Mortgage Glossary Terms

A

Abstract of Title

A history of titles for a property, used to determine if there is an existing claim against a property. This includes all legal actions (grants, wills and conveyances, liens, transfers, and encumbrances). If seriously interested in a property, it is recommended to request this to determine the status of the property.

Acceleration Clause

As outlined in a mortgage agreement, the right of a lender to demand repayment of a full loan balance if the borrower violates one or more particulars in a contract.

Accrued Interest

Interest that is earned on a loan but not repaid, ultimately increasing the loan balance. (See Negative Amortization)

Adjustable Rate Mortgages

Subject to change periodically in response to market interest rate conditions. This means you could benefit if rates fall, but you could also see your monthly payments get more expensive if interest rates rise.

Adjusted Basis

The cost of real property in addition to the value of improvements made to the property minus depreciation.

Adjustment Date

The date that the interest rate is subject to change on an Adjustable Rate Mortgage (ARM). (See Adjustable Rate Mortgages)

Adjustment Interval

The period of time between changes in the interest rate and/or monthly payment in an Adjustable Rate Mortgage, which can vary depending on the index. (See Adjustable Rate Mortgages)

Adjustment Period

The time elapsed between adjustment dates in an Adjustable Rate Mortgage. (See Adjustment Date)

Affordability Analysis

An examination into a potential borrower’s income and liabilities, with taking into account the type of mortgage that will be used including fees and closing costs.

Agreement of Sale

A contract endorsed by both the buyer and seller disclosing the terms and conditions of the property sale.

Amortization Term

The number of months required to amortize a mortgage loan. A 20-year fixed rate mortgage has an amortization term of 240 months. (See Amortized Loan)

Amortized Loan

This is an installment loan with monthly payments, applied to both principal and interest costs. Payments are applied first to paying down the interest on the loan, with the remaining payment being applied to the balance of the principal. As the interest becomes reduced, a larger portion of the payment is applied to the principal balance.

Annual Percentage Rate (APR)

Costs associated with your mortgage loan that will be charged directly from the lender. Includes a yearly percentage of all costs. Must be reported by all lenders under Truth in Lending laws.

Appraisal

Prepared by a professional appraiser, a written estimate of a property’s current market value.

Appraiser

A real estate professional trained in the practice of appraisal. Typically when an appraisal is warranted in connection with a loan, the lender selects the appraiser but the borrower incurs the appraisal fee.

Appraisal Fee

A fee charged by an appraiser for the appraisal of a property.

Assessment

A local property tax assigned for a specified amenity, such as street lighting, sewer fees, etc.

Assignments

As lenders often buy and sell mortgages and deeds of trust from each other, this term refers to the legal record of transfer from one lender to another. Borrowers are not allowed to contest the transfer of loan ownership, as notification of such sale occurs after the transfer has occurred and the new lender is servicing the mortgage. Documentation is recorded in county land records where the property is located. If your mortgage loan gets assigned to a different lender, it is essential to maintain communication with your new lender so mortgage payments can continue to be made appropriately.

Assumability

A mortgage that has the ability to be transferred to the new buyer from the seller. There may be fees incurred from the lender for the assumption of the loan, but as there are not closing costs, this may be a lower cost opportunity.

Assumption

A legal agreement between a seller and buyer, in which a buyer assumes the payments on an existing mortgage. (See Assumability)

Assumption Fee

The fees payable to a lender for the assumption of an existing mortgage. (See Assumption)

B

Back-End Fee

A payment made by a borrower to a mortgage lender for originating the loan. (See Front-End Fee)

Balance

The original amount of the mortgage loan, minus any principal payments that have already been made.

Biweekly Mortgage

A mortgage that is paid in 13 full payments or 26 half payments annually.

Blanket Mortgage

A mortgage that is backed by more than one property or additional collateral.

Borrower

Also referred to as the ‘mortgagor’, an individual who applies for funding from a lender. A borrower has an obligation to repay the principal amount financed from the lending institution, in addition to interest and fees associated with the loan.

