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 borrower’s 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 buyer’s 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 home’s value that is taken up by your mortgage(s); example: if your home’s 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. |