Use the handy mortgage loan dictionary below for explanations of terms such as wraparound mortgage, graduated payment mortgage, growing equity mortgage, and more.
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Additional principal payment
Extra money included in the monthly payment to help reduce
the principal and shorten the term of the loan.
Add-on interest
The interest a borrower pays on the principal for the
duration of the loan.
Adjustable-rate mortgage (ARM)
A loan with an interest rate that is periodically adjusted
to reflect changes in a specified financial index.
Adjusted cost basis
The cost of any improvements the seller makes to the
property. Deducting the cost from the original sales price
provides the profit or loss of a home when it is sold.
Adjustment period
The amount of time between interest rate adjustments in an
adjustable-rate mortgage.
Agent
A person licensed by the state to conduct real estate
transactions.
Alienation clause
A provision that requires the borrower to pay the balance
of the loan in a lump sum after the property is sold or
transferred.
Allowances
Budgets offered by builders of new homes for the purchase
of carpeting and fixtures.
Amortization
The process of paying the principal and interest on a loan
through regularly scheduled installments.
Annual Percentage Rate (APR)
The cost of the loan expressed as a yearly rate on the
balance of the loan.
Application
A document that details a potential borrower's income, debt
and other obligations to determine credit worthiness.
Application fee
The fee that a lender charges to process a loan
application.
Appraisal
An opinion of the value of a property at a given point in
time.
Appreciation
An increase in the value of a home or other property.
Assessed value
A tax assessor's determination of the value of a home in
order to calculate a tax base.
Assumable mortgage
A mortgage that can be transferred to another borrower.
Average price
The price of a home determined by totaling the sales prices
of all houses sold in an area and dividing that number by
the number of homes.
Balloon Mortgage
A mortgage in which monthly installments are not large
enough to repay the loan by the end of the term. As a
result, the final payment due is the lump sum of the
remaining principal.
Balloon payment
The final lump sum payment due at the end of a balloon
mortgage.
Basis Point
A basis point is one one-hundredth of one percentage point.
For example, the difference between a loan at 8.25 percent
and a mortgage at 8.37 percent is 12 basis points.
Bill of sale
A document that transfers ownership of personal
property.
Binder
A report issued by a title insurance company that details
the condition of a home's title. and provides guidelines
for a title insurance policy.
Biweekly mortgage
A mortgage that requires payments every two weeks and helps
repay the loan over a shorter term.
Blanket insurance policy
A policy that covers more than one person or piece of
property.
Blanket mortgage
A mortgage that covers more than one property owned by the
same borrower.
Broker
A person licensed by the state to deal in real estate.
Cap
A limit on the amount the interest rate or monthly payment
can increase in an adjustable-rate mortgage.
Capital expenditure
The cost of making improvements on a property.
Cash-out refinance
The refinancing of a mortgage in which the money received
from the new loan is greater than the amount due on the old
loan. The borrower can use the extra funds in any
manner.
Closing
The final procedure in which documents are signed and
recorded, and the property is transferred.
Closing costs
Expenses incidental to the sale of real estate, including
loan, title and appraisal fees.
Closing statement
A document which details the final financial settlement
between a buyer and seller and the costs paid by each
party.
Commercial property
An area that is zoned for businesses.
Commission
The negotiable percentage of the sales price of a home that
is paid to the agents of the buyer and seller.
Community Reinvestment Act
A federal law that encourages financial institutions to
loan money in the neighborhoods where minority depositors
live.
Compound interest
The interest paid on the principal balance in a mortgage
and on the accrued and unpaid interest of the loan.
Condominium
Individual units in a building or development in which
owners hold title to the interior space while common areas
such as parking lots, community rooms and recreational
areas are owned by all the residents.
Construction loan
Short-term loans a lender makes for the construction of
homes and buildings. The lender disburses the funds in
stages.
Construction to permanent loan
The conversion of a construction loan to a longer-term
traditional mortgage after construction has been
completed.
