Glossary of Common Mortgage Terms to Know
Unless you're an expert, navigating the language used around mortgages can be challenging. Whether you're a first-time homebuyer or haven't heard these terms in a while, you can benefit from reviewing our comprehensive mortgage terms glossary. Browse our alphabetized list of common mortgage terms below to learn more about the homebuying process.
An acceleration clause is a provision in a mortgage that allows the lender to demand payment of the entire principal balance if a monthly payment is missed or some other default occurs.
Additional Principal Payment
An additional principal payment is a way to reduce the remaining balance on the loan by paying more than the scheduled principal amount due.
Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage, or ARM, is a mortgage with an interest rate that changes during the life of the loan according to movements in an index rate. Common types of ARMs include 3/1 ARMs, 5/1 ARMs and 7/1 ARMs. As an example, a 5/1 ARM has a fixed monthly payment and interest for the first 5 years, then turns into a traditional adjustable-rate loan for the remaining 25 years. It's a good choice for people who expect to move or refinance before or shortly after the adjustment occurs. This type of mortgage is sometimes called an adjustable mortgage loan (AML) or a variable-rate mortgage (VRM).
An adjusted basis is the cost of a property plus the value of any capital expenditures for improvements to the property minus any depreciation taken.
An adjustment date is the date that the interest rate changes on an adjustable-rate mortgage.
An adjustment period is the period elapsing between adjustment dates for an adjustable-rate mortgage.
An affordability analysis helps lenders determine a buyer's ability to afford the purchase of a home. It includes your income, liabilities and available funds. It also considers the type of mortgage you plan to use, the area where you want to purchase a home and the closing costs that are likely.
Amortization is the gradual repayment of a mortgage loan, both principal and interest, by installments. When a mortgage is amortized, it means that the monthly payments are large enough to pay the interest and reduce the principal.
An amortization term is the length of time required to pay off, or amortize, the mortgage loan expressed as a number of months. For example, 360 months is the amortization term for a 30-year fixed-rate mortgage.
Annual Percentage Rate (APR)
An annual percentage rate, or APR, is the cost of credit expressed as a yearly rate including interest, mortgage insurance and loan origination fees. This allows the buyer to compare loans, keeping in mind that APR should not be confused with the actual note interest rate.
An appraisal is a written analysis prepared by a qualified appraiser that estimates the value of a property.
Appraised value is an opinion of a property's fair market value based on an appraiser's knowledge, experience and analysis of the property.
An asset is anything owned of monetary value including real property, personal property and enforceable claims against others. It includes bank accounts, stocks, mutual funds and other financial resources.
Assignment is the transfer of a mortgage from one person to another.
Assumability refers to whether a mortgage can be transferred from the seller to a new buyer. It typically requires a credit review of the new borrower, and lenders may charge a fee for the assumption. If a mortgage contains a due-on-sale clause, it may not be assumed by a new buyer.
An assumption fee is money paid to a lender, usually by the purchaser of real property, when a mortgage assumption takes place.
A balance sheet is a financial statement that shows assets, liabilities and net worth as of a specific date.
A balloon mortgage is a mortgage that doesn't fully amortize over the life of the loan. It starts with fixed monthly payments for a stated term, then requires a larger lump sum payment to be paid at the end of the term.
A balloon payment is the final lump sum paid at the maturity date of a balloon mortgage.
Before-tax income refers to total income before taxes are deducted.
Biweekly Payment Mortgage
A biweekly payment mortgage is designed to reduce the debt every 2 weeks instead of the standard monthly payment schedule. The 26, or possibly 27, biweekly payments made in a year are each equal to one-half of the monthly payment required if the loan were a standard 30-year fixed-rate mortgage. The result for the borrower is a substantial savings in interest.
A bridge loan is a second trust that's collateralized by the borrower's present home, allowing the proceeds to be used to close on a new house before the present home is sold. Also known as a swing loan.
A broker is an individual or company that brings borrowers and lenders together for the purpose of loan origination.
A cap limits how much the interest rate or the monthly payment can increase, either at each adjustment or during the life of the mortgage. Payment caps don't limit the amount of interest the lender is earning and may cause negative amortization.