Bridge Loan

A short-term loan taken out against a property to finance the purchase of new real estate.

Budget Mortgage

A mortgage loan that is financed to include insurance and taxes.

C

Capital Gain

Profit earned on an asset, such as real property.

Cash-In Refinance

When refinancing, a transaction in which homeowners pay an amount at closing to lower their mortgage balance.

Caps

Payment caps that limit the frequency and amount of periodic, initial, and lifetime changes in interest rates on Adjustable Rate Mortgages.

Certificate of Title

A legal document that identifies ownership of a property (personal or real). This document is issued by either a state or municipal, and details liens or easements that may be pending on a property.

Closing

The last step in the mortgage loan process, referring to the process of signing the loan documentation.

Closing Costs

Fees charged by lenders and third parties related to the purchase of a home. There are various costs generated with the purchase of a home. The following list includes such potential fees included:

Checking the credit report of the borrower
Inspection fees
Loan origination fee
Attorney costs
Title insurance
Title search fees
Underwriting fee

Closing Date

The calendar date on which the closing occurs, officially allowing the real property to exchange hands between buyer and seller.

Co-Borrowers

One or more individuals who have agreed to share equal responsibility for repaying a loan, signing documentation equally.

Collateral

Owned assets that are used as security for repayment of loan.

Combined Loan-to-Value Ratio

When an individual has a second mortgage on a property, the Loan-to-Value ratio combines both outstanding loan balances and divides that by the equity already invested in both properties. (See Loan-to-Value Ratio)

Conforming Mortgage

A mortgage loan with a set maximum borrowing limit that fits guidelines set by Fannie Mae and Freddie Mac, including requirements on income and credit. This type of mortgage typically has a lower mortgage rate and is considered to be a low-risk. (Please clarify with mortgage team, various meanings to this term)

Contingency

A term that must be satisfied prior to a contract’s ability to be legally binding.

Convertible ARM

An Adjustable Rate Mortgage that carries the option to be converted to a Fixed-Rate Mortgage under defined terms.

Credit Inquiry

Obtaining your credit report for purposes of applying for a mortgage loan.

Credit Limit

A maximum monetary amount that a borrower is approved for.

D

Debt Consolidation

The use of a mortgage loan to pay off other outstanding liabilities.

Debt-To-Income Ratio

A calculation that is the ratio of monthly liabilities, including housing costs, divided by the monthly gross income of the borrower.

Deed

A legal document granting property ownership.

Deed-in-Lieu of Foreclosure

A method that avoids foreclosure by deeding your property to the lender.

Default

Failure to submit payments on time, or meet other guidelines of a loan. Defaulting on a loan can ultimately lead to foreclosure, as failure to make payments can potentially enable the lender to take ownership of the property. Typically, a loan is considered ‘in default’ if a payment is delinquent for 90 days or more.

Delinquency

Failure to make loan payments on time.

Depreciation

A decline in real property value.

Discount

Monetary difference between the value of a mortgage loan and the price at which the note can be sold at in the secondary market.

Down Payment

Money paid by a home buyer that is applied directly to the purchase price of real property, not included in the portion of the purchase price which is financed.

E

Earnest Money Deposit

A monetary commitment by a potential home buyer to show intention on purchasing the real property.

Encumbrance

A lien against a property or restriction to its use, held by someone other than the legal owner.

Equal Credit Opportunity Act (ECOA)

Regardless of age, sex, and/or race, the elimination of discrimination in finance.

Equity

The current market value of a real property versus the outstanding principal balance on loans.

Escalator Clause

A loan clause calling for increases in payments or interest based on pre-determined schedules or a change in an economic index.

Escrow

A third party that can receive, hold, and/or disburse funds or legal documents.

Escrow Account

When a lender creates an account to set aside funds for the payment of property taxes. The lender disburses these funds on behalf of the borrower at arranged intervals.