Contingency
A condition specified in a purchase contract, such as a
satisfactory home inspection.
Conventional loan
A long-term loan a lender makes for the purchase of a
home.
Convertible adjustable-rate mortgage
A mortgage which starts as an adjustable-rate loan, but
allows the borrower to convert the loan to a fixed-rate
mortgage during a specified period of time.
Cooperative project
A project in which a corporation holds title and sells
shares representing individual units to buyers who then
receive a proprietary lease as their title.
Cost-plus contract
A construction contract that determines the builder's
profit based on a percentage of the cost of labor and
materials.
Credit
The money a lender extends to a buyer for a commitment to
repay the loan within a certain time frame.
Credit rating
The degree of credit worthiness assigned to a person based
on credit history and financial status.
Credit report
A credit bureau report that shows a loan applicant's
history of payments made on previous debts. Several
companies issue credit reports, but the three largest are
Trans Union Corp., Equifax and Experian (formerly TRW
).
Deed
The legal document that transfers ownership of a piece of
property.
Deed of trust
A document that gives a lender the right to foreclose on a
piece of property if the borrower defaults on the loan.
Default
The failure to fulfill a duty or promise or discharge an
obligation, such as making monthly mortgage payments.
Deferred maintenance
Any repair or maintenance of a piece of property that has
been postponed, resulting in a decline in property
value.
Delinquent Mortgage
A mortgage that involves a borrower who is behind on
payments. If the borrower cannot bring the payments up to
date within a specified number of days, the lender may
begin foreclosure proceedings.
Depreciation
The decline in value of a piece of property.
Disclosure
A statement to a potential buyer listing information
relevant to a piece of property, such as the presence of
radon or lead paint.
Down payment
The amount of money a buyer agrees to give the seller when
a sales agreement is signed. Complete financing is later
secured with a lender.
Draw
A payment made to subcontractors or suppliers from a
construction loan.
Early occupancy
The condition in which buyers can occupy the property
before the sale is completed.
End loan
The conversion from a construction loan to permanent
financing a condominium buyer secures after all units in a
project have been completed.
Environmental impact statement
A government-mandated evaluation of all aspects and effects
a development will have on the environment of a proposed
site.
Equity
A determination of the value of a property after existing
liens are deducted.
Errors and omissions insurance
A policy that pays for any mistakes a builder or architect
makes in a project.
Escrow
A neutral third party holds the documents and money
involved in a real estate transaction and ensures that all
conditions of a sale are met.. Escrow also refers to a
special account that a lender establishes to hold monthly
installments from the borrower to cover property taxes and
insurance.
Escrow closing
Escrow closes when all conditions of a real estate
transaction are met and the title of the property is
transferred to the buyer.
Estate
The total assets of a person, including real property, at
the time of death.
Fair Credit Reporting Act
A federal law passed in 1971 that regulates the activity of
credit bureaus. It is designed to prevent inaccurate or
obsolete information from staying in a consumer's credit
file and requires credit bureaus to have reasonable
procedures for gathering, maintaining and disseminating
credit information. The act also requires credit bureaus to
show a consumer their credit file if the consumer presents
proper identification, although the bureau reserves the
right to charge a fee for doing so.
Fair Housing Act
Landmark federal law passed in 1965 and amended in 1988
that makes it illegal to deny rent or refuse to sell to
anyone based on race, color, religion, sex or national
origin. The 1988 amendment expanded the protections to
include family status and disability.
Fannie Mae
The official name of the Federal National Mortgage
Association, it is a congressionally chartered,
shareholder-owned company that buys mortgages from lenders
and resells them as securities on the secondary mortgage
market.
Federal Housing Administration (FHA)
This government agency operates a variety of home-loan
programs. Its most popular is the Sec. 203(b), program,
which provides low-rate mortgages to buyers who make a down
payment as small as 3 percent.
