Adjustable Rate Mortgage (ARM): A home loan that can adjust the interest based upon market rates after the set fixed period on the note has expired. Generally an ARM will carry a lower interest rate than a fixed rate mortgage but is considered riskier because the interest rate is not fixed for the life of the loan.
Amortization: A term used to describe the process of paying off a loan over a predetermined period of time at a specific interest rate. The amortization of a loan includes payment of interest and a portion of the outstanding principal balance during each payment cycle.
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.
Annual Percentage Rate (APR): A term used in the Truth-in-Lending Act to represent the full cost of a loan. Stated as a yearly rate, APR includes base interest rate, loan origination fee (points), commitment fees, prepaid interest and other credit costs that may be paid by buyer.
Application Fee: The fee that a mortgage lender charges to apply for a mortgage to cover processing costs.
Appraisal: A professional analysis, including references to sales of comparable properties, used to estimate the value of the property.
Appraiser: A professional who conducts an analysis of the property, including references to sales of comparable properties in order to develop an estimate of the value of the property. The appraiser’s report is called an “appraisal.”
Appreciation: An increase in the property’s value due to changes in market conditions, the opposite of depreciation.
Assessed Value: The value that a public taxing authority places upon personal property for the purposes of taxation.
Assumable Mortgage: A mortgage that can be taken over and “assumed” by the buyer when a property is sold. This type of mortgage is quite popular if the seller has a low interest rate and the market rates are considerably higher.
Balloon Mortgage: A mortgage that typically offers low rates for an initial period of time (usually 5, 7, or 10) years; after that time period elapses, the balance is due or is refinanced by the borrower.
Bankruptcy: Legally declared unable to pay your debts as they become due. Bankruptcy can severely impact your ability to borrow money; talk to a credit counselor as soon as you realize you are having problems paying your bills on time to try to prevent bankruptcy.
Closing (Closing Date): When the real estate transaction between buyer and seller is completed; the buyer signs the mortgage documents and the closing costs are paid. The sale of the property is finalized by delivery of deed and the disbursement of funds necessary to the sale or loan transaction. "Closing Date" is also known as the settlement date. In Washington, Sellers and Buyers sign documents one to two days prior to Close. If the Buyer is using financing this allows time for the bank or funder to get the money to escrow and escrow to verify funds, which is necessary prior to closing and recording.
Closing Costs (Settlement 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. "Closing Costs" include points, taxes, title insurance, financing costs and items that must be prepaid or escrowed and other costs. Ask a lender or real estate professional for a complete list of closing cost items.
Condominium: A unit in a multiunit 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. There are usually condominium association fees for maintenance for building and property upkeep, taxes and insurance on the common areas and reserves for improvements.
Counter-offer: An offer made in return by the person who rejects the previous offer.
Credit Bureau: A company that gathers information on consumers who use credit and sells that information in the form of a credit report to lenders.
Credit History: A credit history is the record of your usage of credit. It is a list of individual consumer debts and an indication as to whether or not these debts were paid back in a timely fashion or “as agreed.” Credit institutions have developed a complex recording system of documenting your credit history.
Credit Report: A document used by the credit industry to examine an individual’s use of credit. It provides information on money that individuals have borrowed from credit institutions and a history of payments.
Credit Score (FICO): A computer-generated number that summarizes an individual’s credit profile and predicts the likelihood that a borrower will repay future obligations.
Debt-to-income Ratio: A comparison of gross income to housing and total monthly expenses.
Deed: The document that transfers ownership of a property.
Default: The inability to pay monthly mortgage payments in a timely manner or to otherwise meet the mortgage terms.
Deposit: See Earnest Money.
Delinquency: Failure of a borrower to make timely mortgage payments under a loan agreement.
Discount point: Paid at closing and calculated as a percentage the total loan amount, discount points are prepaid interest used to reduce the interest rate on a loan.
Down payment: The portion of a home’s purchase price that is paid in cash and is not part of the home loan.
Earnest Money Deposit: The deposit you make to show in good faith that you are 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 satisfied. Your earnest money deposit is credited back at closing towards down payment or closing costs if the offer is accepted.
Escrow Account: A separate account into which the lender puts a portion of each monthly mortgage payment; an escrow account provides the funds needed for such expenses as property taxes and homeowners insurance.
Escrow Company: Firms that act as neutral third parties to ensure that all conditions that the Buyer, Seller and Lender establish in a real estate transaction are met.
Fair Housing Act: A law that prohibits discrimination in all facets of the homebuying process on the basis of race, color, national origin, religion, sex, familial status, or disability.
Fair Market Value: The hypothetical price that a willing buyer and seller will agree upon when they are acting freely, carefully, and with complete knowledge of the situation.
Fannie Mae: Federal National Mortgage Association (FNMA); a federally-chartered enterprise owned by private stockholders that purchases residential mortgages and converts them into securities for sale to investors; by purchasing mortgages, Fannie Mae supplies funds that lenders may loan to potential homebuyers.
FHA: Federal Housing Administration; established in 1934 to advance homeownership opportunities for all Americans. Assists homebuyers by providing mortgage insurance to lenders to cover most losses that may occur when a borrower defaults. This encourages lenders to make loans to borrowers who might not qualify for conventional mortgages.
Fixed-rate Mortgage: A home loan with an unchanging interest rate for the life of the loan and constant principal and interest payments.
Flood Insurance: Insurance that protects homeowners against losses from a flood. If a home is located in a flood plain, the lender will require flood insurance before approving a loan.