Escrow Agent

An authorized party that has the responsibility to both the buyer and seller to ensure that the terms of the sale are met for each involved party.

Escrow Fee

Costs associated with the preparation and transmission of all funds and related legal documentation. Escrow fees are based on the purchase price of real property.

Easement

Authority given to other persons, other than the owner, enabling access to a property.

Estate

An individual’s ownership of real property. At an individual’s time of death, an ‘Estate’ is also defined by the sum of real and personal property owned by an individual.

F

Fair Credit Reporting Act

A consumer protection law established to protect how credit-reporting agencies access and use your information.

Fees

A specified amount associated with taking out a loan that may be required by the lender.

Finance Charge

The total dollar amount your mortgage loan will cost you, including loan lifetime interest payments and fees.

Fixed Rate Mortgages

The interest rate remains the same for the entire term of the loan.

Forbearance

An agreement between the lender and the borrower to temporarily suspend or reduce monthly mortgage payments for a set period of time. Forbearance may be an option for homeowners that are facing a temporary hardship and/or ineligible to refinance.

Foreclosure

The legal process in which the lender legally takes ownership of the borrower’s property, once the borrower has defaulted on his/her mortgage loan.

Front-End Fee

A payment made by a borrower to a mortgage broker. (See Back-End Fee)

G

Grace Period

A stated period of time past a due date before a borrower incurs a late fee, applicable to loans on which interest is calculated monthly.

Grantee

Refers to the recipient of real property, otherwise known as the ‘buyer.’

Grantor

Refers to the seller of real property.

Gross Monthly Income

When completing your mortgage loan application, this is the total amount you earn monthly, excluding taxes or expenses.

H

Home Equity Line of Credit

A line of credit, which is secured by the borrower’s property. This is frequently used to cover home improvements/repairs, unexpected expenses, or debt consolidation.

Home Equity Loan

A type of loan that requires the borrower to use the equity of the owned property as collateral.

Home Inspection

A third party surveys a property for defects in structural features and major appliances. Requesting a home inspection as a contingency in your purchase offer may allow the seller to make necessary repairs before the transfer of ownership occurs.

Homeowner’s Insurance

Also referred to as Hazard Insurance, this insurance protects your property from catastrophic damages, including fire, hurricanes, and theft.

Housing and Urban Development (HUD)

An agency within the United States government that implements federal housing and community development programs. This agency aims to protect consumers by overseeing Fannie Mae and Freddie Mac.

Housing Ratio

Also called Payment-to-Income Ratio or Front-End Ratio, this calculation is the ratio of the monthly mortgage payment to total earned gross monthly income.

I

Income Property

Property that was bought, developed, or improved for the purpose of earning income through renting or placing it back on the market for sale.

Initial Interest Rate

In an Adjustable Rate Mortgage, a specified period of time in the beginning months of the loan in which the interest rate is fixed. (See Adjustable Rate Mortgage)

Initial Rate Period

A defined time period in which the initial interest rate remains unchanged in an Adjustable Rate Mortgage. (See Adjustable Rate Mortgage)

Installment Loan

A loan that is divided and repaid in equal payments, termed installments.

Interest In Property

A legal share in property.

yment guidelines and fees.

Lender

The entity that is offering the loan, for example: the bank, mortgage company, or mortgage broker.

Liability Insurance

Insurance available to property owners to protect against negligence that results in bodily injury, or property damage to another party.

Lien

A security for a debt, in which a creditor has legal claim on a borrower’s property.

Lien Holder

Refers to an individual or entity that holds a lien on a piece of property.

Loan Origination

Refers to the process of obtaining new loans.

Loan Processor

The individual, or entity, that handles all paperwork associated with the closing of your loan.

Loan Provider

Refers to the originator of the loan, a lender or mortgage broker.

Loan Servicing

The various duties a lender performs to protect a mortgage loan, such as collecting payments on a monthly basis from borrowers, assessing late fees to delinquent payments, etc.

