Adjustable Rate Mortgage (ARM): A mortgage that lets the lender adjust the interest rate periodically according to a pre-selected index. Payments may go up or down according to this adjustment.

Acceleration clause: The lender has the right to demand payment of the entire outstanding balance when the first monthly payment is missed. This is a provision written into a mortgage.

Amortization: The systematic and continuous payment, through installments, of a mortgage

Amortization schedule: The schedule showing the amount of each payment applied to interest and principal and the balance remaining.

Annual Percentage Rate (APR): The total yearly cost of a mortgage, on an annual rate, expressed as a percentage. It usually includes a combination of the interest rate, a loan origination fee known as points, and certain other fees paid to a lender to acquire a mortgage. The APR is the most meaningful measure for comparing the cost of mortgage loans offered by different lenders.

Application: A form used by a mortgage lender, either on paper or online, to record necessary information concerning a potential mortgage.

Application Deposit: An amount of money paid to cover expenses such as the appraisal and credit report, during the initial mortgage processing.

Appraisal: A professional opinion of the market value of a property. The term also refers to the process by which this estimate is obtained.

Appreciation: A rise in the value of a property due to changes in market conditions or other causes.

Assessed value: The valuation placed upon real property by a taxing authority for purposes of taxation.

Assessment: A charge against a property for purposes of taxation, such as when the property owner pays a share of the cost of community improvements according to the valuation of the property.

Assumable mortgage: This is a mortgage that can be assumed, or taken over, by the buyer when a home is sold. This is also called “assumption”.

Binder: When a buyer agrees to purchase real estate, a binder is a preliminary agreement, secured by the payment of money.

Borrower: A person who receives funds in the form of a loan or mortgage, with an obligation to repay principal with interest.

Buydown: This is a method of reducing the interest rate on a loan by making a payment to the lender from the seller, buyer or third party.

Cap: A stipulation of an ARM determining how much the interest rate or mortgage payments may increase or decrease.

Cash reserve: A condition of some lenders that buyers have enough cash remaining after closing to make the first two monthly mortgage payments.

Cash to Close: Cash that is readily available to be used to cover the down payment, closing costs, and prepaid items of a mortgage transaction.

Certificate of Occupancy: A certificate issued by a local building department to a builder or renovator, indicating that the building is in proper condition to be occupied and stating the legally permissible use of that building.

Clear title: A title that has no legal questions as to who owns the property, and that it is free of liens.

Closing: A meeting, sometimes called a settlement, during which the title to the property actually changes hands, and the buyer signs the mortgage documents and pays the closing costs

Closing Costs: Also called “settlement costs”, this is money paid by the borrower to cover expenses such as an origination fee, discount points, appraisal, credit report, title insurance, attorney's fees, a survey, and any other expenses in connection with the closing of a mortgage loan.

Closing Statement: A document used at closing that shows the funds received and paid at the closing, including the escrow deposits for taxes, hazard insurance, and mortgage insurance.

Co-Borrower: Additional applicants on a loan whose income helps to qualify for a loan and whose name appears on documents with the same legal obligations.

Collateral: Property (such as securities) pledged by a borrower to protect the interests of the lender.

Commitment letter: A lender's written offer stating the terms, the amount of the loan, the interest rate and any other conditions under which it agrees to lend money to a homebuyer.

Commitment (Loan): A binding agreement made by the lender to the borrower to make a loan, usually at a stated interest rate within a given period of time for a given purpose, subject to the borrower meeting certain conditions.

Commitment Fee (Loan): Any fee paid by a potential borrower to a lender for the lender's promise to lend money at a specified rate and within a given time period.

Condominium: A structure of two or more units in which the homeowner holds title to an individual dwelling unit, an undivided interest in common areas of a multi-unit project, and sometimes the exclusive use of certain limited common areas. The balance of the property is owned in common by the owners of the individual units.

Contingency: A condition that must be met before a contract is legally binding.

Contract of Sale: Written contract signed by a seller and a buyer in which both parties agree to the sale under certain specific terms and conditions. Also called a purchase contract.

Conventional mortgage: Any mortgage that is not insured or guaranteed by the federal government (such as FHA or VA).

Convertible ARM: Under specified conditions, this is an adjustable-rate mortgage that can be converted to a fixed-rate mortgage.

Cooperatives (Co-ops): A structure of two or more units in which the residents own shares in the corporation that owns the property, giving each resident the right to occupy a specific apartment or unit.

