Glossary of Terms
A
Adjustable-Rate Mortgage (ARM): A type of mortgage in which the interest rate can change periodically based on the performance of a specific index or market interest rates.
Amortization: The process of gradually paying off a loan through regular payments of principal and interest over a set period.
Annual Percentage Rate (APR): The total annual cost of a loan to a borrower, including interest and fees, expressed as a percentage.
Appraisal: An estimate of a property's market value, performed by a qualified appraiser.
Appraisal Fee: The fee charged by an appraiser to estimate the market value of a property.
Appreciation: An increase in the value of a property over time.
B
Balloon Mortgage: A mortgage that requires a large payment, known as a balloon payment, at the end of the loan term.
Basis Point: One-hundredth of a percentage point (0.01%).
Biweekly Mortgage: A mortgage in which payments are made every two weeks, resulting in 26 payments per year and effectively shortening the loan term.
Bridge Loan: A short-term loan used to bridge the gap between buying a new property and selling the current one.
C
Cash-Out Refinance: Refinancing a mortgage for more than the current balance, taking the difference in cash.
Closing: The final step in a real estate transaction, where the title is transferred, and the buyer takes possession of the property.
Closing Costs: Expenses incurred in the process of transferring ownership of a property, including fees for title insurance, appraisals, and legal services.
Co-Borrower: An additional person who is obligated to repay the loan and whose income and credit history are used to qualify for the loan.
Conforming Loan: A mortgage that meets the guidelines set by Fannie Mae and Freddie Mac.
Conventional Loan: A mortgage that is not insured or guaranteed by the federal government.
Credit Report: A detailed report of an individual's credit history used by lenders to assess creditworthiness.
D
Debt-to-Income Ratio (DTI): A measure of a borrower's monthly debt payments compared to their gross monthly income.
Deed: A legal document that transfers ownership of a property from one party to another.
Down Payment: The initial payment made by a buyer towards the purchase price of a property.
E
Earnest Money: A deposit made by a buyer to demonstrate their commitment to purchasing a property.
Equity: The difference between the market value of a property and the amount owed on the mortgage.
Escrow: An arrangement in which a neutral third party holds funds or documents until certain conditions are met.
F
Fannie Mae: A government-sponsored enterprise that buys and guarantees mortgages issued by lenders.
Federal Housing Administration (FHA) Loan: A mortgage insured by the FHA, designed to help lower-income and first-time homebuyers.
Fixed-Rate Mortgage: A mortgage with an interest rate that remains constant throughout the life of the loan.
Foreclosure: The legal process by which a lender takes possession of a property when the borrower fails to make mortgage payments.
Freddie Mac: A government-sponsored enterprise that buys and guarantees mortgages issued by lenders.
G
Good Faith Estimate (GFE): An estimate of closing costs provided by a lender to a borrower within three days of applying for a loan.
Government-Sponsored Enterprise (GSE): A financial services corporation created by Congress, such as Fannie Mae and Freddie Mac, to enhance the flow of credit to specific sectors of the economy.
H
Home Equity Line of Credit (HELOC): A revolving line of credit secured by the equity in a property, allowing homeowners to borrow against their equity up to a certain limit.
Homeowners Association (HOA): An organization in a subdivision, planned community, or condominium that makes and enforces rules for the properties and residents.
HUD-1 Settlement Statement: A document that provides an itemized listing of the funds paid at closing in a real estate transaction.
I
Interest-Only Mortgage: A mortgage where the borrower only pays the interest for a set period, followed by payments of principal and interest for the remainder of the term.
Interest Rate: The percentage of a loan amount that a lender charges as interest to the borrower.
J
Jumbo Loan: A mortgage that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac.
L
Loan Estimate: A three-page form provided to borrowers by the lender within three days of applying for a loan, outlining key terms and estimated closing costs.
Loan-to-Value Ratio (LTV): The ratio of the loan amount to the appraised value of the property.
M
Mortgage: A loan used to purchase or refinance a home, where the property serves as collateral for the loan.
Mortgage Broker: An individual or company that acts as an intermediary between borrowers and lenders.
Mortgage Insurance Premium (MIP): Insurance required for FHA loans to protect lenders against losses if the borrower defaults.
Mortgage Note: A legal document that obligates the borrower to repay the loan according to the agreed terms.
N
Negative Amortization: A situation where monthly payments are less than the interest due, causing the loan balance to increase.
O
Origination Fee: A fee charged by a lender for processing a new loan application.
P
Points: Fees paid to the lender at closing in exchange for a lower interest rate. One point equals one percent of the loan amount.
Pre-Approval: A lender's conditional commitment to provide a mortgage loan, subject to verification of financial information.
Prepayment Penalty: A fee charged by a lender if the borrower pays off the loan before the end of the term.
Private Mortgage Insurance (PMI): Insurance that protects the lender in case the borrower defaults on a conventional loan, typically required if the down payment is less than 20%.
Q
Qualifying Ratio: A ratio used by lenders to determine if a borrower qualifies for a mortgage, typically including the housing expense ratio and the debt-to-income ratio.
R
Rate Lock: An agreement between the borrower and lender to lock in the interest rate for a specified period during the mortgage application process.
Refinance: The process of obtaining a new mortgage to replace an existing one, usually to get a better interest rate or terms.
S
Second Mortgage: A mortgage taken out on a property that already has a first mortgage, typically used to access home equity.
Settlement: The process of completing a real estate transaction, where the title is transferred, and funds are disbursed.
T
Title: A legal document that establishes ownership of a property.
Title Insurance: Insurance that protects against losses arising from defects in the title or disputes over property ownership.
Truth in Lending Act (TILA): A federal law requiring lenders to provide borrowers with written disclosures of important terms of the credit agreement, including APR and other charges.
U
Underwriting: The process by which a lender evaluates the risk of providing a mortgage loan to a borrower.
V
VA Loan: A mortgage guaranteed by the U.S. Department of Veterans Affairs, available to eligible veterans and their families.
W
Wraparound Mortgage: A type of seller financing where the new loan wraps around the existing loan, with the buyer making payments to the seller, who in turn makes payments on the original mortgage.
This comprehensive glossary should help you understand the various terms and concepts associated with mortgages.