fees charged in connection with a mortgage loan transaction. Money paid by a buyer (and/or seller or other third party, if applicable) to effect the closing of a mortgage loan, generally including, but not limited to, a loan origination fee, title examination and insurance, survey, attorney’s fee, and prepaid items, such as escrow deposits for taxes and insurance.

• CLOSING DATE:

The date on which the sale of a property is to be finalized and a loan transaction completed. Often, a real estate sales professional coordinates the setting of this date with the buyer, the seller, the closing agent, and the lender.

• CLOSING DISCLOSURE:

A five-page form that provides final details about the mortgage loan you have selected. It includes the loan terms, your projected monthly payments, and how much you will pay in fees and other costs to get your mortgage.

• CO-BORROWER:

Any borrower other than the first borrower whose name appears on the application and mortgage note, even when that person owns the property jointly with the first borrower and shares liability for the note.

• COLLATERAL:

An asset that is pledged as security for a loan. The borrower risks losing the asset if the loan is not repaid according to the terms of the loan agreement.

• COMPARABLES:

An abbreviation for “comparable properties,” which are used as a comparison in determining the current value of a property that is being appraised.

• CONVENTIONAL MORTGAGE:

A mortgage loan that is not insured or guaranteed by the federal government or one of its agencies, such as FHA, VA or RHS. Contrast with “Government Mortgage.”

• CREDIT BUREAU:

An independent agency that gathers and maintains information on the debts and repayment records of individuals and businesses.

• CREDIT HISTORY:

A record of an individual’s debts and repayment record. A credit history helps a lender to determine whether a potential borrower has a history of repaying debts in a timely manner.

• CREDIT LIFE INSURANCE:

A type of insurance that pays off a specific amount of debt or a specified credit account if the borrower dies while the policy is in force.

• CREDIT REPORT:

A document provided by a credit reporting agency containing information about an individual’s previous mortgage history, bank loans, credit cards, and public records dealing with financial matters.

• CREDIT SCORE:

A numerical value that ranks a borrower’s credit risk at a given point in time based on a statistical evaluation of information in the individual’s credit file that has been proven to be predictive of loan performance.

• DEBT-TO-INCOME RATIO (DTI):

The relationship between a borrower’s total monthly debt payments (including proposed housing expenses) and his or her gross monthly income; this calculation is used in determining the mortgage amount that a borrower qualifies for.

• DEED:

The legal document conveying title to a property (i.e., transferring the ownership of real property from one party to another).

• DEED OF TRUST:

A legal document that conveys title to real estate to a disinterested third party (a “trustee”) who holds the title until the borrower has repaid the debt. In some states, this document is used in place of a mortgage.

• DEFAULT:

The failure to make a scheduled payment or otherwise comply with the terms of a mortgage loan or other contract.

• EASEMENT:

A right to the use of, or access to, land owned by another.

• ENCROACHMENT:

The intrusion onto another’s property without right or permission.

• ENCUMBRANCE:

Any claim on a property, such as a lien, mortgage or easement.

• EQUITY:

The owner’s interest in a property, calculated as the current fair market value of the property less the amount of existing liens.

• FLOOD CERTIFICATION FEE:

A fee charged by independent mapping firms to identify properties located in areas designated as flood zones.

• FLOOD INSURANCE:

Insurance that compensates for physical property damage resulting from flooding. It is required for properties located in federally designated flood hazard zones.

• GOOD FAITH ESTIMATE (GFE):

A form required by the Real Estate Settlement and Procedures Act (RESPA) that discloses an estimate of the amount or range of charges for specific settlement services the borrower is likely to incur in connection with the mortgage transaction.

• HAZARD INSURANCE:

Insurance coverage that compensates for physical damage to a property from fire, wind, vandalism, or other covered hazards or natural disasters.

• HOME EQUITY LINE OF CREDIT:

A type of revolving loan that enables a homeowner to obtain multiple advances of the loan proceeds at his or her own discretion, up to an amount that represents a specified percentage of the borrower’s equity in the property.

• HOME INSPECTION:

A home inspection is a professional consulting service that determines the present condition of the home’s major systems, based on a visual inspection of accessible features.

• HOMEOWNERS’ INSURANCE:

A broad form of insurance coverage that combines hazard insurance with personal liability protection and other coverage.

• INTEREST RATE CEILING:

For an adjustable-rate mortgage (ARM), the maximum interest rate, as specified in the mortgage note.

• INTEREST RATE FLOOR:

For an adjustable-rate mortgage (ARM), the minimum interest rate, as specified in the mortgage note.

• LATE CHARGE:

A penalty imposed by the lender when a borrower fails to make a scheduled payment on time.

• LOAN-TO-VALUE (LTV) RATIO:

The relationship between the loan amount and the value of the property (the lower of appraised value or sale price), expressed as a percentage of the property’s value. For example, a $100,000 home with an $80,000 mortgage has an LTV of 80 percent.

• MORTGAGE LIFE INSURANCE:

A type of insurance that will pay off a mortgage if the borrower dies while the loan is outstanding; a form of credit life insurance.

• NOTE:

A written promise to pay a specified amount under the agreed-upon conditions.

• PRIVATE MORTGAGE INSURANCE (PMI):

A type of mortgage insurance from private insurance companies used with conventional loans. Similar to other kinds of mortgage insurance policies, PMI protects the lender if you stop making payments on your home loan. PMI can be arranged by the lender and provided by private insurance companies.

• RESCISSION:

The cancellation or annulment of a transaction or contract by operation of law or by mutual consent. Borrowers may have a right to cancel certain mortgage refinance transactions within three business days after closing, or for up to three years in certain instances.

• SECOND MORTGAGE:

A mortgage that has a lien position subordinate to the first mortgage.

• SETTLEMENT:

The process of completing a loan transaction, at which time the mortgage documents are signed and then recorded, funds are disbursed, and the property is transferred to the buyer (if applicable). Also called closing or escrow in different jurisdictions. Also see “Closing”.

• SURVEY:

A precise measurement of a property by a licensed surveyor, showing legal boundaries of a property and the dimensions and location of improvements.

• TERMITE INSPECTION:

An inspection to determine whether a property has termite infestation or termite damage. In many parts of the country, a home must be inspected for termites before it can be sold.

• TITLE:

A legal document evidencing a person’s right to or ownership of a property.

• TITLE INSURANCE:

Insurance that protects the lender (lender’s policy) or the buyer (owner’s policy) against losses arising from defects in the title not listed in the title report or abstract.

• TITLE SEARCH:

A check of the public records to ensure that the seller is the legal owner of the property and to identify any liens or claims against the property.