Counteroffer: a return offer made by one who has rejected an offer.

Covenant: A clause in a mortgage that obligates or restricts the borrower and that, if violated, can result in foreclosure. Most commonly, assurances set forth in a deed by the grantor or implied by law.

Credit report. A report detailing an individual's credit history, usually prepared by a credit bureau and used by a lender in determining a loan applicant's creditworthiness.

Deed: A legal document conveying title to real property from one individual to another.

Deed of Trust: The document used in many states instead of a mortgage; title is conveyed to a trustee rather than to the borrower (trustor), in favor of the lender (beneficiary) and reconveyed upon payment in full.

Default: The failure to perform an obligation as agreed in a contract, such as making a mortgage payment on a timely basis or to comply with other requirements of a mortgage.

Delinquency: A loan payment that is overdue but within the period allowed before actual default is declared.

Deposit: An amount of money (also called earnest money) given to bind a sale of real estate.

Depreciation: A decline in the value of property, perhaps brought about by age, deterioration, functional or economic obsolescence.

Discount points: See Points.

Down payment: The initial payment of cash towards the purchase price which the buyer pays and does not finance with a mortgage.

Due-on-sale clause: A stipulation in a mortgage that states that the borrower must pay the lender in full if the borrower sells the property.

Earnest money: As evidence of good faith, a deposit made by the potential homebuyer to show that he or she is serious about buying the house.

Easement: A right of way giving persons other than the owner access to or over a property.

Encroachment: Physical items such as a wall, fence, building, etc., on the property of another.

Equal Credit Opportunity Act (ECOA): A Federal law requiring lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, sex, age, marital status, receipt of income from public assistance programs or past exercising of rights under the Consumer Credit Protection Act.

Equity: The difference between the market value of property and any outstanding mortgages, loan balances or other encumbrances on the property.

Escrow: Funds held by the lender, set aside for payment of taxes and possible property and mortgage insurance and other recurring charges against real property.

Fair Credit Reporting Act (FCRA): When a lender turns down a potential borrower because of poor credit, a Federal law requires the lender who is declining the loan to inform the borrower of the source of such information.

Federal Home Loan Mortgage Corporation: Known as Freddie Mac, this is a corporation authorized by Congress, which purchases residential mortgages insured by the Federal Housing Administration (FHA) or guaranteed by the Veterans Administration (VA) as well as conventional home mortgages. It sells participation certificates whose principal and interest are guaranteed by FHLMC.

Federal National Mortgage Association: Known as Fannie Mae, this is a corporation authorized by Congress to support the secondary mortgage market. It purchases and sells residential mortgages insured by the Federal Housing Administration (FHA) or guaranteed by the Veterans Administration (VA) as well as conventional home mortgages.

Finance Charge: The total dollar amount your loan will cost you, which includes your origination fee, all interest payments during the term of the loan, any interim interest paid at closing, and any other charges paid to the lender or to a third party. Certain charges like the appraisal, credit report and the title search charges are not included in the finance charge calculation.

First Mortgage: The first mortgage on a property that has priority over any subsequently recorded mortgages.

Fixed Interest Rate: An interest rate which does not fluctuate during the term of the loan.

Flood Insurance: Insurance required by lenders in areas designated as potential flood areas, protecting against loss by flood damage.

Foreclosure: When a borrower defaults on the debt, the property mortgaged as security for a loan is sold to pay the defaulting borrower's debt.

Good Faith Estimate: An estimate, by the lender, which outlines the likely expenses to be incurred in connection with a settlement.

Gross Monthly Income: Total monthly income earned before tax and other deductions.

Guaranteed Loan: A loan that is “backed” or guaranteed by the Federal Government, such as Veteran's Administration or Rural Development. The guarantee protects the lender against loss by the borrower defaulting on a mortgage.

Hazard insurance: Insurance protecting against loss to real estate from physical damage, from fire, wind, vandalism, or other hazards.

High-Ratio Loan: Where the mortgage loan exceeds 80% of the sales price or appraised value.

Homeowners' Association Dues: The monthly or annual fees charged by a condominium or homeowners' association for maintenance of common areas.

Homeowner's insurance: An insurance policy that combines personal liability coverage and hazard insurance for a building and its contents.

Housing Ratio: Sometimes called the payment-to-income ratio, it’s the ratio of the monthly housing payment (PITI) to total gross monthly income.