FHA loans
Mortgages that are insured by the Federal Housing
Administration. The FHA's 203(b) loan program provides
low-rate mortgages to buyers who make a down payment as
small as 3 percent. The agency also operates loan plans for
investors and purchasers of rural property.
First mortgage
The primary mortgage on a property that has priority over
all other voluntary liens.
Fixed installment
The monthly payment on a home loan.
Fixed-rate mortgage
A home loan with an interest rate that will remain at a
specific rate for the term of the loan. About 75 percent of
all home mortgages have fixed rates.
Flat fee
A set fee charged by a broker instead of a commission.
Flood insurance
zard coverage that is required in designated flood
areas.
Forbearance
A course of action a lender may pursue to delay foreclosure
or legal action against a delinquent borrower.
Foreclosure
The legal process reserved by a lender to terminate the
borrower's interest in a property after a loan has been
defaulted. When the process is completed, the lender may
sell the property and keep the proceeds to satisfy its
mortgage and any legal costs. Any excess proceeds may be
used to satisfy other liens or be returned to the
borrower.
For Sale By Owner (FSBO)
The owner acts as the agent to avoid paying a sales
commission.
Freddie Mac
The common name for the Federal Home Loan Mortgage
Corporation, a congressionally chartered institution that
buys mortgages from lenders and resells them as securities
on the secondary mortgage market.
Fully amortized adjustable-rate mortgage
A mortgage that amortizes, or pays down, the balance of a
loan.
Gift
A cash gift a buyer receives from a relative or other
source. Lenders usually require a "gift letter" stating
that the money will not have to be repaid.
Grace period
A specified amount of time to make a loan payment after its
due date without penalty.
Graduated-payment mortgage (GPM)
A mortgage that requires a borrower to make larger monthly
payments over the term of the loan. The payment is
unusually low for the first few years but gradually rises
until year three or five, then remains fixed.
Growing-equity mortgage
A fixed rate mortgage that increases payments over a
specific period of time. The extra funds are applied to the
principal.
Guarantee mortgage
A loan guaranteed by a third party, such as a government
institution.
Hazard insurance
This provision of homeowners insurance covers damage by
fire, wind or other disaster. It is required by all lenders
before a loan is approved.
Home equity conversion mortgage
Loans made to older owners who want to convert equity into
money. Because borrowers are qualified on the basis of the
value of their home, e, the loan is not the same as a home
equity loan. Also known as reverse mortgages.
Home equity loan
A loan that allows owners to borrow against the equity in
their homes.
Home inspection
An examination of a home's construction, condition and
internal systems by an inspector or contractor prior to
purchase.
Homeowners' association
A group that governs a modern subdivision or planned
community. An association collects monthly fees from all
owners to pay for maintenance of common areas, handle legal
and safety issues, and enforce the covenants, conditions
and restrictions set by the developer.
Homeowners' insurance
This insurance includes hazard coverage for any damages
that may affect the value of a house, in addition to
personal liability and theft coverage.
Home warranty
A type of insurance that covers repairs to certain parts of
a house and some fixtures.
Impact fees
Fees collected from developers of new homes to pay for
schools, parks and other facilities.
Impounds
A portion of the monthly mortgage payment that is placed in
an account and used to pay for hazard insurance, property
taxes and private mortgage insurance.
Income property
Property that is not occupied by the owner but is used to
generate income.
Index
Financial tables used by lenders to calculate interest
rates on adjustable mortgages and on Treasury bills.
Initial interest rate
The original interest rate on an adjustable mortgage.
Interest
The fee borrowers pay to obtain a loan. It is calculated
based on a percentage of the total loan.
Interest accrual rate
The rate at which interest accrues on a mortgage.
Interest-only loan
The pays only the interest that accrues on the loan balance
each month. Because each payment goes toward interest, the
outstanding balance of the loan does not decline with each
payment.
Interest Rate
The sum, expressed as a percentage, charged for a loan.
Interest payments on most home loans are tax-
deductible.
