Mortgage
Lingo
Mortgage
Lending Lingo: What Does It Mean?
Like all industries, the world of mortgage lending
has its own language, or terminology. Following are
some of the terms you will hear most frequently during
the course of obtaining a mortgage loan.
Adjustable Rate Mortgage (ARM): also referred to as
a variable rate loan; a mortgage in which the interest
rate is adjusted at fixed intervals based on a pre-selected
index
Amortization: the process by which the principal amount
of the mortgage is reduced through periodic payments
Annual Percentage Rate (APR): an interest rate that
reflects the cost of a mortgage as a yearly rate;
takes into account any points and fees, and is based
on the loan going to its full term
Appraisal: an expert evaluation of the fair market
value of the property
Balloon: a type of mortgage where monthly payments
are made until a certain date when the remaining balance
becomes payable in full
Caps: a limit in the amount that an ARM may change
at each adjustment period and over the life of the
loan
Close of escrow: also referred to as settlement; the
date on which the property (deed) and purchase funds
are exchanged between the parties involved
Closing: also referred to as settlement; the time
when legal title to a property passes from the seller
to the buyer
Closing costs: the fees paid to obtain a mortgage
loan
Conventional loan: any mortgage loan that does not
have government backing
Credit score: a number which is developed from the
information contained in your credit file; a credit
score represents your credit risk
Debt ratio: the amount, expressed as a percentage,
of the borrowerís monthly gross income that
is spent on housing and consumer debt
Deed of Trust: the piece of paper that is recorded
against a property to secure the mortgage loan
Down payment: the cash payable by the buyer of a property
equal to the difference between the sale price and
the mortgage loan amount
Equity: the cash value of a property after all liens
have been paid off
Escrow: a neutral third party who holds the deed or
other instrument for the seller and the buyerís
funds until the conditions of the transaction are
met
First Mortgage: the mortgage that is in first lien
position and has first claim in the event of a default
Fixed Rate Mortgage: a mortgage in which the interest
rate remains constant over the life of the loan
Good Faith Estimate: a written estimate of the closing
costs associated with obtaining a particular mortgage
loan
HUD-1: the final settlement statement that is issued
by escrow at closing showing the disbursement of all
funds taken into escrow
Loan-to-value (LTV): expressed as a percentage; represents
the percentage of your homeís value that is
taken up by your mortgage(s); example: if your homeís
value is $350,000 and your mortgage balance is $248,500,
your LTV is 71%.
Margin: in an ARM, the spread between the rate of
the index and the rate actually charged to the borrower
Mortgage insurance: an insurance policy paid by the
borrower which guarantees the lender that they will
be paid back the entire amount of the loan if the
borrower defaults
Negative amortization: the process of adding to the
principal balance of a loan when the payments do not
fully cover the required interest
Points: a "point" is equal to 1% of the
loan amount
Prelim: short for "preliminary title report;"
a written document about a property which details
the liens, easements, ownership and any other recorded
items against the property
Prepayment penalty: a charge imposed by a mortgage
lender on a borrower who wants to pay off part or
all of a mortgage loan in advance of schedule
Principal: the face amount of a mortgage loan
Title: legal evidence of ownership of a property
Title insurance: insurance obtained by the buyer of
a house to ensure clear title to the property
