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Glossary of Terms

Adjustable Rate Mortgage - A real estate loan with an interest rate that changes periodically in relation to an index. Monthly payments may increase or decrease accordingly. Often referred to as an ARM. The frequency of the adjustments depends on the type of ARM. (See Hybrid ARM)
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Amortization - A repayment method in which the amount you borrow is repaid gradually through regular monthly payments of principal and interest. During the first few years, most of each payment is applied toward the interest owed. During the final years of the loan, payment amounts are applied almost exclusively to the remaining principal.
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Annual Percentage Rate (APR) The cost of credit expressed as an annual rate. The disclosed APR is often higher than the interest rate because of loan discount points and other prepaid finance charges. The purpose of the APR is to give borrowers a consistent means of comparing rates and loan programs.
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Appraisal An assessment of a property’s value conducted by an appraiser as part of a home purchase or refinance. Also refers to the written appraisal report.
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Balloon Payment A lump sum payment that pays off the balance of a loan. More common in commercial than residential financing.
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Borrower-Paid Mortgage Insurance (BPMI) - A mortgage insurance policy in which the premium is paid by the borrower (as opposed to the lender.)
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Buy Down - A large upfront fee paid by the borrower to secure a lower interest rate for part of the loan term. The rate increases incrementally at pre-determined times until the full rate is reached and maintained for the remainder of the loan term. A buy down is different from a discount point.
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Cash Out Refinance - A refinance in which the borrower either receives money back or rolls in an existing second mortgage.
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Ceiling - The maximum allowable interest rate over the life of an adjustable rate mortgage loan.
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Closing - The meeting during which final loan documents are signed, dated, and notarized. Can also refer to when a loan funds.
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Closing Costs - One-time fees required to close a mortgage loan. Examples include underwriting, escrow, and title insurance fees.
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Combined Loan to Value (CLTV) - The ratio of the unpaid principal balances of all mortgages on a property to the property's appraised value, expressed as a percentage.
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Credit Report - A report detailing an individual's credit history prepared by a credit reporting company.
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Credit Score - A value ranging from 300-900 based on analysis of a person’s credit history to determine their creditworthiness.
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Debt-to-Income Ratio - The ratio of total monthly payment obligations on all debts listed on the credit report plus the proposed housing payment to gross monthly income, expressed as a percentage.
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Disclosures - Standardized forms that outline the terms of a loan and the borrower’s rights during the loan process.
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Discount Point - A fee paid to the lender by the borrower to reduce the interest rate over the entire loan term.
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Down Payment - A partial payment toward the total purchase price of a property that is made up front. The balance is financed through a home mortgage.
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Earnest Money - A deposit paid by the buyer to the seller to show their intent to complete the purchase. Earnest money is held by the escrow company and applied to the purchase at closing.
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Escrow Account - An account established by the lender to hold impounds from monthly mortgage payments from which the hazard insurance premium and property tax payments are made.
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Escrow Company - The company that facilitates the funding and document signing required for loan closing. The escrow company also ensures that all funds are wired and that the deed is recorded.
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Equity - The difference between the appraised value of a home and the total outstanding mortgage balance.
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Finance Charge - The total amount of interest paid over the life of the loan plus the prepaid finance charges (PFCs).
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First Mortgage - A mortgage that is in first lien position. If the borrower defaults on the loan, the lender of the first mortgage can take possession of and sell the property.
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Fixed Rate - An interest rate that is fixed for the entire loan term.
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Flood Certification - Certification of whether or not a property is located in a flood zone, as determined by FEMA. If the property is in a flood zone, the borrower is required to carry flood insurance in addition to hazard insurance. A Flood Certification Fee is part of closing costs.
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Fully Indexed Rate - On an adjustable rate mortgage, the rate determined by the index plus margin. After the introductory period, the rate adjusts to the fully indexed rate but never exceeds the ceiling.
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Funding - The point at which the loan funds are wired from the lender to escrow.
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Gross Income Annual or monthly income before taxes and expenses are deducted.
