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 wanted to brush up on what adjustable-rate mortgages or cash-out refinances are, below is a glossary of common mortgage 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 their own financial credibility. It is the opposite of a Fixed-Rate Mortgage. ADJUSTMENT DATEThe date on which interest will begin to accrue on the mortgage. Typically 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 SCHEDULEA graph or table showing 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 borrower’s term. Gives the borrower an idea of how much they are paying each month, and what it’s going towards (interest or principal). See Mortgage Amortization also. APPRAISALThe process of determining the estimated value of a specific property at a certain time. Lenders generally require appraisals to verify that the buyer has purchased the home for a fair market price and to ensure that the home meets the lender’s standards. While we can make recommendations for which appraisal management company to use, appraisals cannot be conducted or contracted by the lending party or broker directly, and must be carried out by an independent, third-party licensed appraiser in order to safeguard the borrower from collusion or fraud. Sometimes termed Property Valuation or Real Estate Appraisal. APPRAISED VALUEThe fair market value of a property as determined by a licensed and qualified appraiser. ANNUAL PERCENTAGE RATE (APR)The real interest rate the borrower is paying for their loan when extra costs such as private mortgage insurance are factored in. ASSETSomething the borrower owns that adds to their net worth such as: real estate or real property owned (including investment properties), a small business or entrepreneurial enterprise, investment and stock portfolios, a 401k, savings account, and any extra incomes derived in relation to any of the above. ASSUMABLE MORTGAGEWhen 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 rest of the funds through other means. BI-WEEKLY MORTGAGE PAYMENTSA 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 LOANA temporary loan which is needed if the borrower closes on the loan for their new house before they’ve sold their old house. The loan is secured by their existing home. Also known as Interim Financing. CASH-OUT REFINANCEA mortgage loan that allows homeowners to convert the equity of their home (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 MORTGAGEKnown colloquially as a closed mortgage. 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 COSTSCosts 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 DATEThe 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. See Sale Contract and Purchase Agreement Contract. COLLATERALWhat 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 FEEA 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 LOANA loan that is NOT backed or insured by a government entity. Usually available with private lenders and the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). They include conforming loans, non-conforming loans, jumbo loans, and portfolio loans. CREDIT BUREAUA 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 REPORTHistory 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 (DTI) ratio. Any delinquent accounts, bankruptcies, foreclosures or lawsuits will also be included in the credit report. CREDIT SCOREThe 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 is used as the “average.” Also known as FICO score, FICO credit score. DEBT CONSOLIDATIONA 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 (DTI) RATIOThe 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 TRUSTSee Mortgage Deed. DEFAULTFailure 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 POINTSFees that the borrower may choose to pay in order to bring their interest rate down DOWN PAYMENTThe 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 secondary or investment properties is normally 5%. EQUITYThe 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 (FHA) LOANSA government-backed loan that is insured by the Federal Housing Administration (FHA) and that has more flexible lending requirements. See Mortgage Insurance Premiums (MIP). FAIR MARKET VALUE (FMV)The price a ready, willing, and able buyer with knowledge of all pertinent facts is willing to pay for a certain property. FIRST MORTGAGEThe 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 MORTGAGEA 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). FORECLOSUREThe legal process in which the mortgage lender sells the property because the borrower has defaulted on their mortgage loan. See Default. GIFT LETTERA 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 also states that the gift is genuine and that the gift receiver is not required to pay back the gift. HOME EQUITY LINE OF CREDIT (HELOC)A loan that is based on how much equity the homeowner has. Similar to having a line of credit (like a credit card). This is different from a cash-out refinance in which the homeowner is advanced a fixed dollar amount. See cash-out refinance. HOME EQUITY LOANSee HELOC. HOME INSURANCEInsurance 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. May also cover the contents of the home and any other losses the homeowner may suffer due to destruction of