Loan-to-Value Ratio

A calculation of how much equity you have in your home. The difference between how much your home is worth and how much you owe on it. Example: If your home is worth $200,000 and you owe $100,000 on your mortgage loan, you have $100,000 worth of equity invested in your home. To calculate your Loan-To-Value Ratio, divide your current loan amount by the home’s value. In this example, the proper calculation is $100,000/$200,000, which equals a ratio of 50%. (See Combined Loan-to-Value Ratio)

Lock-In Clause

Agreement within a loan that prohibits the borrower from paying a loan in full prior to a specified date.

M

Margin

An amount added to the interest rate index to determine the interest rate on an Adjustable Rate Mortgage.

Market Price

The sale price of a real property.

Market Rate

An estimated average interest rate for a mortgage loan at a given time.

Market Value

Typically determined by an appraisal, the suggested selling price of a real property.

Maturity Date

The due date or termination date that a loan must be repaid in full, including principal, interest, and fees.

Modification

Refers to any change to the original mortgage agreement.

Monthly Payment

Depending on the terms of your mortgage loan, the monthly combined amount of principal, interest, taxes, and insurance paid on your mortgage loan.

Mortgagee

In a mortgage agreement, this term refers to the mortgage lender.

Mortgage Banker

A financial entity that originates or funds the mortgage loan and provides loan services.

Mortgagor

In a mortgage agreement, this term refers to the mortgage loan borrower.

Multi-Dwelling Units

Although a single mortgage loan will be used, this type of real property contains separate housing units for more than one family.

N

Negative Amortization

When a mortgage payment is made that is less than the interest-only amount, the difference is then added onto the principal balance of the loan. (See Amortized Loan)

Negative Amortization Cap

On an Adjustable Rate Mortgage, the maximum percentage of negative amortization allowed on an ARM. Once the percentage is reached, there is an automatic increase in the payment.

Negative Homeowners Equity

The remaining balance of a mortgage loan is greater than the value of the property.

Net Effective Income

A calculation of gross income minus federal income tax.

Note

A promissory note secured by a mortgage, which obligates a named borrower to repay a loan at a specified interest rate over a set period of time.

Note Rate

The interest rate on a mortgage note.

O

Origination Date

A specified date on which the loan will be disbursed or funded.

Origination Fee

A fee charged by the bank or broker for completing the mortgage process, which is calculated by a set percentage of the amount financed.

Outstanding Balance

The remaining balance on a debt.

Owner Occupied

The primary residence of the borrower/property owner.

P

Package Mortgage

A mortgage loan that includes equipment and appliances in addition to the real property itself.

Par Rate

Assuming there is not a change in market rates, the interest a borrower will qualify for.

Partial Payment

A payment that is below the monthly minimum required amount. When facing an economic hardship, this may be an option provided to borrowers.

Payment

The amount to be paid to the lender to reduce the balance of a loan, on a timely schedule. (See Monthly Payment)

Payment Period

A defined time period over which the borrower commits to make payments to the lender. Payment periods can be on a monthly or bi-weekly basis.

Payoff

Payment of an outstanding loan balance in full.

Periodic Payment Cap

In an Adjustable Rate Mortgage, this limits the payment fluctuations that can occur in any one adjustment period.

Periodic Rate Cap

In an Adjustable Rate Mortgage, this limits the interest rate fluctuations that can occur in any one adjustment period.

Personal Property

Any ‘movable’ asset that refers to all except real estate. (Personal property is not fixed to one location, as are buildings and land properties).

PITI

An acronym for a mortgage payment that is the sum of monthly principal, interest, taxes, and insurance.

Portfolio Lender

A mortgage lender that is distinguished by securing the loans it grants by creating a portfolio of the loans it originates rather than selling the loans in the secondary market.

Pre-Approval

The ‘first-step’ to obtaining your dream home, which involves assessment of your credit score/debt-to-income ratio in determining a dollar amount of a mortgage. It also provides an estimate of how much you may be able to borrow – a good first step in your house-hunting journey.