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Hazard Insurance -A lender-required insurance policy carried by a homeowner that protects against events such as theft and fire. On a home purchase, the first year’s premium is typically due at closing. Also called Homeowner’s Insurance.
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Home Equity Line of Credit (HELOC) - A revolving line of credit with an adjustable interest rate extended to a borrower for which the borrower’s home is used as collateral. The lender agrees to a maximum line of credit and the borrower may choose when and how much to borrow. Often used for home improvements, major purchases or expenses, and debt consolidation. The interest paid on a HELOC is usually tax deductible.
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Home Equity Loan - Unlike a HELOC, a home equity loan is fully amortized and distributed in a single lump sum. Interest paid is usually tax deductible. Often used for home improvement or investment in other real estate.
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HUD I Settlement Statement - The form used at loan closing on which costs associated with purchasing or refinancing the home are itemized.
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Hybrid Adjustable Rate Mortgage (ARM) - A mortgage with a fixed introductory rate that begins to adjust after the introductory period. For example, in a 5/1 ARM the rate is fixed for five years and will then adjust every subsequent one year.
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Impounds - A portion of a monthly mortgage payment, in addition to principal and interest, that is kept in an escrow account from which the lender pays property taxes and hazard insurance.
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Index - A statistical indicator representing the value of the securities which constitute the index. An index is used as a barometer of market conditions. The rate in an adjustable rate mortgage is tied to an index which will determine the rate when it adjusts. The most common mortgage indices are the one-year LIBOR, PRIME, and T-Bill. For example, if an ARM is tied to the LIBOR index and at the time of adjusting the LIBOR is at 1.3% and their margin is 2.25%, the new rate (index + margin) will be 3.55%.
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Inspection Contingency - A common clause in a purchase and sale contract that allows a prospective buyer to cancel or further negotiate the contract based on the results of a professional home inspection without losing their Earnest Money.
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Interest Only Loan - A loan program featuring an introductory period during which smaller payments are made that apply only to interest and not principal. The loan is recast after the introductory period, resulting in a larger monthly payment that applies to both principal and interest.
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Interest Rate - The cost of borrowing money, reflected as a percentage.
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Lender The financial institution that underwrites and issues the funds for the loan.
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Lender-Paid Mortgage Insurance (LPMI) - A mortgage insurance policy in which the premium is paid by the lender through a higher interest rate to the borrower.
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Lien - In the case of a mortgage, a consensual agreement between the lender and the property owner that gives the lender rights to the property if the borrower defaults on the loan.
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Loan Approval -The commitment by the lender that they will fund the loan based on the documentation provided by the borrower.
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Loan Officer - A person who helps borrowers obtain mortgage loans from banks and other financial institutions. A loan officer may be employed by a bank or a mortgage brokerage.
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Loan Processor - The person who coordinates with lenders, loan officers, and escrow and title companies to facilitate the loan from application to close.
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Loan Term - The amount of time required to pay off the loan expressed as a number of months. For example, the loan term for a 15-year fixed-rate mortgage is 180 months. Also called amortization term.
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Loan to Value (LTV) - The ratio of the loan amount on the first mortgage to the appraised value of the property, expressed as a percentage.
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Lock - Securing an interest rate until the loan or refinance is closed. A rate is typically locked for 15-45 days. If the loan does not close before the term of the lock expires, the rate may change or rate lock extension fees may apply.
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Margin - A percentage added to an index to determine the interest rate for an adjustable rate mortgage. This is a fixed feature of the specific loan and is not dependent on economic factors.
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Monthly Mortgage Insurance - A borrower-paid mortgage insurance policy in which the premium is added to the borrower’s monthly payment.
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Mortgage - A loan for the purchase or refinance of a property in which the property is used as collateral.
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Mortgage Broker - An individual who works with several lenders to find the best rates and mortgage loan programs for their client’s situation and needs.
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Mortgage Insurance (MI) - Protection for a lender against loss from loan default when the loan-to-value is greater than 80 percent. There are several types and arrangements of mortgage insurance: Lender Paid, Borrower Paid, Up Front, Monthly, and Split.
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Mortgagee - The lender in a mortgage loan transaction.