Interest rate buy-down plans
For cash-short buyers, some sellers are willing to advance
funds from the sale of the home to buy down the interest
rate and reduce the buyer's monthly obligation.
Interest rate caps
A limit on the amount that can be charged to the monthly
payment of an adjustable-rate mortgage during an adjustment
period.
Interest rate ceiling
The highest interest a lender can charge for an
adjustable-rate mortgage.
Investment property
Real estate that generates income, such as an apartment
building or a rental house.
Jumbo mortgage
Loans that exceed limits set by Fannie Mae and Freddie Mac.
The current limit is $417,000.
Late charge
A fee a lender imposes on a borrower when the borrower does
not make a payment on time.
Lender
A bank, savings institution or mortgage company that offers
home loans.
Liability insurance
A policy that protects owners against any claims of
negligence, personal injury or property damage.
Lien
A claim laid by one person or company on the property of
another as security for money owed.
Life cap
A limit on the amount that a loan rate can move during the
term of the mortgage. For example, the rate on an
adjustable-rate mortgage that begins at 5 percent and has a
lifetime cap of 6 percentage points cannot rise above 11
percent, even if rates on fixed-rate mortgages soar to 20
percent.
Loan application
The first step toward submitting a home loan requires the
borrower to itemize basic financial information.
Loan application fee
A fee charged by lenders to for making a loan
application.
Loan commitment
A promise by a lender or other financial institution to
make or insure a loan for a specified amount and on
specific terms.
Loan officer
An official representative of a lending institution who is
empowered to act on behalf of the lender within certain
limits.
Loan origination fee
Most lenders charge borrowers an origination fee--or
points--for processing a loan. A point is 1 percent of the
total loan amount.
Loan processing fee
A fee charged by some lenders for gathering information to
enable the lender to process the loan.
Loan term
The amount of a time set by the lender for a buyer to pay a
mortgage. Most conventional loans have 30-year or 15-year
terms.
Loan -to-value ratio
A technical measure used by lenders to assess the
relationship of the loan amount to the value of the
property
Low-documentation loan
A mortgage that requires only minimal verification of
income and assets.
Low-down-payment loan
A home loan that requires the borrower to make only a small
down payment before obtaining the financing needed to
purchase a house.
Margin
The lender's "retail markup" on the mortgage. For example,
if the index rate for an adjustable-rate mortgage is 5
percent but the lender has a 2.5 percentage-point margin,
the rate the borrower will pay is 7.5 percent.
Market value
The price that a piece of property sells for at a
particular point in time.
Mechanic's lien
Subcontractors or suppliers sometimes will file an
encumbrance, or mechanic's lien, against a property to seek
payment.
Mortgage
A legal document specifying a certain amount of money to
purchase a home at a certain interest rate, and using the
property as collateral.
Mortgage acceleration clause
A clause which allows a lender to demand that the entire
balance of the loan be repaid in a lump sum under certain
circumstances. The acceleration clause is usually triggered
if the home is sold, title to the property is changed, the
loan is refinanced or the borrower defaults on a scheduled
payment.
Mortgage banker
A company that provides home loans using its own money. The
loans are usually sold to investors such as insurance
companies and Fannie Mae.
Mortgage broker
A company that matches lenders with prospective borrowers
who meet the lender's criteria. The mortgage broker does
not make the loan, but receives payment from the lender for
services.
Mortgage insurance
Required by lenders in some loans to protect them from a
possible default . All conventional loans with less than a
20 percent down payments require private mortgage
insurance, or PMI.
Multiple listing service (MLS)
The service combines the listings for all available homes
in an area, except For-Sale-By-Owner (FSBO) properties, in
one directory or database.
Negative amortization
The situation occurs when a borrower's monthly payment is
not large enough to cover both the principal and interest
of a loan. As a result, the outstanding balance of the loan
actually grows larger with each payment rather than
smaller. Most fixed-rate loans are not subject to negative
amortization, but many adjustable-rate mortgages are
susceptible.
No-documentation loan
A loan application that does not require verification of
income but typically is granted in cases of large down
payments.