Pre-Payment

An amount paid on a mortgage loan in an effort to reduce the principal balance of the loan, before the required payment is due.

Pre-Payment Penalty

A fee imposed by the mortgage lender if the borrower pays off the loan before the termination date.

Pre-Qualification

Providing financial, employment, and other necessary information to a lender to receive a preliminary estimate of a mortgage loan. Although pre-qualification does not require a commitment to lend, it may help you determine your mortgage limit.

Primary Residence

The property on which the borrower lives the majority of year.

Prime Rate

The interest rate lenders charge their most creditworthy borrowers. As eligible borrowers have the lowest chance of defaulting, lenders can charge a lower rate.

Principal

The portion of your monthly mortgage payment that is allocated to directly reduce your loan balance.

Private Mortgage Insurance

Insurance available to protect your mortgage by select private mortgage insurance companies.

Processing Fees

Fees associated with creating the mortgage loan, typically paid at loan closing.

Promissory Note

A written promise to repay a specified monetary amount over a defined time period, including the terms for repayment. Differing from a mortgage and deed of trust, a promissory note is held by the lender until it is repaid in full. A promissory note is not recorded in county land records.

Purchase Agreement

A contract that is signed by the buyer and seller, with both parties agreeing on the terms and conditions of the property sale.

Q

Qualification

A lender’s process of determining a prospective borrower’s ability to satisfy a loan. Although qualification does not initially involve a borrower’s credit history, this process involves gathering information from the borrower, which is subject to verification, and ultimately, credit approval. Although a borrower may be qualified, meaning that one has the ability to pay, a poor credit history may reveal that the borrower has made delinquent payments and may not be a reliable applicant.

Qualification Ratios

An important financial ratio used by lenders to determine how much a prospective borrower can afford to borrow. Qualification ratios compare your gross income to your expenses, including the estimated cost of housing expenses.

Quitclaim Deed

A legal document in which a named individual surrenders the right to ownership and/or interest in a property, or transfers interest to another individual.

R

Rate Lock

The act of a lender guaranteeing a set interest rate for a defined time period to a borrower.

Real Estate Settlement Procedures Act (RESPA)

An act governing the transparency of closing costs in a property transaction to all involved parties.

Real Property

Refers to real estate property, ex: buildings and land.

Reconciliation

The process of determining the final estimate of value of real property after surveying several approaches in a property’s appraisal.

Reconveyance Clause

The clause in a deed of trust that states once a mortgage loan is repaid in full, the title will be given to the borrower.

Recording

Filing documents related to a property’s title for public record.

Recording Fees

A monetary amount paid to a lender for filing formal property records. (See Recording)

Refinancing

The process of paying one loan off in full by using the funds of a new loan, with the same real property as collateral.

Regulation Z

A requirement of lenders to provide the actual total costs of borrowing, as outlined as a provision in the Truth in Lending Act. (See Truth in Lending Act)

Repayment Plan

A mutual agreement between a delinquent borrower and lending institution to allow the borrower to avoid foreclosure by making payments on past due amounts as well as regularly scheduled payments.

Right-of-First Refusal

A contract provision that requires a property owner to allow a specified party the right to purchase or deny a property before the sale is offered to other potential buyers.

Right of Rescission

As covered under the Truth in Lending Act, the protection provided to borrowers who are refinancing to cancel the transaction within three days of endorsing loan documents. (See Truth in Lending Act)

S

Scenario Analysis

In an Adjustable Rate Mortgage, an estimate of change in the loan payment and interest rate in response to changes in specified market situations.

Secure Option ARM

An Option Adjustable Rate Mortgage in which the initial rate is guaranteed for the first five years of the loan’s life. (See Option Adjustable Rate Mortgage)

Secondary Mortgage Market

A liquid market in which mortgage loans and servicing rights are exchanged between financial institutions and investors.

Secured Loan

A loan that is guaranteed by collateral.