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Mortgagor - The borrower in a mortgage loan transaction.
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Note - A written agreement containing a promise of the signer (borrower) to pay to a named person or institution (lender) a definite sum of money at a specified date or on demand.
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Note Rate - The rate reflected on a note. Same as interest rate.
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Origination Charge - As shown on the Good Faith Estimate, the sum total of the lender underwriting fee, the processing fee, and the mortgage broker fee.
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PITI Refers to the four elements of a monthly mortgage payment: principal, interest, property taxes, and hazard insurance.
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Points - A percentage of the loan amount paid as a fee to the lender and/or mortgage broker. Short for “percentage points.” A charge of one point equals 1% of the loan amount.
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Prepaids - A portion of closing costs used by the lender to pay prepaid interest and establish an escrow account from which property taxes and hazard insurance are paid.
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Prepaid Finance Charges (PFCs) - A specific set of closing costs that are added to the interest paid to calculate the APR.
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Prepaid Interest - An interest payment made at closing to cover the interest that accrues from the day of closing until the end of the closing month.
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Principal - The loan amount, excluding interest, that remains unpaid.
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Property Tax - Tax paid to the local government by a property owner based on the assessed value of the property being taxed. Payments are usually included with the monthly mortgage payment or paid every six months.
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Rebate - A credit paid by the lender toward the borrower’s closing costs. The dollar amount of the rebate is tied to the interest rate on the loan. Also called Yield Spread Premium (YSP).
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Recast - A recalculation of the principal, interest, and loan term that results in a different monthly mortgage payment. A loan may be recast if a borrower pays a large sum toward principal, if the borrower is in financial distress, or in certain adjustable rate mortgage loan programs.
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Recording - Registration of official deeds by the county to establish ownership of property.
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Right to Rescission - The legal right of the borrower to void or cancel a mortgage contract in such a way as to treat the contract as if it never existed. Right of rescission is not applicable on home purchase mortgages but may be applicable to other mortgages, such as primary residence refinances and home equity loans.
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Servicing a Loan The ongoing process of collecting the monthly mortgage payment. Includes maintenance of the escrow account for payment of property tax and/or homeowners insurance bills. It may be the lender’s responsibility to service the loan.
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Split Mortgage Insurance - A borrower-paid mortgage insurance premium that is divided between upfront and monthly premiums. As a result, the payments are lower than the monthly mortgage insurance option.
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Subordinate Loan - A loan that is second priority or in second lien position to the first mortgage loan. Home Equity Line of Credit and Home Equity Loans are subordinate loans.
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Subordination Agreement - In a refinance, required written agreement of the lender of the subordinate loan that the new first mortgage will take priority.
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Tax Service - A fee collected by the lender as part of closing costs and paid to a third-party company to ensure that the borrower pays property taxes.
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Title - Written evidence of the right of ownership to a specific property.
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Title Search - Detailed examination of the historical records of the property to make sure the buyer is purchasing the property from the legal owner and that there are no liens or outstanding restrictive covenants that could adversely affect the transferability or value of the property. For refinance loans, the title search also ensures that the borrower does not have any new liens that would preclude the lender from taking first lien position in the event of foreclosure.
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Title Insurance - Insurance for lenders and homeowners against financial loss resulting from legal defects in the title. There are two kinds of title insurance: A Lender Policy Premium is based on the loan amount and is paid by the borrower with closing costs. An Owner Policy Premium is based on the sales price and is paid by the seller.
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Upfront Mortgage Insurance Premium (UFMIP) - A borrower-paid mortgage insurance policy that is paid in one upfront premium. This premium can be financed into the loan or included in closing costs, depending on the loan program. FHA loans usually have a UFMIP that is financed into the loan amount.
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Underwriter - An employee of the lender who is responsible for analyzing the supporting documentation that supports the loan profile.
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Underwriting - The process of verifying borrower data and approving a loan, according to investor guidelines.
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Yeild Spread Premium (YSP) - A credit paid by the lender toward the borrower’s closing costs. The dollar amount of the YSP is tied to the interest rate on the loan. Also called a rebate.
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