Certificate of Eligibility (COE)
A Certificate of Eligibility, or COE, is a document issued by the federal government certifying a veteran's eligibility for a Department of Veterans Affairs, or VA, mortgage.
Certificate of Reasonable Value (CRV)
A Certificate of Reasonable Value, or CRV, is a document issued by the Department of Veterans Affairs that establishes the maximum value and loan amount for a VA mortgage.
Change frequency refers to how often the monthly payment and interest rate may change in an adjustable-rate mortgage, typically stated as a number of months.
Closing, also called settlement, refers to a meeting held to finalize the sale of a property. It's when the buyer signs the mortgage documents and pays closing costs.
Closing costs refer to expenses beyond the price of the property that are incurred by buyers and sellers when transferring ownership of a property. Closing costs normally include an origination fee, property taxes, charges for title insurance, escrow costs and appraisal fees. However, costs may vary depending on location, lender and other factors.
Compound interest refers to interest paid on the original principal balance plus any accrued and unpaid interest.
Consumer Reporting Agency
A consumer reporting agency, or credit bureau, is an organization that handles the preparation of reports used by lenders to determine a potential borrower's credit history. The agency gets data for these reports from a credit repository and other sources.
A conversion clause is a provision in an adjustable-rate mortgage allowing the loan to be converted to a fixed-rate mortgage at some point during the term. Usually conversion is allowed at the end of the first adjustment period, though a conversion clause may cost extra.
A credit report details an individual's credit history. It's prepared by a credit bureau and used by lenders to determine a loan applicant's creditworthiness.
Credit Risk Score
A credit risk score measures a consumer's credit risk relative to the rest of the US population, based on the individual's credit usage history. The credit score most widely used by lenders is called FICO, developed by Fair, Issac and Company. This number, ranging from 300 to 850, is calculated by a mathematical equation that evaluates many types of information on your credit report. Higher FICO scores represent lower credit risks, which typically equates to better loan terms. In general, credit scores are critical in the mortgage loan underwriting process.
Deed of Trust
A deed of trust is a document used in some states instead of a mortgage. The title is conveyed to a trustee.
Default refers to an ongoing failure to make mortgage payments on a timely basis or to comply with other requirements of a mortgage.
Delinquency refers to a failure to make a mortgage payment on time.
A deposit is a sum of money given to bind the sale of real estate. It can also refer to money given to ensure payment or an advance of funds in the processing of a loan.
A discount is a fee paid directly to a lender in exchange for a lower interest rate on the loan. In an adjustable-rate mortgage with an initial rate discount, the lender gives up a number of percentage points in interest to reduce the rate and lower the payments for part of the mortgage term, usually for 1 year or less. After the discount period, the rate usually increases according to its index rate.
A down payment is a part of the purchase price of a property that's paid in cash and not financed with a mortgage.
Equity is the amount of financial interest in a property. For buyers, it's the difference between the fair market value of their property and the amount still owed on the mortgage.
Escrow is an item of value, money or documents deposited with a third party to be delivered upon the fulfillment of a condition. For example, parties may deposit funds or documents into an escrow account to be disbursed upon closing of a sale of real estate.
Escrow disbursements refers to the use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance and other property expenses as they become due.
An escrow payment is the part of a mortgagor's monthly payment that's held by the servicer to pay for taxes, insurance, lease payments and other items as they become due.
Fannie Mae refers to the Federal National Mortgage Association, or FNMA. It's a congressionally chartered, shareholder-owned company that's the nation's largest supplier of home mortgage funds.
An FHA mortgage is a type of government mortgage loan that's insured by the Federal Housing Administration, or FHA.
FICO scores are the most widely used credit score in US mortgage loan underwriting. Also see Credit Risk Score.
The first mortgage refers to the primary lien against a property.
A fixed installment is the monthly payment due on a mortgage loan, including payment of both principal and interest.
Fixed-Rate Mortgage (FRM)
A fixed-rate mortgage, or FRM, is a mortgage where the interest rate is fixed throughout the entire term of the loan.