Non-assumption clause
A loan provision that prohibits the transfer of a mortgage
to another borrower without lender approval.
Non-recurring closing costs
Costs that are one-time only fees for such items as an
appraisal, loan points, credit report, title insurance and
a home inspection.
Note
The legal document that requires a borrower to repay a
mortgage at a certain interest rate over a specified period
of time.
Note rate
The interest rate specified in a mortgage note.
Notice of default
A lender's initial action when a mortgage payment is late
and attempts to reconcile the issue out of court have
failed.
Origination fee
A fee charged by most lenders--also called points--for
processing a loan. A point is 1 percent of the total loan
amount.
Owner financing
A transaction in which the seller of a property agrees to
finance all or part of the purchase.
PITI (Principal, Interest, Taxes,
Insurance)
When a buyer applies for a loan, the lender will calculate
the principal, interest, taxes and insurance. The figure is
designed to represent the borrower's actual monthly
mortgage-related expenses.
Point
Fees charged by lenders at the time a loan is originated. A
point is equal to 1 percent of the total loan amount.
Pre-approval letter
A letter from a lender that informs a seller about the
amount of money that a potential buyer can obtain.
Prepaid expenses
The costs for taxes, insurance and assessments paid before
the due date.
Prepaid interest
Interest paid before it is due. For example, at the close
of a real estate transaction borrowers usually pay for the
interest on their loan that falls between the closing
period and the first monthly payment.
Prepayment penalty
Lenders can impose a penalty on a borrower who pays a loan
off before its expected end date.
Prequalification
Many lenders will prequalify a borrower who is shopping for
a loan by completing a preliminary assessment of the
buyer's ability to pay for a home.
Principal
The amount of money that the borrower owes on a
mortgage.
Private mortgage insurance (PMI)
A special type of loan insurance that many lenders require
borrowers to purchase if the borrower's down payment is
less than 20 percent of the home's purchase price.
Property tax
Property taxes are calculated at about 1.5 percent of the
current market value.
Property value
The value of a piece of property is based on the price a
buyer will pay at a certain time.
Purchase agreement
A document which details the purchase price and conditions
of the transaction.
Qualifying ratios
Lenders compute qualifying ratios to determine how much a
potential buyer can borrow.
Quit-claim deed
A document that releases a party from any interest in a
piece of real estate.
Rate-improvement mortgage
A loan with a clause that entitles a borrower to a one-time
cut in the interest rate without going through
refinancing.
Rate lock
When interest rates are volatile, many borrowers want to
"lock in" an interest rate and many lenders will oblige,
setting a limit on the amount of time the guaranteed
interest rate is in effect.
Real estate
Land and anything permanently affixed to it, including
buildings, fences and other items attached to the
structure.
Real estate agent
A real estate agent has a state license to represent a
buyer or a seller in a real estate transaction in exchange
for a commission. Most agents work for real estate
brokers.
Real estate broker
A real estate agent who is licensed by the state to
represent a buyer or seller in a real estate transaction in
exchange for a commission. Most brokers also have agents
working for them, and are entitled to a portion of their
commissions.
Real estate investment trusts (REITs)
The trusts are publicly traded companies that own, develop
and operate commercial properties.
Real Estate Settlement Procedures Act (RESPA)
A federal law designed to make sellers and buyers aware of
settlement fees and other transaction-related costs. RESPA
also outlaws kickbacks in the real estate business.
Recording fee
A fee charged by real estate agents for conveying the sale
of a piece of property into the public record.
Refinancing
The process of replacing an older loan with a new mortgage
that has better terms.
Regulation Z
The federal code issued under the Truth-in-Lending Act
which requires that a borrower be advised in writing of all
costs associated with the credit portion of a financial
transaction.
Rehabilitation mortgage
A mortgage that provides for the costs of repairing and
improving a resale home or building.
Remaining balance
The amount of unpaid principal on a home loan.
