Mortgage Dictionary

ADJUSTABLE RATE MORTGAGE (ARM): A mortgage in which the interest rate is adjusted periodically based on a pre-selected index.

APPRAISAL: An estimate of the value of property, made by a qualified professional called an appraiser. Most states require licenses. Various lenders have their own lists of approved appraisers.

APPRAISED VALUE: An opinion of value reached by an appraiser based upon knowledge, experience, and a study of pertinent data.

BALLOON (PAYMENT) MORTGAGE: Usually a short-term fixed-rate loan, which involves small payments for a certain period of time and one large payment for the remaining amount of the principal at a time specified in the contract.

BALLOON PAYMENT: The unpaid principal amount of a mortgage or other long-term loan due on a specified date in the future. Usually the amount that must be paid in a lump sum at the end of the term.

BORROWER (MORTGAGOR): One who applies for and receives a loan in the form of a mortgage with the intention of repaying the loan in full.

CLOSING: The meeting between the buyer, seller and lender or their agents, in which the property and funds legally change hands. Also called the settlement. Closing costs usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement. The costs of closing usually are about 3 – 6 percent of the mortgage amount.

CONVENTIONAL LOAN: A mortgage not insured by FHA or guaranteed by the VA. Typically these loans are financed by FNMA or FHLMLC.

DEBT-TO-INCOME RATIO: The ratio, expressed as a percentage, which results when a borrower's monthly payment obligation on long-term debts is divided by his or her gross monthly income. See housing expenses-to-income ratio.

DEED: The written document conveying real property. The Deed must be executed (signed), ACKNOWLEDGED, and DELIVERED to the Grantee. Once recorded at the Courthouse, the original piece of paper is not needed to convey title in the future.

DISCOUNT POINT: The amount of money you can choose to pay when you first get a loan to reduce its overall interest rate. Discount points are usually a small fraction of the total amount of your loan – i.e. 1, 2, or 3% -- and can lower the interest rate for the entire life of the loan, or just part of it.

DOWN PAYMENT: Money paid to make up the difference between the purchase price and mortgage amount.

EARNEST MONEY: Money given by a buyer to a seller or realtor as part of the purchase price to bind a transaction or assure payment. A good faith deposit.

EQUAL CREDIT OPPORTUNITY ACT (ECOA): A federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status or receipt of income from public assistance programs.

EQUITY: The difference between the fair market value and current indebtedness, also referred to as the owner's interest. The value an owner has in real estate over and above the obligation against the property. When you first buy a home, your ownership equals your down payment; your mortgage lender owns the rest. To calculate your equity, subtract the amount you owe on your loan from your home's current market value.

ESCROW PAYMENT: The portion of a mortgagor's monthly payments held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Known as impounds or reserves in some states.

FHA LOAN: A loan insured by the Federal Housing Administration open to all qualified home purchasers. While there are limits to the size of FHA loans, they are generous enough to handle moderately-priced homes almost anywhere in the country.

FIRST MORTGAGE: A real estate loan that creates a primary lien against real property.

FIXED RATE MORTGAGE: The mortgage interest rate will remain the same on these mortgages throughout the term of the mortgage for the original borrower.

GIFT LETTER: A form stating that a relative is giving you money to help you buy a home, and that they will not ask you to pay it back. The letter also provides proof, by referring to bank statements and other records, that the relative does, in fact, have enough money to cover the amount of the gift, and that the money has been transferred to your possession.

HAZARD INSURANCE: A form of insurance in which the insurance company protects the insured from specified losses, such as fire, windstorm and the like.

INTEREST RATE: The percentage of an amount of money which is paid for its use for a specified time. Usually expressed as an annual percentage.

LOAN-TO-VALUE RATIO (LTV): The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage.

NOTE: A written promise to pay a certain sum of money at a certain time. A negotiable note starts "Pay to the Order Of" and is transferable by endorsement similar to a check.

PITI: Principal, Interest, Taxes, and Insurance. Also called monthly housing expense.

POINTS (LOAN DISCOUNT POINTS): Prepaid interest assessed at closing by the lender. Each point is equal to 1 percent of the loan amount (e.g., two points on a $100,000 mortgage would cost $2,000.00).

PRE-APPROVAL: A way in which you can establish your ability to get a home loan worth a certain amount of money, even before you've found the home you want to buy. The pre-approval process is done in conjunction with a specific lender; the results are based on the total income of your household, the amount of your monthly debt, as well as other factors – depending on your situation as a home buyer.

PRIVATE MORTGAGE INSURANCE (PMI): In the event that you do not have a 20 percent down payment, lenders will allow a smaller down payment – as low as 3 percent in some cases. With the smaller down payment loans, however, borrowers are usually required to carry private mortgage insurance. Private mortgage insurance will usually require an initial premium payment and may require an additional monthly fee, depending on your loan's structure.

RATE LOCK: A way in which you can guarantee that the interest rate on your loan remains the same between the time of your application, and when you qualify for the loan. When applying for a loan, you can lock the interest rate for a specified amount of time.

SURVEY: A measurement of land, prepared by a registered land surveyor, showing the location of the land with reference to known points, its dimensions, and the location and dimensions of any buildings.

TITLE INSURANCE: A policy, usually issued by a title insurance company, which insures a home buyer against errors in the title search. The cost of the policy is usually a function of the value of the property, and is often borne by the purchaser and/or seller. Policies are also available to protect the lender's interests. Title insurance covers mistakes made during a TITLE SEARCH as well as matters which could not be found or discovered in the public records, such as missing heirs, mistakes, fraud and forgery. Compare, CERTIFICATE OF TITLE.