Frequently Used Terms

Adjustable Rate Mortgage (ARM) - An ARM Loan (Adjustable Rate Mortgage) is a loan type that allows the lender to adjust the interest rate during the term of the loan. Generally, these changes are determined by a margin and an index so that the interest rate changes up or down, are based on the market conditions at the time of the rate change.

Amortization - The breakdown of a mortgage loan (including principal and interest) into equal payments over a specified period of time.

Annual Percentage Rate (APR) - To make it easier for consumers to compare mortgage loan interest rates, the federal government developed a standard format called an "Annual Percentage Rate" or APR, to provide an effective interest rate for comparison shopping purposes. Some of the costs you pay at closing are factored into the APR for ease of comparison. Your actual monthly payments are based on the periodic interest rate, NOT on the APR.

Appraisal - An estimated value of the property. As part of the loan approval process, the lender will hire an appraiser to assess the property and determine whether the loan amount is appropriate to its value. The appraiser uses several factors to determine the property's value, including its size, location, condition and the sales price of recently sold comparable properties in the area.

Balloon Mortgage - Monthly payments are made for a specified period of time, with the balance of the loan paid in full at the end of the loan term.

Bridge Loan - Also called a swing or interim loan, a bridge loan is an "in-between" loan that allows a buyer to make a down payment on a new home before their current home is sold. Typically, the money made from the sale of a current home would be immediately applied to the purchase of a new home; but when the timing is not right, a bridge loan can help the buyer finance their new home while the current home is still for sale.

Cash-Out Refinance - A refinance transaction in which the amount of money received from the new loan exceeds the total outstanding amount on the existing first mortgage, allowing the borrower to receive cash back from their loan.

Closing - The point at which the property's sale becomes final. The borrower signs the mortgage papers and in return receives the deed to the property. It is at this point that the down payment and closing costs are paid to the lender.

Closing Costs - All costs incurred during the purchasing of the property, not including the sales price itself. Closing costs vary from state to state, but your loan officer will be able to give you an estimate when you apply for your loan.

Commitment Letter - A formal offer by a lender stating the terms under which it agrees to lend money to a home buyer, also called a "loan commitment".

Construction Loan - A short-term loan used for financing the construction cost of a home, in which the lender makes payments to the builder at periodic intervals as the work progresses.

Credit History/Report - A record of a person's debts, both open and paid, and their payments toward those debts. This is a tool used by a lender to determine a potential borrower's ability to repay a mortgage, based on their history of repaying other debts in a timely manner.

Earnest Money - A deposit paid by a potential homebuyer to a realtor upon bid acceptance that indicates their intention to purchase the house.

Escrow - An escrow account is somewhat like a forced savings account, in which a portion of the monthly mortgage payment is set aside by the lender for payment of such expenses as property taxes or hazard insurance. This assures the lender that when these types of payments come due, adequate funds will be available.

Equity - The amount of a property that is "owned" by the homeowner, versus the amount still owed on the mortgage.

Equity Loan - A loan taken against a home's equity; in essence, the homeowner is taking out a loan against him or herself, and is repaying into their own mortgage.

Fixed Rate Mortgage - A loan that carries a guaranteed fixed interest rate and payments for the life of the loan.

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

Good Faith Estimate - A written estimate of the closing costs the borrower will most likely have to pay based on common local practices. The lender must provide this disclosure to the borrower within three days of receiving a loan application.

Government Loan - A government loan is one that is insured by the federal government, through agencies such as the Federal Housing Administration (FHA), or Veterans Administration (VA).

Inspection - A thorough review of the home's structural and mechanical condition performed by a qualified home inspector hired by the buyer.

Interest - The fee charged by the lending institution for borrowing money.

Jumbo Loan - A loan that exceeds the purchase limits established by Fannie Mae and Freddie Mac, also called a non-conforming loan.

Line of Credit - An agreement by a financial institution to extend credit up to a certain amount for a certain time to a specified borrower; Often taken against a home's equity.

Loan-to-Value (LTV) - The relationship between the principal balance on the mortgage and the appraised value of the property. For example, a $100,000 home with $80,000 remaining on the mortgage has an LTV of 80%.

Lock - Also called a "rate lock". A commitment by the lender to guarantee a specific interest rate if a mortgage closes within a set period of time (usually 30, 45 or 60 days), after which the guaranteed rate will expire.

Mortgage Insurance - Insurance for the lender in the event that the borrower defaults on the loan. Mortgage Insurance is typically required when the loan has an LTV of 80% or greater.

Offer to Purchase - Also called an "offer". When potential buyers are interested in purchasing a house, they will place a bid, offering to pay the seller a certain price for the house. The seller may either accept, or counter-offer until a price, closing date, and all contingencies are agreed upon.

Origination Fee - A fee paid to a lender for processing a loan application. The origination fee is stated in the form of points, and is paid at the time of closing.

PITI - An acronym for principal, interest, taxes, and insurance – factors that comprise a monthly mortgage payment.

Points - The borrower can purchase points in exchange for a lower interest rate. One point is equal to one percent of the loan amount and can decrease the interest rate by 1/8 to 1/4 percent. Before purchasing points, it is important to determine if the up-front cost will justify the long-term savings.

Principal - The portion of your mortgage loan that represents the actual amount borrowed, not including interest.

Refinance - The process of paying off one loan with the proceeds from a new loan (usually for a lower interest rate) using the same property as security.

Reserves - A cash amount that a homebuyer must have on hand after making a down payment and paying all closing costs.

Title - The legal document guaranteeing ownership of a piece of property.

Title Insurance - Insurance that protects the lender or buyer against loss arising from a dispute over ownership of a piece of property. The cost for title insurance is paid once, at the closing of the loan.

Truth-In-Lending - A federal law that requires lenders to fully disclose, in writing, all costs and terms associated with a mortgage, including the Annual Percentage Rate (APR) and other charges.

Underwriting - The "behind-the-scenes" process of reviewing a loan application to verify all information given and evaluate the borrower's credit history to determine whether the borrower qualifies for the loan for which they have applied.