Mortgage Glossary of Terms

Common Mortgage Terms Explained

Some terms in this glossary are older and rarely used today. If a term isn’t clear, call or text me.

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
A
Actual Cash Value
An amount equal to the replacement value of damaged property minus depreciation.
Adjustable Rate Mortgage (ARM)
Also, known as a variable rate loan, an ARM usually offers a lower initial rate than a fixed rate loan. The interest rate can change at a specified time, known as an adjustment period, based on a published index that tracks changes in the current finance market. Indexes used for ARMs include the LIBOR index and the Treasury index. ARMs also have caps or a maximum and minimum that the interest rate can change at each adjustment period.
Adjustment Period
The time between interest rate adjustments for an ARM. There is usually an initial adjustment period, beginning from the start date of the loan and varying from 1 to 10 years. After the first adjustment period, adjustment periods are usually 12 months, which means that the interest rate can change every year.
Amortization Schedule
Provided by mortgage lenders, the schedule shows how, over the term of your mortgage, the principal portion of the mortgage payment increases and the interest portion of the mortgage payment decreases.
Amortize
Paying off a debt by making regular installment payments over a set period of time, at the end of which the loan balance is zero.
Annual Percentage Rate (APR)
How much a loan costs annually. The APR includes the interest rate, points, broker fees and certain other credit charges a borrower is required to pay.
Appraisal
A professional analysis used to estimate the value of the property. This includes examples of sales of similar properties.
Appreciation
An increase in the market value of a home due to changing market conditions and/or home improvements.
Assets
Everything of value an individual owns
Assumption
A home buyer's agreement to take on the primary responsibility for paying an existing mortgage from a home seller.
B
Balloon Mortgage
A mortgage loan with initially low-interest payments, but that requires one large payment due upon maturity (for example, at the end of seven years).
Buy Down Mortgage
A mortgage loan in which one party pays an initial lump sum to reduce the borrower’s monthly payments.
C
Capacity
Your ability to make your mortgage payments on time. This depends on your income and income stability (job history and security), your assets and savings, and the amount of your income each month that is left over after you've paid for your housing costs, debts and other obligations.
Closing (Closing Date)
The completion of the real estate transaction between buyer and seller. The buyer signs the mortgage documents and the closing costs are paid. Also, known as the settlement date.
Closing Agent
A person who coordinates closing-related activities, such as recording the closing documents and disbursing funds.
Closing Costs
The costs to complete the real estate transaction. These costs are in addition to the price of the home and are paid at closing. They include points, taxes, title insurance, financing costs, items that must be prepaid or escrowed and other costs. Ask your lender for a complete list of closing cost items.
Closing Disclosure
A five-page form you receive at least three business days before closing that shows your final loan terms and closing costs. Compare it with your Loan Estimate.
Collateral
Property which is used as security for a debt. In the case of a mortgage, the collateral would be the house and property.
Condominium
A unit in a multi-unit building. The owner of a condominium unit owns the unit itself and has the right, along with other owners, to use the common areas, but does not own the common elements such as the exterior walls, floors and ceilings or the structural systems outside of the unit; these are owned by the condominium association.
Conforming Loan Limit
The maximum loan amount Fannie Mae and Freddie Mac will buy, set each year by the Federal Housing Finance Agency. Loans above it are jumbo loans.
Credit Report
A document used by the credit industry to examine your use of credit. It provides information on money that you've borrowed from credit institutions and your payment history.
Credit Score
A computer-generated number that summarizes your credit profile and predicts the likelihood that you'll repay future debts.
Creditworthy
Your ability to qualify for credit and repay debts.
D
Debt-to-Income Ratio (DTI)
Your monthly debt payments, including the new house payment, compared with your gross monthly income. Lenders use it to judge how much you can afford.
Deed
A legal document under which ownership of a property is conveyed.
Down Payment
The part of the purchase price you pay at closing instead of borrowing. How much you need depends on the loan program and the property.
E
Earnest Money Deposit
The deposit to show that you're committed to buying the home. The deposit will not be refunded to you after the seller accepts your offer, unless one of the sales contract contingencies is not fulfilled.
Equity
Ownership interest in a property after liabilities are deducted. Also, referred to as your assets.
Escrow
A lender-held account where a homeowner pays money toward taxes and insurance of a home.
Escrow Account
The actual account where the escrow funds are held in trust.
F
FHA Loan
A loan insured by the Federal Housing Administration with flexible credit guidelines and a smaller down payment for qualified buyers.
Fixed Rate Mortgage