Homeowner's warranty: A type of warranty or insurance, provided by the builder or seller, that covers repairs to specified parts of a house for a specific period of time.

Index: A rate to which the interest rate on an Adjustable Rate Mortgage is tied. The interest rate may go up or down depending on whether the index rate goes up or down.

Insured Loans: A loan insured by FHA or a private mortgage insurance company.

Interest: Either a) a fee charged for borrowing money, or b) A share or right in some property.

Interest rate cap: Also called a Life Cap or Life Rate, it’s how much interest rates may increase or decrease per adjustment period or over the life of a mortgage.

Investment Property: Property owned, but not occupied by the owner, with the intent of earning income.

Joint tenancy: Joint ownership by two or more persons giving each person equal interest and equal rights in the property, including the right of survivorship.

Late charge: A cash penalty a borrower must pay when a mortgage payment is made after the due date.

Lease-Purchase Mortgage Loan: Low to middle income homebuyers are able to lease a home from a non-profit organization with an option to buy. It’s an alternative Fannie Mae financing option.

Lien: An encumbrance against a property for money due, that must be paid off when the property is sold.

Lifetime cap: Also called an Interest Cap, it dictates how much interest rates may increase or decrease per adjustment period or over the life of an Adjustable Rate Mortgage.

Loan commitment: Also called a Commitment letter, it’s a lender's written offer stating the terms, the amount of the loan, the interest rate and any other conditions under which it agrees to lend money to a homebuyer.

Loan servicing: The responsibility of collection of mortgage payments from borrowers.

Loan-to-value percentage (LTV): The comparison between the outstanding unpaid principal of the mortgage and the lower of the appraised value, or sales price, of the property.

Lock-in: A written guarantee stating that the homebuyer will receive a specified interest rate and points to be paid at closing, provided the loan is closed within a set period of time.

Margin: The number of percentage points a lender adds to the index value to calculate the ARM interest rate at each adjustment period.

Market Value: The highest price which a buyer would pay and a seller will accept, for a property. The market value may be different from the market.

Maturity: The end or final due date on which final payment on a mortgage must be paid in full.

Monthly Payment: Consisting usually of principal, interest, taxes, and insurance, this is the amount that must be paid each month on a mortgage loan.

Mortgage: A legal document that pledges a property to the lender as security for the payment of a loan.

Mortgage banker: A banker that issues mortgages for resale in the secondary market.

Mortgage broker: An individual or company that acts as a “go-between” for borrowers and lenders for a fee.

Mortgage Disability Insurance: In the event of a disability of an insured borrower for a specified period of time, this is an insurance policy which will pay the monthly mortgage payment.

Mortgage Insurance: Insurance protecting the mortgage lender against financial loss due to a mortgage default.

Mortgage insurance premium (MIP): The consideration paid by a mortgagor (borrower) to the FHA or a private insurer for mortgage insurance.

Mortgage Life Insurance: In the case of a death of a covered borrower, this is a term life insurance policy that covers the declining balance of a loan secured by a mortgage, and is payable to the lender.

Mortgage margin: The set percentage the lender adds to the index value to determine the interest rate of an ARM.

Mortgage note: A written promise to pay a sum of money at a stated interest rate during a specified period of time, and the mortgage note is secured by a mortgage.

Mortgage interest rate: The rate of interest in effect for the monthly payments.

Mortgagee: The lender in a mortgage agreement.

Mortgagor: The borrower in a mortgage agreement.

Negative amortization: This is when the monthly payments cover only part of the interest then due. The amount of the shortfall is added to the unpaid principal balance to create additional principle.

Non-Conforming Loan: For various reasons, including loan amount and loan characteristics, these are loans that usually have a higher interest rate and origination fee because they are not eligible for sale and delivery to either Fannie Mae or Freddie Mac

Note: A written agreement containing a promise of the signer to pay to a named person, or bearer, a definite sum of money at a specified date or on demand.

Notice of default: A formal written document to a borrower that a default has occurred and that legal action may be taken.

Occupancy: Either a renter or owner who uses the property as a full-time residence.

Origination Fee: A fee paid to a lender for processing a loan application. Usually a percentage of the loan amount.

Owner financing: A property purchase transaction in which the property seller provides all or part of the financing.