Fully Amortized ARM
An adjustable-rate mortgage with a monthly payment sufficient to amortize the remaining balance, at the interest accrual rate, over the amortization term.
Ginnie Mae refers to the Government National Mortgage Association, or GNMA. It's a government-owned corporation within the Department of Housing and Urban Development, or HUD, that assumes responsibility for government-backed mortgage loans.
Gross income is a borrower's normal annual income, including overtime that's regular or guaranteed. Salary is usually the principal source, but other income may qualify if it's significant and stable.
Growing-Equity Mortgage (GEM)
A growing-equity mortgage, or GEM, is a fixed-rate mortgage that provides scheduled payment increases over an established period of time. The increased amount of the monthly payment is applied directly toward reducing the remaining balance of the mortgage.
A guarantee mortgage is a mortgage that's guaranteed by a third party.
Housing Expense Ratio
The housing expense ratio is a percentage of gross monthly income budgeted to pay housing expenses.
HUD-1 Settlement Statement
The HUD-1 Settlement Statement is a document that provides an itemized listing of the funds that are payable at closing. Items that appear on the statement include real estate commissions, loan fees, points and initial escrow amounts. Each item on the statement is represented by a separate number within a standardized numbering system. The totals at the bottom of the document define the seller's net proceeds and the buyer's net payment at closing.
The index is the measure of interest rate changes a lender uses to determine how the interest rate on an adjustable-rate mortgage will change over time. The index is generally a published number or percentage, such as the average interest rate or yield on Treasury bills. Some index rates tend to be higher than others, and some are more volatile.
Initial Interest Rate
The initial interest rate is the original interest rate on the mortgage at the time of closing. It's also known as the start rate or teaser.
An installment is a regular periodic payment that a borrower agrees to make to a lender.
An insured mortgage is a mortgage protected by the federal government or by private mortgage insurance, or PMI.
Interest is a fee charged for borrowing money.
Interest Accrual Rate
The interest accrual rate is the percentage rate at which interest accrues on the mortgage. In most cases, it's also the rate used to calculate the monthly payments.
Interest Rate Buydown
An interest rate buydown is an arrangement between a homebuilder or seller, and a buyer that leads to reduced monthly payments in the early years of a mortgage. One party—often the seller, but sometimes the buyer—pays an amount of money up front to the lender, which is typically deposited into an escrow account and released each month to subsidize the buyer's mortgage payments. The interest rate for a buydown mortgage starts below market rate and increases over time based on the terms of the loan. For example, the interest rate for a 2-1 buydown mortgage will start at 2% below market rate, increase by 1% at the end of the first year and increase another 1% at the end of the second year. It then remains fixed for the remainder of the loan term.
Interest Rate Ceiling
The interest rate ceiling for an adjustable-rate mortgage is the maximum interest rate specified in the mortgage note.
Interest Rate Floor
The interest rate floor for an adjustable-rate mortgage is the minimum interest rate specified in the mortgage note.
A late charge is the penalty a borrower must pay when a payment is made after a stated number of days, usually 15 days after the due date.
Lease-Purchase Mortgage Loan
A lease-purchase mortgage loan is an alternative financing option that allows low- and moderate-income buyers to lease a home with the option to buy. Each month's rent payment consists of principal, interest, taxes and insurance payments (also referred to as PITI payments) on the first mortgage, plus an extra amount that accumulates in a savings account for a down payment.
Liabilities are a person's financial obligations. Liabilities include both long- and short-term debt.
Lifetime Payment Cap
The lifetime payment cap for an adjustable-rate mortgage is a limit on the amount that payments can increase or decrease over the life of the mortgage. Also see Cap.
Lifetime Rate Cap
The lifetime rate cap for an adjustable-rate mortgage is a limit on the amount that the interest rate can increase or decrease over the life of the mortgage. Also see Cap.
Line of Credit
A line of credit is an agreement by a commercial bank or other financial institution to extend credit up to a certain amount for a certain time.
A liquid asset refers to cash or any asset that's easily converted into cash.