property, in whole or in part. Also known as Homeowners Insurance. Different from Mortgage Insurance. HOMEOWNERS ASSOCIATION (HOA) FEESA monthly fee charged by an association of homes that covers a resident’s expenses for maintenance, repair, security, and upkeep of common areas. The cost is usually uniform for each lot owner. INTEREST RATEThe percentage of the loan that the borrower must pay in addition to the amount they borrowed (the principal). JOB LETTER See VOE. JUMBO LOANA non-conforming mortgage, meaning one that does not meet the lending requirements of Freddie Mac and Fannie Mae. In many cases, this is because the loan amount exceeds the loan limit, or the amount that government entities are willing to guarantee. LENDERSee Mortgage Lender. LIABILITYFinancial obligation(s) of an individual. For example: credit card debt(s), car payments, mortgage payment, etc. LIENA legal claim against a property made to guarantee the payment of a debt.LOANA borrowed amount of money that is eventually repaid in full along with a certain amount of interest that is accrued over the total time of repayment. Typically paid off by making regular, periodic payments. See Mortgage. LOAN OFFICERA trained and accredited, NMLS-certified employee of a brokerage or lending institution. LOAN TERMThe 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 of the property, 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 VALUEHypothetically, the highest price a buyer would pay and the lowest price a seller would accept on a property. Market value could differ from the price that the property could be sold for at a given time since buyers and sellers will fluctuate in terms of what price they’re willing to accept. See Fair Market Value and Market Price. MARKET PRICEWhat a willing, ready, and able buyer will pay for a property, and what the seller will accept for it. See Market Value. MATURITY DATEThe date on which the loan term ends. So long as the borrower made all of their mortgage payments, this would be when they paid off the total amount owed (both principal and interest). MORTGAGEA loan backed by real estate in which the lender advances the total funds to the seller and is repaid by the borrower over a prearranged period of time, typically with interest accruing on the unpaid balance. Also known as Mortgage Loan. MORTGAGE AMORTIZATIONThe process of repaying a mortgage loan by dividing the amount owed into smaller payments that are made over a period of time. Usually by paying off more interest and less principal in the beginning, and then, over time, more principal and less interest. See Amortization Schedule. MORTGAGE APPLICATIONA 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 BROKERTraditionally someone who connects borrowers with mortgage lenders. They do not personally lend any of their own money unlike mortgage bankers. Instead, brokers facilitate the process of applying for a mortgage by gathering documentation and presenting mortgage offers to the borrower. MORTGAGE DEEDA legal document designating the property as collateral for the mortgage loan. MORTGAGE HOLDERThe individual or entity who owns the mortgage loan and who is entitled to enforce 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 INSURANCEIf a buyer cannot afford to put at least 20% down, they are usually required by the lender to pay for mortgage insurance. This protects the lender in the event that the borrower defaults on their mortgage. MORTGAGE INSURANCE PREMIUMS (MIP)A monthly fee that is required for FHA loans no matter how much the borrower puts down for the down payment. 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 LENDERAn 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 PAYMENTA periodic (usually monthly) amount that is paid to the mortgage lender for repayment of a loan. Typically, a portion goes towards paying off the principal while another portion goes towards paying off the accrued interest. MORTGAGE PRINCIPALSee Principal. MORTGAGE RATESee Interest Rate. MORTGAGE STATEMENTMonthly letter sent by one’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 Lender. MORTGAGORThe borrower or borrowing party. The person(s) taking a loan for the purchase of a property. OFFER LETTERA physical representation of a prospective buyer’s intentions to buy a home. As its name suggests, it is a letter given to the owner of a property in order to inform them of a prospective purchase. OPEN-END MORTGAGEA 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 interest payments in the event of an early repayment. A HELOC is an example of an open-end mortgage. ORIGINATION POINTSWhat the lenders charge borrowers in order to pay their loan officers. Ranges from 1-3% of the loan amount. Also known as points. PAY STUBTraditionally 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. POINTSSee Origination Points. PRE-APPROVALThe process of verifying the highest loan amount available to a borrower as determined by their income, liabilities, and credit score. PRE-APPROVAL LETTERA letter stating the highest loan amount available to the borrower. Can be presented to a seller, realtor, or real estate agent in order to demonstrate the potential buyer’s seriousness and their eligibility to take on a loan for said property. PREPAYMENT PENALTIESPossible condition of a mortgage loan. If the borrower breaks or pays off their mortgage early, they might have to pay a fee. In the U.S., prepayment penalties are rare, but can still be found on portfolio loans. Most prepayment penalties last for 1-3 years, so if the borrower refinances, sells the house, or pays off the mortgage before then, they will be penalized. PRINCIPALThe amount of money borrowed or still owed on a mortgage loan. Does not include the amount accrued through interest. PRIMARY RESIDENCEThe main home a person inhabits. Not a secondary or investment property. PRIME RATEThe lowest commercial interest rate that banks charge corporate customers with the highest credit rating. 