Mortgage Terms

Actual Cash Value: The amount of money you receive for damaged property, calculated by subtracting depreciation from the replacement value.

Adjustable-Rate Mortgage (ARM): A loan with an initial lower interest rate that can change at specified times based on market indexes.

Adjustment Period: The time between interest rate adjustments for an ARM, typically ranging from 1 to 10 years for the initial period and 12 months for subsequent adjustments.

Amortization: The process of repaying a loan over time, including both interest and principal portions in each payment.

Amortization Schedule: A schedule provided by lenders that outlines how the principal and interest portions of mortgage payments change over the loan term.

Annual Percentage Rate (APR): The annual cost of a loan, including interest rate, fees, and other charges.

Application Fee: The fee charged by a lender to process a mortgage application.

Appraisal: A professional analysis used to estimate the value of a property, based on sales of similar properties.

Appraiser: A professional who conducts property analysis to determine its value, known as an “appraisal.

Appreciation: An increase in a home’s market value due to changing market conditions or improvements.

Arbitration: A process to settle disputes by referring them to a neutral third party (arbitrator), whose decision both parties agree to accept.

Assets: All valuable possessions owned by an individual.

Assumption: A homebuyer’s agreement to take over the responsibility of paying an existing mortgage from the seller.

Bankruptcy: A legal declaration of being unable to pay debts, which has significant negative impacts on credit and borrowing ability.

Capacity: Your ability to make your mortgage payments on time. This depends on your income and income stability (job history and security), your assets and savings, and the amount of your income each month that is left over after you’ve paid for your housing costs, debts, and other obligations.

Closing (Closing Date): The completion of the real estate transaction between the buyer and seller. The buyer signs the mortgage documents, and the closing costs are paid. Also known as the settlement date.

Closing Agent: A person who coordinates closing-related activities, such as recording the closing documents and disbursing funds.

Closing Costs: The costs to complete the real estate transaction. These costs are in addition to the price of the home and are paid at closing. They include points, taxes, title insurance, financing costs, items that must be prepaid or escrowed, and other costs. Ask your lender for a complete list of closing cost items.

Closing Disclosure: A form that provides the final details of the selected mortgage loan. It includes the loan terms, and projected monthly payments, and lists all fees and other costs to get the mortgage (closing costs). The lender is required to give the borrower the Closing Disclosure at least three business days before closing on the mortgage loan.

Collateral: Property that is used as security for a debt. In the case of a mortgage, the collateral would be the house and property.

Commitment Letter: A letter from your lender stating the amount of the mortgage, the number of years to repay the mortgage (the term), the interest rate, the loan origination fee, the annual percentage rate, and the monthly charges.

Concession: Something given up or agreed to in negotiating the sale of the house. For example, the sellers may agree to help pay for closing costs.

Contingency: A plan for something that may occur but is not likely. For example, your offer may be contingent on the home passing a home inspection. If the home does not pass inspection, you’re protected.

Counter-offer: An offer made in response to a previous offer. For example, after the buyer presents their first offer, the seller may make a counter-offer with a slightly higher sale price.

Credit: The ability of a person to borrow money or buy goods by paying over time. Credit is extended based on a lender’s good opinion of the person’s financial situation and reliability.

Credit Bureau: A company that gathers information on consumers who use credit. These companies sell that information to credit lenders in the form of a credit report.

Credit History: A record of credit use comprised of a list of individual consumer debts and a record of whether or not these debts were paid back on time or “as agreed.” Credit institutions have created a detailed document of your credit history called a credit report.

Credit Report: A document used by the credit industry to examine your use of credit. It provides information on the money that you’ve borrowed from credit institutions and your payment history.

Credit Score: A computer-generated number that summarizes your credit profile and predicts the likelihood that you’ll repay future debts.

Creditworthy: Your ability to qualify for credit and repay debts.

Debt: Money owed from one person or institution to another person or institution.

Debt-to-Income Ratio: The percentage of gross monthly income that goes toward paying for your monthly housing expense, alimony, child support, car payments and other installment debts, and payments on revolving or open-ended accounts such as credit cards.

Deed: The legal document transferring ownership or title to a property.

Deed of Trust: A legal document in which the borrower transfers the title to a 3rd party (trustee) to hold as security for the lender. When the loan is paid in full the trustee transfers title back to the borrower. If the borrower defaults on the loan the trustee will sell the property and pay the lender the mortgage debt.

Default: Failure to fulfill a legal obligation. A default includes failure to pay on a financial obligation, but may also be a failure to perform some action or service that is non-monetary. For example, when leasing a car, the lessee is usually required to properly maintain the car.

Depreciation: A decline in the value of a house due to changing market conditions or lack of upkeep on a home.

Down Payment: A portion of the price of a home, usually between 3-20%, not borrowed and paid up front.

Earnest Money Deposit: The deposit to show that you’re committed to buying the home. The deposit will not be refunded to you after the seller accepts your offer, unless one of the sales contract contingencies is not fulfilled.

Equity: The value in your home above the total amount of the liens against your home. If you owe $100,000 on your house but it is worth $130,000, you have $30,000 of equity.

Escrow: The holding of money or documents by a neutral third party before closing. It can also be an account held by the lender (or servicer) into which a homeowner pays money for taxes and insurance.