A loan is a sum of borrowed money, called the principal, that's generally repaid with interest.
Loan-to-Value (LTV) Ratio
The loan-to-value, or LTV, ratio measures the relationship between the principal balance of a mortgage and the appraised value of the property, or the sale price if it's lower. For example, a $100,000 home with an $80,000 mortgage has an LTV ratio of 80%.
A lock-in period is when a lender guarantees a specific interest rate for a specified period of time, including the loan term and any points to be paid at closing. Short-term locks under 21 days are usually available after the lender approves the loan. However, many lenders may permit a borrower to lock a loan for 30 days or more prior to submission of the loan application.
Margin is the number of percentage points the lender adds to the index rate to calculate an adjustable-rate mortgage's interest rate at each adjustment.
Maturity is the date on which the principal balance of a loan becomes due and payable.
Monthly Fixed Installment
A monthly fixed installment is the portion of a total monthly payment that's applied toward principal and interest. When a mortgage is negatively amortized, the monthly fixed installment doesn't include any amount for principal reduction and doesn't cover all of the interest. The loan balance therefore increases instead of decreases.
A mortgage is a legal document that pledges a property to the lender as security for payment of a debt.
A mortgage banker works for a company that originates mortgages exclusively for resale in the secondary mortgage market.
A mortgage broker is an individual or a company that brings borrowers and lenders together for the purpose of loan origination.
Mortgage Insurance (MI)
Mortgage insurance, or MI, is a contract that insures the lender against loss caused by a mortgagor's default on a mortgage loan. Mortgage insurance can be issued by a private company or by a government agency.
Mortgage Insurance Premium (MIP)
A mortgage insurance premium, or MIP, is the amount paid by a mortgagor for mortgage insurance.
Mortgage Life Insurance
Mortgage life insurance is a type of term life insurance. In the event that the borrower dies while the policy is in force, the debt is automatically paid by insurance proceeds.
A mortgagor is the borrower in a mortgage agreement.
Negative amortization occurs when the monthly payments don't cover all of the interest cost. The interest cost that isn't covered is added to the unpaid principal balance. This means that, even after making many payments, you could owe more than you did at the beginning of the loan. Negative amortization can occur when an adjustable-rate mortgage has a payment cap that results in monthly payments not high enough to cover the interest due.
Net worth is the value of all of a person's assets, including cash.
A non-liquid asset is an asset that can't easily be converted into cash. Examples include real estate, art and collectibles, jewelry, vehicles, and equipment.
A note is a legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.
An origination fee is money paid to a lender for processing a loan application. The origination fee is stated in the form of points, where one point is equal to 1% of the mortgage amount.
Owner financing refers to a property purchase transaction in which the party selling the property provides all or part of the financing.
Payment Change Date
The payment change date is the date when a new monthly payment amount takes effect on an adjustable-rate mortgage or a graduated-payment mortgage. Generally, the payment change date occurs in the month immediately after the adjustment date.
Periodic Payment Cap
A periodic payment cap is a limit on the amount that payments can increase or decrease during any one adjustment period.
Periodic Rate Cap
A periodic rate cap is a limit on the amount that the interest rate can increase or decrease during any one adjustment period, regardless of how high or low the index might be.
PITI reserves refer to the cash amount that a borrower must have on hand after making a down payment and paying all closing costs for the purchase of a home. Reserves must equal the amount that the borrower would have to pay for principal, interest, taxes and insurance for a predefined period, typically 3 months.
A point is equal to 1% of the principal amount of your mortgage. For example, if you get a mortgage for $165,000, 1 point means $1,650 to the lender. Points are usually collected at closing and may be paid by either the borrower or the seller, or they may split the cost between them.
Pre-approval is the process of determining how much money you'll be eligible to borrow before you apply for a loan.
A prepayment penalty is a fee that may be charged to a borrower who pays off a loan before it's due.
The prime rate is the interest rate that banks charge to their preferred customers. Changes in the prime rate influence changes in other interest rates, including mortgage rates.
In a loan, principal can refer to the amount originally borrowed or the amount that remains unpaid. It's also the part of a monthly payment that reduces the remaining balance of a mortgage.
