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Plain-English definitions for the mortgage terms you'll come across.
Also known as a variable rate mortgage. A type of mortgage where the interest rate changes periodically. As a result, the principal and interest payments may vary over the life of the loan because the loan is linked to a financial index. Lower initial payments may make it easier for buyers to qualify.
The length of time for which the interest rate is fixed on an adjustable-rate mortgage. If the adjustment period is six months, the interest rate will remain fixed for six months, after which it will adjust.
A gradual paying off of a debt through your payments on principal and interest.
APR is a measurement of the full cost of a loan, including interest and loan fees, expressed as a yearly percentage rate. This is one way to compare the cost of loans offered by different lenders.
The assessment of the market value of the property at a given date.
A person educated and trained in the methods of determining the value of property through analysis of various factors.
An increased value of property due to either a positive improvement of the area or the elimination of negative factors.
Any item owned by a person that has monetary value.
A loan that involves small payments for a certain period of time and one final balloon payment for the remaining principal amount at a time specified in the contract.
The final lump sum paid at the maturity date of a balloon mortgage.
The financial inability to pay one's debts when due. A proceeding in which the debtor surrenders his assets to the bankruptcy court, thereby relieving him from insurmountable debt.
A yield of 1/100th of a percentage point.
Income before any taxes have been deducted. Also known as Gross Income.
The limit on how much an interest rate can change, either at each adjustment or over the life of the mortgage.
A refinance transaction that allows the borrower to take out additional funds above the existing mortgage amount. This extra cash can be used for closing costs, escrow, home improvement, education, etc.
Expenses incurred in a real estate or mortgage transaction. There are two types: recurring (one-time transactional cost) and non-recurring (costs associated with owning the property that recur month after month).
A type of asset (such as a car or a home) that can be used as a guarantee to pay off a loan. If the terms of the loan are not met, the borrower risks losing the asset.
Individual ownership of a dwelling unit and an individual interest in the common areas and facilities serving the multi-unit property.
A provision in some ARMs that enables home buyers to change an ARM to a fixed-rate loan, usually after the first adjustment period.
An adjustable rate mortgage that can be converted into a fixed-rate mortgage under specific conditions.
Adjustable-rate mortgage with rates that adjust based on a cost-of-funds index, often the 11th District Cost of Funds.
The financial worthiness of the borrower; the history of whether the borrower has met financial obligations on time. Also: an agreement between borrower and lender in which the borrower receives something of value in exchange for the promise of repayment.
A complete record detailing a person's open and repaid debts. Generally a good indicator of the individual's history of timely debt repayment.
A report detailing a borrower's credit history including payment history on revolving and installment accounts, current credit standing, and public records including tax liens and judgements.
An amount that is owed.
Failure to meet legal obligations in a contract — such as failure to make payments on time. This can lead to foreclosure.
A sum of money given to show good faith in order to secure the sale of a property.
Decline in the value of a property due to wear and tear, obsolescence, adverse changes in the neighborhood, or any other reason.
Money paid to make up the difference between the purchase price and the mortgage amount.
A clause that requires full payment of a mortgage or deed of trust when the secured property changes ownership.
A deposit made by a buyer of real estate towards the down payment to evidence good faith. Typically held by the real estate brokers or the escrow company.
The difference between the fair market value and current indebtedness. The value an owner has in real estate over and above the obligation against the property.
Neutral third party that handles all funds in a real estate transaction.
The part of a mortgagor's monthly payment that is held by the servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due.
A taxable entity established upon the death of a taxpayer, consisting of all the decedent's property and personal effects.
Price, usually arrived at by comparable sales in the area, that is negotiated between the seller and buyer in a reasonable time.
Federal National Mortgage Association; a federally sponsored secondary market agency that purchases loans made by mortgage lenders.
A loan insured by the Federal Housing Administration open to all qualified home purchasers.
A mortgage that has priority as a lien over all other mortgages. In a foreclosure the first mortgage will be satisfied before other mortgages.
A type of loan where the interest rate is locked in for the full term of the loan.
The index plus the margin, rounded to the next highest eighth.
A revolving line of credit usually secured by a second deed of trust and lasting for the term of the loan. Operates like a credit card.
Often referred to as a second mortgage, a home equity loan allows you to borrow against the equity accumulated in your home.
The relationship of the total housing payments (PITI — Principal, Interest, Taxes, Insurance) to gross monthly income.
Portion of a borrower's monthly payments held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments and other items. Also known as reserves or escrow account.
A measure by which Adjustable Rate Mortgage interest rates are raised and lowered. By law the index must be published and verifiable by the borrower and not controlled by any one institution.
A loan larger than the limits set by Fannie Mae and Freddie Mac. Because jumbo loans cannot be funded by these agencies, they usually carry a higher interest rate.
The institution — bank, mortgage company or mortgage broker — offering the loan.
An encumbrance against the property as security for a debt or charge.
The relationship between the amount of the mortgage loan and the appraised value of the property, expressed as a percentage.
The amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate.
A loan for the purpose of buying a home. The four basic components are principal, interest, taxes and insurance (PITI).
Principal, Interest, Taxes and Insurance — usually referred to as the total monthly payment on a loan.
A point is equal to one percent of your mortgage loan. You may want to consider 'buying down' your interest rate by paying discount points up front — especially if you plan to own your home for a long time.
A process mortgage lenders use to determine how much money they would lend based on a limited review of the buyer's financial situation. The pre-approval letter strengthens the buyer's position when bidding on a home.
A preliminary assessment of the buyer's ability to secure a loan, based on a specific set of lending guidelines and representations made by the buyer. Not a guarantee or commitment by the lender.
A penalty charged to the borrower when full or partial payment of the principal is paid before the due date. Not allowed for FHA or VA loans.
The amount borrowed or outstanding balance on a loan.
Insurance against a loss by the lender in the event of default by the borrower. Borrowers are usually required to carry PMI if the down payment is less than 20%.
Repaying an existing loan from the proceeds of a new loan on the same property.
Evidence of an individual's ownership of property.
Research of public records to determine the history of ownership and loans for a particular piece of real estate.
A loan guaranteed by the Department of Veterans Affairs and available to qualifying veterans, active-duty military, and certain surviving spouses.