Remaining term
The original loan term minus the number of payments
made.
Resale value
The future value of a piece of property that can be
affected by many factors, including the surrounding
neighborhood, school scores, and economic and housing
market conditions.
Reserve fund
All homeowners associations set aside a certain amount of
money for major repairs or improvements.
Restructured loan
A mortgage in which new terms are negotiated.
Return on investment
The amount of profit a property generates.
Reverse mortgage
A special type of loan available to equity-rich, older
owners. Repayment is not necessary until the borrower sells
the property or moves into a retirement community.
Right of first refusal
An agreement by a property owner to give another person the
right to buy or rent the property before it goes on the
open market.
Right to rescission
A provision in the federal Truth-in-Lending Act that allows
borrowers to cancel certain kinds of loans within three
days of signing.
Second mortgage
Another loan placed upon a piece of property.
Secured loan
Any loan backed by collateral.
Servicer
A firm that collects mortgage payments and manages
borrowers' escrow accounts.
Settlement statement
A document that details who has paid what to whom.
Shared-appreciation mortgage
A loan that allows a lender or other party to share in the
borrower's profits when the home is sold.
Shared-equity transaction
A transaction in which two buyers purchase a property, one
as a resident co-owner and the other as an investor
co-owner.
Special assessment
When a homeowners' association needs or wants extra funds,
it levies a special assessment upon the owners.
Step-rate mortgage
A loan that allows a gradual increase in the interest rate
during the first few years of the loan.
Subordinate loan
A second or third mortgage.
Sweat equity
The non-cash value put into a piece of property by the
owner, such as do-it-yourself home improvements.
Teaser rate
An low, short-term rate offered on a mortgage to entice the
borrower.
Timeshare
Ownership that involves the acquisition of a specific
period of time, or that percentage of interest, in a
vacation home or resort.
Title
The actual legal document conferring ownership of a piece
of real estate.
Title company
Firms that ensure that the title to a piece of property is
clear and provide title insurance.
Title insurance
A policy issued to lenders and buyers to protect any losses
because of a dispute over the ownership of a piece of
property.
Total expense ratio
The percentage of monthly debt obligations relative to
gross monthly income.
Townhouse
An attached home that is not a condominium.
Tract home
Another term for a production home, a mass-produced house
constructed by one builder in a project.
Transfer of ownership
Any legal means by which a piece of real estate changes
hands.
Truth-in-Lending Act
A federal law that protects consumers in a variety of ways.
One of its key provisions allows a consumer to cancel a
home-improvement loan, second mortgage or other loan if the
home was pledged as security (except for a first mortgage
or first trust deed) until midnight of the third business
day after the contract was signed.
Two-step mortgage
An adjustable mortgage with two interest rates, one for the
first five or seven years of the loan, and the other for
the remainder of the loan term.
Underwriting
The process that lenders go through to evaluate the risks
posed by a particular borrower and to set appropriate
conditions for the loan.
U.S. Department. of Housing and Urban Development
(HUD)
A federal agency that oversees the Federal Housing
Administration and a variety of housing and community
development programs.
Unsecured loan
Any loan that is not backed by collateral.
Variable rate
An interest rate that changes with fluctuations in such
indexes as the U.S. Treasury bill index.
Verification of deposit
Part of the loan process, in which a lender will ask a
borrower's bank to sign a statement verifying the
borrower's account balances and history.
Verification of employment
Part of the loan process, in which a lender asks the
borrower's employer for confirmation of the borrower's
position and salary.
Veterans Administration (VA)
The U.S. Department of Veterans Affairs operates a variety
of programs to help veterans. One of the key plans it
oversees is the VA loan program, which allows most veterans
to purchase a house without a down payment.
VA loan
A program that allows most veterans to purchase a house
without a down payment.
Wraparound mortgage
A loan to a buyer for the remaining balance on a seller's
first mortgage and an additional amount requested by the
seller. Payments on both loans are made to the lender who
holds the wraparound loan.