Glossary of Mortgage Terms
When you need to know the answer, or something's unfamiliar, this is the place to turn. Click on any term displayed below and we'll take you right to its meaning or explanation.
Adjustable Rate Mortgage (ARM) - A mortgage loan which allows the lender to adjust the interest rate periodically in accordance with a stated index and as agreed to at the inception of the loan by all parties. (Also known as variable rate mortgages)
Annual Percentage Rate (APR) - A numerical figure which expresses (on an annual basis) the charges imposed on the borrower to obtain a mortgage loan (such as interest, discount points and other costs).
Balloon Mortgage - A short-term mortgage with fixed installments of principal and interest that do not fully amortize the loan. The balance of the mortgage is due in a lump sum at the end of the term.
Buydown Mortgage - A fixed rate mortgage with a below-market interest rate for a stated initial period. The lender receives a payment subsidy in the form of additional discount points paid by the builder, seller or buyer.
Cash Reserve - In the mortgage commitment, some lenders require that the borrower have on deposit in their bank accounts at the time of the closing an amount equal to a predetermined number of months of the cost of principal, interest, taxes, and insurance. This is called a cash reserve.
Certificate of Occupancy - A certificate issued by a local governmental entity responsible for the use of land in the community where the property is located stating that the structures on the property or any improvements made to those structures comply with the codes, ordinances and regulations of that governmental entity and that they may be occupied.
Closing - The final step in the mortgage loan process after loan commitment. The closing is a meeting between all parties involved in the mortgage transaction in which mortgage documents are signed.(Also known as, settlement)
Commitment Fee - A fee paid to the lender for processing, underwriting and originating the mortgage. When this fee is a percentage of the amount of the mortgage it is also called points. One point is one percent of the amount of the mortgage. (Also known as points or origination fee)
Conforming Loan - A mortgage in which the loan amount is less than or equal to the maximum amount eligible for purchase by either Government Sponsored Enterprise (GSE- Fannie Mae or Freddie Mac). Loan amounts are considered conforming if they are less than or equal to the following amounts based on the applicable property type:
- 1 Unit - $417,000
- 2 Unit - $533,850
- 3 Unit - $645,300
- 4 Unit - $801,950
Discount Points - A one-time charge paid by the borrower to the lender at closing to obtain a lower interest rate on the mortgage loan. One point equals 1% of the loan amount; therefore, two points on a $100,000 mortgage would cost $2,000. (Also known as points)
Equity - The amount by which the value of the borrower's home exceeds the amount owed on the mortgage loan. If the borrower's home is worth $100,000 and the borrower owes $65,000 on the mortgage loan secured by the borrower's home, then the borrower's equity in that home is $35,000 or 35% equity in the home.
Federal Housing Administration (FHA) - A federal agency that is part of the Department of Housing and Urban Development (HUD) that sets policy for mortgage underwriting and provides insurance for residential mortgages.
First Mortgage - A mortgage whose lien is superior to the lien of any other mortgage on the same property. This lien is superior either because it was recorded prior to all other mortgages or because the mortgagee of another mortgage which had been recorded ahead of this mortgage has agreed to have a lien subordinated to the lien of this mortgage.
Good Faith Estimate - An estimate of the fees a mortgage borrower will be required to pay at closing. It is required by Federal law that the lender provide the Good Faith Estimate within three business days of the initial loan application.
Housing expense ratio - The relationship of a borrower’s monthly payment obligation on housing (principal, interest, taxes, insurances and other applicable housing expenses) divided by gross monthly income, expressed as a percentage. (Also known as top ratio)
Index - A benchmark, usually a published interest rate, such as the one-year London Interbank Offered Rate (LIBOR) security yields, used to calculate the interest rate of an adjustable rate mortgage when rate is scheduled to change. Generally, a margin stated in loan documents is added to the index to determine the new interest rate.
Jumbo Loan - A mortgage in which the loan amount exceeds the maximum amount eligible for purchase by either Government Sponsored Enterprise (GSE- Fannie Mae or Freddie Mac). Loan amounts are considered Jumbo if they exceed the following amounts based on the applicable property type:
- 1 Unit - $417,000
- 2 Unit - $533,850
- 3 Unit - $645,300
- 4 Unit - $801,950
LIBOR index - The London Interbank Offered Rate Index is the average yield of interbank offered rates for one-year U.S. dollar-denominated deposits in the London Market, as published in The Wall Street Journal.
Lien - An encumbrance on property which act as security for the payment of a debt or the performance of an obligation. A mortgage is a lien. A lender will want most, if not all, liens on the property removed before making a mortgage loan.
Loan-to-Value Ratio - The mortgage amount divided by the lower of the purchase price or the appraised value of the property. This ratio is expressed as a percentage. A lender will use this ratio in determining the maximum mortgage loan that it will make on the property.
Mortgage - A pledge of real estate collateral to secure a debt. Also, the legal document describing and defining the pledge. The mortgage may also include the terms of repayment of the debt. (Also known as deed of trust)
Mortgage Insurance - Insurance that protects the lender in case the homebuyer does not make their mortgage payments. Typically, a borrower would be required to pay a fee for mortgage insurance if their down payment is less than 20%. (Also known as private mortgage insurance or PMI)
Points - A one-time charge paid by the borrower to the lender at closing to obtain a lower interest rate on the mortgage loan. One point equals 1% of the loan amount; therefore, two points on a $100,000 mortgage would cost $2,000.
Private Mortgage Insurance (PMI) - Insurance that protects a lender in the event of the borrower's default in the payment of a mortgage loan and is generally required if the amount borrowed is more than 80% of the value of the real property securing the mortgage loan.
Processing - The second step in the mortgage application process which involves the verification of information stated on the application. Credit reports and the appraisal are also ordered at this time.
Pro-Rata Share - In relation to a Co-Op, the pro rata share is your apartment’s share of the building’s underlying mortgage. The share is determined by dividing the amount of the underlying mortgage by the number of shares in the building and then multiplying the per-share amount by the number of shares for your apartment. The lower of either the appraised value or purchase price then divides that number.
Ratios - Guidelines applied by the lender during underwriting a mortgage loan application to determine how large a loan to grant to an applicant. The ratios that lenders use are generally the Loan-to-Value Ratio, Housing-to-Income Ratio and Debt-to-Income Ratio.
Title Search - A process that examines local public records, laws and related court decisions to determine if any other parties have valid claims against the subject property (such as past due taxes, judgments or mechanics' liens). It also discloses past and current facts about the subject property's ownership.
Title Insurance Policy - In real estate, an insurance policy by which the insurer agrees to pay the insured (purchaser, mortgagee, etc.) a specific amount for any loss caused by defects of title to the subject property.
Truth-in-Lending Disclosure - Federal law requires that the lender must give this document to the homebuyer within three business days after loan application. This disclosure gives details of the mortgage payments along with the corresponding APR and finance changes.
Underwriting - In mortgage lending, the decision-making process used to determine whether the loan risk is acceptable to the lender. Underwriting involves the satisfactory review of the property appraisal and examination of the borrower's ability and willingness to repay the debt.