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)Protects the lender in case the borrower stops making payments on their loan. Usually required for conventional loans if the borrower put down less than 20% for the down payment. Usually a monthly fee. Not the same as Mortgage Insurance Premiums (MIP). PROPERTY TAXReal estate tax that is calculated by a local government and paid by the borrower. PROPERTY TAX ASSESSMENTA method of placing value on real estate. A property tax assessment is used to determine how much the homeowner will have to pay in property taxes. PURCHASE AGREEMENT CONTRACTA legally-binding document stating the buyer’s intention to purchase a home for an agreed-upon price from the seller, and the seller’s intention to convey the property to the buyer. It usually contains a number of specific conditions (such as a condition of financing, condition of a home inspection, etc). It is referred to as a Sale Contract from the perspective of the buyer. See Sale Contract. RATE AND TERM REFINANCEA refinance in which the objective is to lower the rate or change the loan term. See Refinance. RATE LOCKRefers to an agreement between a mortgage lender and a borrower to fix or lock a certain interest rate for a set number of days. Gives the borrower time to close on a real estate purchase and/or mortgage loan without the risk of rate fluctuation. REAL ESTATE AGENTThe person acting as the agent for the sale of real estate on behalf of the property owner and/or buyer. See Realtor®. REAL ESTATE APPRAISALSee Appraisal. REALTOR®A real estate agent who is a member of the National Association of Realtors. See Real Estate Agent. REFINANCE Replacing the existing mortgage with a new one in order to renegotiate new terms, pay off the loan faster, take money out of the house, etc. Can be with the same lender or with a new one. See also Cash-Out Refinance and Rate and Term Refinance. REVERSE MORTGAGEA type of mortgage loan available for homeowners 62 years and older which allows them to turn the existing equity in their home to cash. Typically used to supplement their expenses after retiring. After passing, all equity paid out to the home buyer must be paid off (by family or others) to regain ownership of the home. Otherwise, the home will become the property of the mortgagee. SALE CONTRACTA written agreement between a buyer and seller of real estate, setting forth the terms of the sale and specifying the rights and duties of each party in the real estate transaction. Referred to as the Purchase Contract from the perspective of the buyer. See Purchase Agreement Contract. SECOND MORTGAGEAn additional, second mortgage taken out on a property for reasons such as securing the down payment for another home. 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 taken care of. See First Mortgage. SECURITYSomething to be pledged as collateral for a loan. As it concerns mortgages, the security is the property itself. See Collateral. SEMI-MONTHLY MORTGAGE PAYMENTSStructured for the borrower to make mortgage payments twice a month. For instance, on the 1st and 15th of each month. SWEAT EQUITYEquity that comes from a homeowner performing valuable upkeep for or completing renovations on a property that is up for purchase or refinance. TERMSee Loan Term. TITLELegal document that includes specifics on the property being purchased such as who owns it, how it is owned, etc. Usually in the form of a deed. TITLE INSURANCEA form of insurance which protects the holder in the case of defects in the title to the property. UNDERWRITINGThe process wherein the financial institution responsible for the loan determines – based on credit, employment, assets, and other factors – if a home buyer is able to accept the mortgage loan as agreed upon. UPFRONT MORTGAGE INSURANCE PREMIUMS (UFMIP)Required for FHA loans. An upfront fee that is paid by the borrower at closing. Usually represents 1.75% of the loan amount. Must be paid in addition to a monthly fee for mortgage insurance. See Mortgage Insurance Premiums (MIP). U.S. DEPARTMENT OF AGRICULTURE (USDA)It is designed to “improve the economy and quality of life in rural America” by providing loans for low-to-median income people. U.S. DEPARTMENT OF AGRICULTURE (USDA) LOANA USDA loan is a zero down payment mortgage backed by the U.S. Department of Agriculture for eligible rural and suburban areas. VARIABLE RATE MORTGAGESee 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 (VA) LOANA mortgage made by private lenders and backed partially by the Department of Veteran Affairs. Has more lenient requirements such as no minimum down payment.