Valerie, David, and Dr. Christian Long

Mortgage Glossary

Adjustable Rate Mortgage (ARM): Mortgage loans under which the interest rate is periodically adjusted based upon terms agreed to at the inception of the loan.

Amortization: The reduction of a debt through regular payments of both interest and principal.

Annual Percentage Rate (APR): The total cost of a mortgage stated as a yearly rate; it includes all financing costs, such as interest, mortgage insurance, and the loan origination fee.

Appraisal: An estimate of the value of a property made by a qualified person, using the property’s age, size, location, quality, etc.

Appreciation: An increase in the value of a property due to market conditions or other causes.

Asset: Anything of monetary value that is owned by a person or company. Assets include real property, personal property, stocks, mutual funds, etc.

Bankruptcy: Legal relief from the payment of all debts after the surrender of all assets to a court-appointed trustee. Assets are distributed to creditors as full satisfaction of debts, with certain priorities and exemptions. A person, firm or corporation may declare bankruptcy under one of several chapters of the U. S.

Bankruptcy Code: Chapter 7 covers liquidation of the debtor's assets; Chapter 11 covers reorganization of bankrupt businesses; and Chapter 13 covers payment of debts by individuals through a bankruptcy plan.

Biweekly Payment Mortgage: A mortgage with payments due every two weeks (instead of monthly).

Bridge Loan: A short-term loan secured by the borrower’s current home (which is usually for sale) that allows the proceeds to be used for building or closing on a new house before the current home is sold. Also known as a “swing loan.”

Cash-out Refinance: A refinance transaction in which the borrower receives additional funds over and above the amount needed to repay the existing mortgage, closing costs, points, and any subordinate liens.

Closing: Also known as settlement, the finalization of the process of purchasing or refinancing real estate. The closing includes the delivery of a deed, the signing of mortgage documents and the disbursement of funds.

Closing Costs: Costs that are paid at closing, in addition to the purchase price of the property. These costs normally include, but are not limited to, origination fees, discount points, attorney's fees, costs for title insurance, surveys, recording documents, and prepayment of real estate taxes and insurance premiums held by the lender. Sometimes the seller will help the borrower pay some of these costs.

Co-Borrower: A party who signs the mortgage note along with the primary borrower, and who also shares the title to the subject real estate.

Collateral: An asset that is pledged as security for a loan. The borrower risks losing the asset if the loan is not repaid according to the terms of the loan agreement. In the case of a mortgage, the collateral would be the house and real property.

Commitment Letter: A binding offer from your lender that includes the amount of the mortgage, the interest rate, and repayment terms.

Comparables: An abbreviation for “comparable properties,” which are used as a comparison in determining the current value of a property that is being appraised.

Co-Signer: A party who signs the mortgage note along with the borrower, but who does not own or have any interest in the title to the property.

Construction Loan: A loan for financing the cost of construction or improvements to a property; the lender disburses payments to the builder at periodic intervals during construction.

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

Credit Report: Information provided by a credit bureau that allows a lender or other business to examine your use of credit. It provides information on money that you’ve borrowed from credit institutions and your payment history.

Credit Score: A numerical value that ranks a borrower’s credit risk at a given point in time based on a statistical evaluation of information in the individual’s credit history that has been proven to be predictive of loan performance.

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

Debt-to-Income Ratio: Compares the amount of monthly income to the amount the borrower will owe each month in house payment (PITI) plus other debts. The other debts may include, but are not limited to: car payments, credit cards, alimony, child support, and personal loans. This ratio is commonly used to see if the borrower has the capacity to repay the debt.

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

Default: Failure to fulfill a legal obligation. A default includes failure to pay on a financial obligation, but also may 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.

Delinquency: The condition of a loan when a scheduled payment is 30 or more days past due.

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

Down Payment: The part of the purchase price which the buyer pays in cash and does not finance with a mortgage.

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 Account: An account held by the lending institution to which the borrower pays monthly installments for property taxes, insurance, and special assessments, and from which the lender disburses these sums as they become due.

Fair Market Value: The price that a property would bring if freely offered on the open market with both a willing buyer and willing seller.

Finance Charge: The cost of credit as a dollar amount (i.e. total amount of interest and specific other loan charges to be paid over the term of the loan and other loan charges to be paid by the borrower at closing). Loan charges include origination fees, discount points, mortgage insurance, and other applicable charges. If the seller pays any of these charges, they cannot be included in the finance charge.

First Mortgage: A mortgage that is the primary lien against a property.

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

Floating: The term used when a purchaser elects not to lock in an interest rate at the time of application.

Flood Insurance: Insurance that compensates for physical property damage resulting from flooding. It is required for properties located in federally designated flood hazard zones.

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 or affidavit that indicates that part of a borrower's down payment is supplied by relatives or friends in the form of a gift and that the gift does not have to be repaid.

Good Faith Estimate (GFE): An estimate of settlement charges paid by the borrower at closing. The Real Estate Settlement Procedures Act (RESPA) requires a Good Faith Estimate of settlement charges be provided to the borrower.

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

Home Equity Loan: A cash loan made against the equity in the borrower’s home. A home equity loan is a second loan that can be used for big expenses, such as college loans and home improvements.

Home Equity Line of Credit (HELOC): A type of revolving loan that enables a homeowner to obtain multiple advances of the loan proceeds at his or her own discretion, up to an amount that represents a specified percentage of the borrower’s equity in the property

Homeowner’s Insurance: A policy that protects you and the lender from fire or flood that 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.

HUD-1 Settlement Statement: A final listing of the closing costs of the mortgage transaction. It provides the sales price and down payment, as well as the total settlement costs required from the buyer and seller.