The principal balance is the outstanding balance of principal on a mortgage not including interest or any other charges.
Principal, Interest, Taxes and Insurance (PITI)
Principal, interest, taxes and insurance are the four components of a monthly mortgage payment. Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the monthly costs of property taxes and homeowners insurance, which may be paid into an escrow account.
Private Mortgage Insurance (PMI)
Private mortgage insurance, or PMI, is mortgage insurance provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults. Most lenders generally require PMI for a loan with an LTV ratio over 80%.
Qualifying ratios are calculations used to determine if a borrower can qualify for a mortgage. They consist of two separate ratios: housing expenses as a percentage of income and total debt obligations as a percentage of income.
A rate lock is a commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specific interest rate and lender costs for a specified period of time.
Real Estate Agent
A real estate agent is a person licensed to negotiate and transact the sale of real estate on behalf of a buyer or seller.
Real Estate Settlement Procedures Act (RESPA)
The Real Estate Settlement Procedures Act, or RESPA, is a consumer protection law that requires lenders to give borrowers advance notice of closing costs.
A Realtor is a real estate professional who's an active member of the National Association of Realtors, or NAR.
Recording refers to the noting in a registrar's office of the details of a properly executed legal document such as a deed, mortgage note, satisfaction of mortgage or an extension of mortgage, thereby making it a part of the public record.
Refinancing refers to paying off one mortgage loan with the proceeds from a new loan using the same property as security.
Revolving liability refers to a credit arrangement, such as a credit card, that allows a customer to borrow against a pre-approved line of credit when purchasing goods and services.
Secondary Mortgage Market
The secondary mortgage market is where existing mortgages are bought and sold by various banks and financial institutions.
Security refers to the property that will be pledged as collateral for a loan.
A seller carry-back is an agreement in which the owner of a property provides financing, often in combination with an assumable mortgage. Also see Owner Financing.
A servicer is an organization that collects principal and interest payments from borrowers and manages borrowers' escrow accounts. Servicers often service mortgages purchased by an investor in the secondary mortgage market.
Standard Payment Calculation
Standard payment calculation is a method used to determine the monthly payment required to repay the remaining balance of a mortgage in substantially equal installments over the remaining term of the mortgage at the current interest rate.
A step-rate mortgage is a mortgage that allows the interest rate to increase according to a specified schedule, such as 7 years, resulting in increased payments. At the end of the specified period, the rate and payments will remain fixed for the remainder of the loan.
Third-party origination occurs when a lender uses another party to completely or partially originate, process, underwrite, close, fund or package the mortgages it plans to deliver to the secondary mortgage market.
Total Expense Ratio
The total expense ratio refers to a mortgagor's total obligations as a percentage of gross monthly income including monthly housing expenses plus other monthly debts.
The Treasury index is used to determine interest rate changes for certain ARMs. It's based on the results of auctions that the US Treasury holds for its Treasury bills and securities. It can also be derived from the US Treasury's daily yield curve, which is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market.
Truth in Lending Act (TILA)
The Truth in Lending Act, or TILA, is a federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including APR and other charges. These terms are often delivered in the form of a truth-in-lending disclosure.
A two-step mortgage is an adjustable-rate mortgage with one interest rate for the first 5 to 7 years of its mortgage term and a different interest rate for the remainder of the amortization term.
Underwriting is the process of evaluating a loan application to determine the risk involved for the lender. Underwriting involves an analysis of the borrower's creditworthiness and the quality of the property itself.
A USDA mortgage is a type of government mortgage loan that's insured by the US Department of Agriculture, or USDA.
A VA mortgage is a type of government mortgage loan that's guaranteed by the Department of Veterans Affairs, or VA.
A wrap-around mortgage is a type of mortgage used in owner financing. It includes the remaining balance on an existing mortgage plus an additional amount requested by the seller. The buyer sends payments to the seller, who then sends payments to the seller's lender. This type of mortgage may not be allowed by a seller's lender and, if discovered, could be subject to a demand for full payment.
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This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.