Servicer

An organization that collects payments from borrowers, as well as manages escrow accounts, for mortgages that have been purchased in the secondary mortgage market.

Servicing

The various responsibilities of a loan servicer, which include collecting mortgage payments from borrowers.

Short Sale

A real estate transaction in which the sale proceeds are less than the balance on the outstanding loan. A short sale is an alternative to foreclosure and is only possible with an agreement between a borrower and the lender.

Stop Date

A calendar date on a term loan when the terminal balloon payment is due.

Sweat Equity

An increase in a property’s value resulting from improvement by the property’s owner.

T

Tangible Net Benefit

The net gain a borrower receives from refinancing.

Tax Lien

An outstanding claim against real property in the sum of its outstanding taxes.

Tenancy In Common

When multiple individuals possess a property title but ownership is expressed in stated percentages.

Title

A legal document that declares ownership of a property.

Title Insurance

Should a problem arise that affects legal ownership of a property, this type of insurance can protect either the lender or owner.

Title Search

An inquiry into a property’s title to ensure that the seller is the legal owner of the property for sale, and that there are no outstanding claims or liens against the property.

Total Cost In Dollars

The sum of all your monthly payments over the entire term of the loan. This amount only includes payments as scheduled and does not account for any other unforeseen charges, including late fees or extra payments.

Total Debt Ratio

Monthly Expenses, including housing payments, divided by gross monthly income.

Total Expense Ratio

The total amount of housing expenses compared to the borrower’s income.

Transfer of Ownership

The assumption of real property from one party to another.

Transfer Tax

State or local tax that is charged when a property title exchanges from one party to another. (See Transfer of Ownership)

Truth in Lending Act (TILA)

A United States federal law that was passed in 1968 requiring all lenders to provide loan disclosures, terms and conditions, and loan cost information. Applicable to loans covered under TILA, a borrower has a right of rescission, a three-day window that allows you the opportunity to withdraw from the loan process without losing any money.

U

Underwriter

An individual who reviews a loan application to determine whether to approve or deny a mortgage loan in accordance to the lender’s criteria.

Underwriting

Refers to the process of determining whether a lender will issue a mortgage loan to a borrower, through careful examination of the real property, borrower’s financial status, etc.

Underwriting Fee

The costs associated with an underwriter assessing a prospective borrower’s complete loan application.

Uniform Residential Loan Application (URLA)

A requirement for all mortgage applicants, also known as a Freddie Mac (65) or a Fannie Mae Form 1003.

Usury

Interest fees that exceed the legal rate established by law.

V

Variable Rate Mortgage

(See Adjustable Rate Mortgage)

Verification of Deposit (VOD)

A document originated by the borrower’s financial institution that certifies the status and current balance of the borrower’s accounts.

Verification of Employment (VOE)

A document originated by the borrower’s employer proving the borrower’s job title and salary.

W

X

Y

Year – End Statement

A report that is available at the end of a 12-month period, showing the remaining loan balance and the total amount of interest paid. Depending on the lender used for your mortgage loan, the details listed on your year-end statement may vary.

Yield to Maturity

Estimating that at the time of maturity a loan will be repaid in full, a calculation on the lender’s percentage of annual return on the amount loaned to a borrower.

Yield Spread Premium

By originating loans, the commission received by brokers from lenders.

Z

#

1031 Tax

An exchange of real estate property that is tax-deferred to offset, or possibly avoid, capital gains.

The Learning Center is an educational tool and the content is for information purposes only and is not intended to provide investment, legal, tax, or accounting advice, nor is it intended to indicate the availability or applicability of any Ladysmith Federal product or service to your unique circumstances. All examples are hypothetical and for illustrative purposes. Although we have obtained content from sources deemed to be reliable, Ladysmith Federal and its affiliates are not responsible for any content provided by unaffiliated third parties. You may wish to consult an appropriate advisor about your unique situation. The applicability of this information to your circumstances is not guaranteed. You should obtain personal advice from qualified professionals.