Installment: The regular periodic payment that a borrower agrees to make to a lender.

Interest:  The amount paid by a borrower to a lender for the use of the lender's money for a certain period of time.

Interest Rate: The percentage of an amount of money that is paid for its use for a specific time; usually expressed as an annual percentage.

Judgment: The final legal decision by a judge in a court of law regarding the legal rights of involved parties or the payment of a debt.

Late Charge: A penalty imposed by the lender when a borrower fails to make a scheduled payment on time.

Liabilities: A person’s debts and other financial obligations.

Lien: A legal claim against a property that must be paid off when the property is sold. A lien is created when you borrow money and use your home as collateral for the loan.

Loan Application: A source of information on which the lender bases a decision to make or not make a loan; defines the terms of the loan contract, gives the names of the borrower(s), place of employment, salary, bank accounts, credit references, real estate owned, and describes the property to be mortgaged.

Loan Term: Number of years a loan is amortized. Mortgage loan terms are generally 15, 20, or 30 years.

Loan-to-Value (LTV): The ratio of the total amount borrowed on a mortgage against a property, compared to the appraised value of the property. A LTV ratio of 90 means that the borrower is borrowing 90% of the value of the property and paying 10% as a down payment.

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

Maturity Date: The date on which a mortgage loan is scheduled to be paid in full, as stated in the note.

Mortgage: The written instrument used to pledge a title to real estate as security for repayment of a promissory note.

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

Mortgagee: The institution, group, or individual that lends money on the security of pledged real estate; the association, the lender.

Mortgagor: The owner of real estate who pledges his property as security for the repayment of a debt; the borrower.

Note: A written promise to pay a specified amount under the agreed upon conditions.

Points: A factor used in rate adjustment. One point is equal to 1% of the loan amount.

Pre-Approval: A process in which a customer provides appropriate information on income, debts and assets that will be used to make a credit-only loan decision. The customer typically has not identified a property to be purchased; however, a specific sales price and loan amount are used to make a loan decision. (The sales price and loan amount are based on customer assumptions.)

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.

Principal Balance: The outstanding balance of a mortgage, not counting interest.

Private Mortgage Insurance: Insurance for conventional mortgage loans that protects the lender from loss in the event of default by the borrower.

Promissory Note: A written promise to repay a specified amount over a specified period of time.

Purchase and Sale Agreement: A document that details the price and conditions for a transaction. In connection with the sale of a residential property, the agreement typically would include: information about the property to be sold, sale price, down payment, earnest money deposit, financing, closing date, occupancy date, length of time the offer is valid, and any special contingencies.

Rate Lock: An agreement in which an interest rate is “locked in” or guaranteed for a specified period of time prior to closing.

Recording: The filing of a lien or other legal documents in the appropriate public record.

Refinancing: Creating a new loan, usually with a lower interest rate, to pay off an existing loan using the same property as security.

Rescission: The cancellation or annulment of a transaction or contract by operation of law or by mutual consent. Borrowers have a right to cancel certain mortgage refinance and home equity transactions within three business days after closing, or for up to three years in certain instances.

Second Mortgage: A mortgage that is subordinate to a first mortgage, often created when a borrower needs additional funds.

Secured Loan: A loan that is backed by property such as a house, car, jewelry, etc.

Security: The property that will be given or pledged as collateral for a loan.

Servicing: All the management and operational procedures that the lender (or a company acting for the lender) handles for the life of the loan, including: collecting the mortgage payments, ensuring that the taxes and insurance charges are paid promptly, sending the borrower an annual report on the mortgage and escrow accounts, releasing the lien upon payment in full, and foreclosing if in default.  

Servicing Released: A stipulation in the agreement for the sale of mortgages in which the lender is not responsible for servicing the loan.

Servicing Retained: A loan sale in which the original lender's servicing department continues to service the loan after the sale to a secondary institution or investor.

Settlement: The process of completing a loan transaction at which time the mortgage documents are signed and then recorded, funds are disbursed, and the property is transferred to the buyer (if applicable). Also called closing or escrow in different jurisdictions.

Settlement Statement: Also referred to as a HUD-1 Settlement Statement. The complete breakdown of costs involved in the real estate transaction for both the seller and buyer.

Subordinate Financing: An additional lien against the real estate securing the borrowers’ first mortgage. This lien takes second priority to the first mortgage.

Taxes and Insurance: Funds collected as part of the borrower’s monthly payment and held in escrow for the payment of the borrower’s, or funds paid by the borrower for, state and local property taxes and insurance premiums.

Title: Evidence of the ownership of land, publically recorded in the county in which the property is located.  Once your transaction closes and title is recorded, you are the owner with all rights to the property.

Title Insurance Policy: A contract by which the insurer, usually a title company, indicates who has legal title and agrees to pay the insured a specific amount of any loss caused by clouds, claims, or defects of title to real estate, which the insured has an interest as owner, mortgagee, or otherwise.

(a) Owner's Title Policy: Usually issued to the landowner himself. The owner's title insurance policy is bought and paid for only once and then continues in force without any further payment. Owner's title insurance policies are not assignable.

(b) Mortgagee's Title Policy: Issued to the mortgagee and terminates when the mortgage debt is paid. In the event of foreclosure, or if the mortgagee acquires the title from the mortgagor in lieu of foreclosure, the policy continues in force, giving continued protection against any defects of the title which existed at, or prior to, the date of the policy.

Title Search: A check of the public records to ensure that the seller is the legal owner of the property and to identify any liens or claims against the property.

Transfer Tax: State or local tax payable when the title to the property passes from one owner to another.

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

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

Unsecured Loan: A loan that is not backed by collateral.

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