A mortgage loan in which the interest rate remains the same for the life of the loan.
G
Gift Letter
A letter that a family member writes verifying that s/he has given you a certain amount of money as a gift and that you don't have to repay it. You can use this money towards a portion of your down payment with some mortgages.
Good-faith Estimate
An older itemized estimate of loan costs. Since 2015 it has been replaced by the Loan Estimate.
H
HELOC (Home Equity Line of Credit)
A revolving line of credit secured by your home that lets you borrow against your equity while keeping your first mortgage.
HUD-1 Settlement Statement
An older final statement of closing costs. Since 2015 most home loans use the Closing Disclosure instead.
Hazard Insurance
Insurance coverage that pays for the loss or damage to a person’s home or property.
Home Inspection
A professional inspection of a home to determine the condition of the property. The inspection should include an evaluation of the plumbing, heating and cooling systems, roof, wiring, foundation, and pest infestation.
Homeowner's Insurance
A policy that protects you and the lender from fire or flood, which damages the structure of the house; a liability, such as an injury to a visitor to your home; or damage to your personal property, such as your furniture, clothes or appliances.
I
Index
The published index of interest rates used to calculate the interest rate for an ARM. The index is usually an average of the interest rates on a particular type of security such as the LIBOR.
Interest
The cost you pay to borrow money. It is the payment you make to a lender for the money it has loaned to you. Interest is usually expressed as a percentage of the amount borrowed.
Interest Only Mortgage
A mortgage where the borrower pays only the interest on the loan for a specified amount of time.
Investment Property
A property not considered to be a primary residence that is purchased by an investor to generate income, gain profit from reselling or to gain tax benefits.
J
Jumbo Loan
A mortgage above the conforming loan limit. Common for higher-priced homes in Durango and the mountains.
L
Liabilities
Your debts and other financial obligations.
Lien
A claim or charge on property for payment of a debt. With a mortgage, the lender has the right to take the title to your property if you don't make the mortgage payments.
Loan Estimate
A three-page form you receive within three business days of applying that shows your estimated rate, monthly payment and closing costs, so you can compare loans.
Lock-in Rate
A written agreement guaranteeing a specific mortgage interest rate for a certain amount of time.
M
Margin
A percentage added to the index for an ARM to establish the interest rate on each adjustment date.
Market Value
The current value of your home based on what a purchaser would pay. An appraisal is used to determine market value.
Mortgage
A legal document that pledges property to a lender as security for the repayment of the loan. The term is also used to refer to the loan itself.
Mortgage Insurance
Insurance that protects the lender if a borrower stops paying. It is usually required when the down payment is small. On conventional loans it can usually be removed once you reach the equity level your loan allows; FHA rules differ.
P
Points
Fees paid at closing, either to lower your interest rate (discount points) or as part of the lender's charges. One point equals one percent of the loan amount.
Pre-Approval
A lender's review of your income, assets and credit that shows how much you can borrow, so sellers can trust your offer.
Principal
The amount of money borrowed to buy your house or the amount of the loan that has not yet been repaid to the lender. This does not include the interest you will pay to borrow that money. The principal balance (sometimes called the outstanding or unpaid principal balance) is the amount owed on the loan minus the amount you've repaid.
R
Rate Cap
The limit on the amount an interest rate on an ARM can increase or decrease during an adjustment period.
Refinance
Paying off an existing loan with a newer, usually lower rate loan.
Replacement Cost
The cost to replace damaged personal property without a deduction for depreciation.
Reverse Mortgage (HECM)
A loan for homeowners 62 and older that turns home equity into cash with no monthly mortgage payment required. You still pay property taxes, insurance and upkeep.
S
Servicer
A firm that performs functions in support of a mortgage that include collecting mortgage payments, paying the borrower's taxes and insurance and generally managing borrower escrow accounts.
Short Sale
The process in which a servicer works with a delinquent borrower to sell the house by a real estate agent prior to the foreclosure sale.
T
Title
The documented evidence that a person or organization has ownership of real property.
Truth-in-lending Act (TILA)
Federal law that requires disclosure of a truth-in-lending statement for consumer loans. The statement includes a summary of the total cost of credit, such as the APR and other specifics of the loan.
U
USDA Loan
A loan guaranteed by the U.S. Department of Agriculture for homes in eligible rural areas, with household income limits.
Underwriting
The process a lender uses to determine loan approval. It involves evaluating the property and the borrower's credit and ability to pay the mortgage.
V
VA Loan
A loan guaranteed by the Department of Veterans Affairs for eligible veterans, service members and surviving spouses, with no monthly mortgage insurance.

Learn More About Each Loan