Mortgage Terminology
Use this glossary to learn the meanings of common terms you may encounter during your home financing process.
Adjustable-Rate Mortgage (ARM)
A mortgage with an interest rate that remains constant for an initial fixed period of time and then adjusts at a prearranged frequency
Amortization
A monthly repayment schedule in which a loan is repaid in fixed payments of principal and interest
Annual Percentage Rate (APR)
The annual cost of a loan, expressed as a yearly rate that reflects interest, discount points, lender fees, and mortgage insurance, thus being slightly higher than the interest rate on the loan
Application / URLA
An initial statement of personal and financial information required to approve a mortgage loan
Appraisal
A written estimate of a property’s current market value, based on recent sales information from similar properties and the current condition of the property
Cap
Limits on changes in adjustable-rate mortgage (ARM) interest rates or monthly payments, either in an adjustment period or over the life of the loan
Change in Circumstance
A form that accompanies a revised Loan Estimate (LE) and details what has changed on the revised LE
Closing Costs
Expenses paid by the borrower and/or seller during the closing, which can include the loan origination fee, discount points, attorney’s fees, title insurance, appraisals, etc.
Closing Disclosure (CD)
A form that provides final details about a mortgage loan, such as loan terms and projected monthly payments and closing costs, and must be provided to the borrower by the lender at least three days before the loan closes
Co-Borrower
Any additional borrowers whose names appear on the loan documents
Collateral
A property being financed that a borrower offers to a lender to secure a loan
Contingency
A condition that must be satisfied before a contract is legally binding and a sale can close
Conventional Loan
A mortgage that is not guaranteed or insured by any government agency
Debt-to-Income Ratio (DTI)
Total monthly debt payments (including projected payments for a new mortgage) divided by monthly income
Department of Veterans Affairs (VA)
The government agency that manages benefits and other issues for Veterans of the military
Discount Points
See: Points
Down Payment
The difference between the purchase price and the loan amount
Earnest Money
A deposit made by a buyer in evidence of good faith when the purchase agreement is signed
Equal Credit Opportunity Act (ECOA)
Federal law requiring 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 percentage of a property’s value held by the owner, which is the difference between the property’s value and the amount owed on the mortgage
Escrow
The neutral third party that holds money and/or documents until the escrow instructions are fulfilled
Fair Credit Reporting Act
The law that protects consumers through federal regulations on the total interest paid over the life of a loan and procedures to repair errors on a person’s credit report
Fannie Mae
A government-sponsored enterprise that buys and sells conventional mortgages
Federal Housing Administration (FHA)
A division of Housing and Urban Development (HUD) that insures residential mortgage loans and sets standards for underwriting
FHA Loan
A loan insured by the Federal Housing Administration
Fixed-Rate Mortgage
A mortgage with an interest rate that doesn’t change for the life of the loan
Freddie Mac
A government-sponsored enterprise that purchases conventional mortgages
Ginnie Mae
The government corporation that purchases conventional mortgages from HUD-approved bankers
Homeowners Insurance (HOI)
Insurance that covers an individual’s home against damages to the home or possessions in the home as well as accidents in the home or on the property
Housing and Urban Development (HUD)
A U.S. government agency established to implement federal housing and community development programs and that oversees the Federal Housing Administration
Index
A benchmark rate used to determine the rate on an adjustable-rate mortgage (ARM) after the initial rate expires
Interest Rate
The amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets
Jumbo Loan
A mortgage larger than the conforming loan limits set by Federal Housing Finance Agency (FHFA)
Loan Estimate (LE)
A form that provides important details about a loan and must be provided to the borrower by the lender within three days of the lender receiving the loan application
Loan-to-Value Ratio (LTV)
The percentage of a property’s value that is borrowed
Lock-In Rate
A lender’s guarantee of an interest rate for a set period of time
Margin
The amount of percentage points, or spread, added to an index to determine the rate an adjustable-rate mortgage will charge after each adjustment
Mortgage
A document that creates a lien on a property as security for the payment of a debt
Mortgage Insurance Premium (MIP)
An insurance premium that a borrower is required to pay on an FHA loan
Mortgage Servicer
The financial institution or entity that is responsible for collecting payments on a mortgage
Mortgagee Clause
A clause endorsed on a mortgagor’s insurance policy whereby the insurance company agrees to protect the mortgagee’s interest regardless of any violation of the policy terms by the mortgagor
PITI
An acronym used to describe monthly housing expenses: principal, interest, taxes, and insurance
Points
Funds paid at closing to the lender, with one point equal to 1% of the loan amount
Preapproval
A preliminary approval from a lender to loan a borrower a specific amount of money
Prepayment Penalty
A charge for paying off a loan prior to the end of the prepayment penalty period (certain loan types only)
Prequalification
A basic review by a lender determining the loan amount for which a borrower may qualify
Principal
The amount of debt on a loan that does not include interest
Private Mortgage Insurance (PMI)
Insurance that a borrower is typically required to purchase on a conventional loan with an LTV above 80%
Refinance
The process of paying off one loan with the proceeds from a new loan secured by the same property
Right of Rescission
A 3-day waiting period after signing the closing documents granted to the borrower on a refinance transaction of their primary residence to allow them to cancel if they so choose
Second Mortgage
A subordinate mortgage made in addition to a first mortgage
Term
The number of years until a loan is due to be paid in full
TILA-RESPA Integrated Disclosure Rule (TRID)
A rule that consolidates four existing disclosures, applicable to most closed-end borrower credit transactions secured by real property, into two forms: the Loan Estimate (LE) and the Closing Disclosure (CD)
Title
A document that gives evidence of ownership of a property as well as rights of ownership and possession
Title Insurance
Insurance that protects the lender (lender’s policy) or buyer (owner’s policy) against loss due to disputes over property ownership
Underwriting
The process of verifying data and evaluating a loan application for approval
VA Loan
A home loan available to eligible military Veterans and surviving spouses with little or no down payment and guaranteed by the Department of Veteran Affairs (VA)
VA Loan Funding Fee
The fee financed or paid upfront associated with a VA loan
Verification of Deposit (VOD)
A document signed by the borrower’s bank or other financial institution that verifies the borrower’s account balance and history
Verification of Employment (VOE)
A document signed by the borrower’s employer that verifies the borrower’s position and salary