Fixed-Rate Mortgage: A mortgage with an interest rate that does not change during the entire term of the loan.

Forbearance: Your lender may offer a temporary reduction or suspension of your mortgage payments while you get back on your feet. Forbearance is often combined with a reinstatement or a repayment plan to pay off the missed or reduced mortgage payments.

Foreclosure: A legal action that ends all ownership rights in a home when the homebuyer fails to make the mortgage payments or is otherwise in default under the terms of the mortgage.

Gift Letter: A letter written by a family member verifying that a certain amount of money was given to you as a gift and that you don’t have to repay it. You can use this money toward a portion of your down payment with some mortgages.

Gross Monthly Income: The income you earn in a month before taxes and other deductions. It may also include rental income, self-employed income, income from alimony, child support, public assistance payments, and retirement benefits.

Home Inspection: A professional inspection of a home to determine the condition of the property. The inspection should include an evaluation of the plumbing, heating and cooling systems, roof, wiring, foundation, and pest infestation.

Homeowner’s Insurance: A policy that protects you and the lender from fire or flood, which damages the structure of the house; a liability, such as an injury to a visitor to your home; or damage to your personal property, such as your furniture, clothes, or appliances.

Housing Expense Ratio: The percentage of your gross monthly income that goes toward paying for your housing expenses.

Interest: The cost you pay to borrow money. It is the payment you make to a lender for the money it has loaned to you. Interest is usually expressed as a percentage of the amount borrowed.

Liabilities: Your debts and other financial obligations.

Lien: A claim or charge on property for payment of a debt. With a mortgage, the lender has the right to take the title to your property if you don’t make the mortgage payments.

Loan Estimate: A written statement from the lender itemizing the approximate costs and fees for the mortgage. A lender is required to provide potential borrowers with a loan estimate within three business days of receiving a loan application.

Loan Modification: This is a written agreement between you and your mortgage company that permanently changes one or more of the original terms of your note to make the payments more affordable.

Loan Origination Fees: Fees paid to your mortgage lender for processing the mortgage application. This fee is usually in the form of points. One point equals 1% of the mortgage amount.

Lock-In Rate: A written agreement guaranteeing a specific mortgage interest rate for a certain amount of time.

Low-Down-Payment Feature: A feature of some mortgages, usually fixed-rate mortgages, that helps you buy a home with as little as a 3% down payment.

Market Value: The current value of your home based on what the purchaser would pay. An appraisal is sometimes used to determine market value.

Mortgage: A loan using your home as collateral. In some states, the term mortgage is also used to describe the document you sign to grant the lender a lien on your home. It may also be used to indicate the amount of money you borrow, with interest, to purchase your house. The amount of your mortgage is usually the purchase price of the home minus your down payment.

Mortgage Broker: An independent finance professional who specializes in bringing together borrowers and lenders to complete real estate mortgages.

Mortgage Lender: The lender providing funds for a mortgage. Lenders also manage the credit and financial information review, the property, and the loan application process through closing.

Mortgage Rate: The cost or the interest rate you pay to borrow money to buy your house.

Offer: A formal bid from the homebuyer to the home seller to purchase a home.

Open House: When the seller’s real estate agent opens the seller’s house to the public. You don’t need a real estate agent to attend an open house.

Points: 1% of the amount of the mortgage loan. For example, if a loan is made for $50,000, one point equals $500.

Pre-Approval Letter: A letter from a mortgage lender indicating that you qualify for a mortgage of a specific amount. It also shows a home seller that you’re a serious buyer.

Pre-Qualification Letter: A letter from a mortgage lender that states that you’re pre-qualified to buy a home but does not commit the lender to a particular mortgage amount.

Principal: The amount of money borrowed to buy your house or the amount of the loan that has not yet been repaid to the lender. This does not include the interest you will pay to borrow that money. The principal balance (sometimes called the outstanding or unpaid principal balance) is the amount owed on the loan minus the amount you’ve repaid.

Private Mortgage Insurance (PMI): Insurance needed for mortgages with low down payments (usually less than 20% of the price of the home).

Rate Cap: The limit on the amount an interest rate on an ARM can increase or decrease during an adjustment period.

Ratified Sales Contract: A contract that shows both you and the seller of the house have agreed to your offer. This offer may include sales contingencies, such as obtaining a mortgage of a certain type and rate, getting an acceptable inspection, making repairs, and closing by a certain date.

Real Estate Professional: An individual who provides services in buying and selling homes.

Refinance: Getting a new mortgage with all or some portion of the proceeds used to pay off the original mortgage.

Repayment Plan: This is an agreement that gives you a fixed amount of time to repay the amount you are behind by combining a portion of what is past due with your regular monthly payment. At the end of the repayment period, you have gradually paid back the amount of your mortgage that was delinquent.

Replacement Cost: The cost to replace damaged personal property without a deduction for depreciation.

Title: The right to, and the ownership of, property. A title or deed is sometimes used as proof of ownership of land.

Title Insurance: Insurance that protects lenders and homeowners against legal problems with the title.

Truth-In-Lending Act (TILA): Federal law that requires disclosure of a truth-in-lending statement for consumer loans. The statement includes a summary of the total cost of credit, such as the APR, and other specifics of the loan.

Underwriting: The process a lender uses to determine loan approval. It involves evaluating the property and the borrower’s credit and ability to pay the mortgage.