Payment cap: With some adjustable-rate-mortgages, it’s a provision limiting the amount by which a borrower's payments may increase regardless of any interest rate increase.

PITI: Stands for principal, interest, taxes, and insurance - the most common components of a monthly mortgage payment.

Planned unit developments (PUDs): A common property that is owned and maintained by an owners' association for the benefit and use of the individual PUD unit owners.

Point: One percent of the amount of the loan.

Preliminary Title Report: The results of a title search by a title company prior to issuing a commitment to insure clear title.

Pre-paids: Property expenses such as such as taxes, insurance, rent, etc, which are paid in advance of their due date and will usually be prorated upon sale.

Prepayment penalty: A penalty fee that may be charged to a borrower who pays off a loan before it is due.

Pre-qualification: Determining, in advance of a loan application, how much money a prospective homebuyer will be eligible to borrow.

Primary Residence: A residence which the borrower intends to occupy as a principal residence.

Principal: Either the amount borrowed (i.e. the face value of a note or mortgage) or the remaining unpaid debt, not including interest.

Private mortgage insurance (PMI): Insurance written by non-government insurers that protect lenders resulting from a mortgage default.

Processing: The preparation of a mortgage loan application and supporting documentation for consideration by a lender or insurer.

Purchase Contract (Agreement/Offer): A written contract signed by the buyer and seller stating the terms and conditions of the sale.

PUD: see Planned Unit Development above

Qualifying ratios: The ratio of fixed monthly expenses to gross monthly income, which becomes the guidelines for the lender to determine how large a loan to grant a homebuyer.

Radon: A radioactive gas found in some homes that in large concentrations can cause health problems.

Rate lock: See Lock-in.

Real Property: Land and anything that is affixed to it.

Real estate sales professional: A person licensed to negotiate and transact the sale of real estate on behalf of the property owner.

Real Estate Settlement Procedures Act (RESPA): A Federal consumer protection law that requires lenders to give borrowers information and advance notice of closing costs. It also establishes guidelines for escrow account balances and servicing disclosure.

Refinancing: The process of paying off one loan with the proceeds from a new loan using the same property as security.

Rent with option to buy: See Lease-Purchase Mortgage Loan.

Residential Mortgage Credit Report: A report requested by your lender that utilizes information from at least two of the three national credit bureaus and information provided on your loan application. Also see Credit Report above.

Satisfaction of Mortgage: The recordable instrument issued by the lender verifying full payment of a mortgage debt.

Second Home: A residence other than the borrower's primary residence, such as a vacation or weekend home, which the borrower intends to occupy for a portion of each year.

Second mortgage: A mortgage that has a lien position secondary to the first mortgage.

Secondary mortgage market: The buying and selling of existing mortgages. It is different from the primary mortgage market where mortgages are originated.

Security: In lending, the collateral given, deposited, or pledged to secure the payment of a debt.

Seller-take-back: A written agreement where the owner of a property provides financing.

Settlement: See Closing.

Settlement Services: Closing services provided by the lender..

Settlement sheet: The calculation of costs payable at closing that determines the seller's net proceeds and the buyer's net payment.

Survey: A print showing the measurements of the boundaries of a parcel of land,, the location of improvements, easements, rights of way encroachments, and other physical features.

Tenants-by-Entirety: A type of joint ownership of property in which husband and wife are co-owners with rights of survivorship.

Tenancy in common: A type of joint ownership in a property without right of survivorship.

Term: The time limit within which a loan must be repaid.

Title: The evidence one has of right to possession of land or ownership of a property.

Title company: A company that specializes in examining and insuring titles to real estate.

Title Insurance: Insurance for the lender or the buyer, against loss resulting from defects of title to a specifically described parcel of real property, or from disputes over ownership of property.

Title search: An examination of public title records to ensure that the seller is the legal owner of the property and that there are no liens or other claims outstanding.

Total Debt Ratio: Monthly debt and housing payments divided by gross monthly income.

Transfer tax: State or local tax payable when title passes from one owner to another.

Truth-in-Lending Act: A federal law requiring a disclosure of credit terms using a standard format.

Zero Point Option: A provision which allows the borrower to avoid the points associated with the loan origination fee. Usually this saving is offset by a slightly higher loan interest rate.

About The Author

David Morris is a successful freelance writer providing tips and advice for consumers on sites such as mortgages, personal loans and equity loans. Many have commented that his articles have made financial topics easy to understand.

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