Foreclosure: A legal process in which mortgaged property is sold to pay the loan of the defaulting borrower.
Freddie Mac: Federal Home Loan Mortgage Corporation (FHLM). A federally-chartered corporation that purchases residential mortgages, securitizes them, and sells them to investors. This provides lenders with funds for new homebuyers.
Good Faith Estimate: An estimate of all closing fees including pre-paid and escrow items as well as lender charges; must be given to the borrower within three days after submission of a loan application.
Homeowner’s Insurance: A policy that protects you and the lender from fire or flood which damages the structure of the house or from 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. This type of insurance policy therefore combines protection against damage to a dwelling and its contents with protection against claims of negligence or inappropriate action that result in someone’s injury.
Housing Expense Ratio: The percentage of your gross monthly income that goes toward paying for your housing expenses.
Home Inspection: A professional inspection of a home to review the condition of the property. The inspection should include an evaluation of the plumbing, heating and cooling systems, roof, wiring, foundation and pest infestation.
Home Warranty: Offers protection for mechanical systems and attached appliances against unexpected repairs not covered by homeowner’s insurance.
Housing Counseling Agency: Provides counseling and assistance to individuals on a variety of issues, including loan default, fair housing, and homebuying.
HUD: The U.S. Department of Housing and Urban Development. Established in 1965, HUD works to create a decent home and suitable living environment for all Americans; it does this by addressing housing needs, improving and developing American communities, and enforcing fair housing laws.
HUD-1 Settlement Statement: A final listing of the costs of the mortgage transaction. It provides the sales price, and down payment, as well as the total settlement costs required from the Buyer and Seller.
Index: A measurement used by lenders to determine changes to the Interest rate charged on an adjustable rate mortgage after the fixed period of the loan has expired.
Inflation: The number of dollars in circulation exceeds the amount of goods and services available for purchase. Inflation results in a decrease in the dollar’s value.
Interest: The cost you pay to borrow money. It is the payment you make to a lender for the money it has lent to you. Interest is usually expressed as a percentage of the amount borrowed.
Interest Rate: The cost to borrow money expressed as a percentage.
Insurance: Protection against a specific loss over a period of time that is secured by the payment of a regularly scheduled premium.
Judgement: A legal decision. When requiring debt repayment, a judgement may include a property lien that secures the creditor’s claim by providing a collateral source.
Lien: A claim or charge on property for payment of some debt. With respect to a mortgage, it is the right of the lender to take the title to your property if you default and do not make the payments due on the mortgage.
Loan: Money borrowed with intent to repay.
Loan Fraud: Purposely giving incorrect information on a loan application in order to better qualify for a loan; may result in civil liability or criminal penalties.
Loan-to-value (LTV) Ratio: A percentage calculated by dividing the amount borrowed by the price of the home to be purchased. The higher the LTV, the less cash a borrower is required to pay as down payment.
Lock-in: Since interest rates can change frequently, many lenders offer an interest rate lock-in that guarantees a specific interest rate if the loan is closed within a specific time.
Loss Mitigation: A process to avoid foreclosure; the lender tries to help a borrower who has been unable to make loan payments and is in danger of defaulting on his or her loan.
Loan Origination Fees: The fee paid to your mortgage lender for their services of processing the mortgage application. This fee is usually in the form of a percentage of the loan amount.
Low Down Payment Feature: A loan program that requires little or no money down to purchase.
Margin: An amount the lender adds to an index to determine the interest rate on an adjustable rate mortgage.
Market Value: The current value of your home based on what a willing purchaser would pay. The value determined by an appraisal is often used to determine market value.
Mortgage: A loan secured by a lien on your home. In some states the term mortgage is also used to describe the document you sign to show that you have granted the lender a lien on your home; other states use a deed of trust document instead of a mortgage. It may also be used to indicate the amount of money you borrow, with interest, to purchase your house. The amount of your mortgage is usually the purchase price of the home minus your down payment.
Mortgage Broker: An independent finance professional that specializes in bringing together borrower and lender to facilitate real estate mortgages.
Mortgage Insurance (MI or PMI): A policy that protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan; mortgage insurance may be required for borrowers with a down payment of less than 20% of the home’s purchase price.
Mortgage Lender: The lender providing funds for a mortgage. Lenders also manage the credit and financial information review, the property and the loan application process through closing.
Mortgage Rate: The cost or the interest rate you pay to borrow the money to buy your house.
Mortgage: A lien on the property that secures the promise to repay a loan.
Mortgage Banker: A company that originates loans and resells them to secondary mortgage lenders like Fannie Mae or Freddie Mac.
Offer: A formal bid from the homebuyer to the home seller to purchase a home, generally put forth in writing.
Origination: The process of preparing, submitting, and evaluating a loan application; generally includes a credit check, verification of employment, and a property appraisal.
Origination fee: Paid at closing and calculated as a percentage the total loan amount, origination points are paid to the mortgage company originating the loan for their services.
Open House: When the seller’s real estate agent opens the seller’s house to the public. You do not need a real estate agent to attend an open house, but if you have one it's courteous to tell the open house agent that you are working with an agent.
PITI: Principal, Interest, Taxes, and Insurance: The four elements of a monthly mortgage payment. Payments of principal and interest go directly towards repaying the loan while the portion that covers taxes and insurance goes into an escrow account to cover the fees when they are due.
PMI: See mortgage insurance.
Pre-approval: Lender commits to lend to a potential borrower for generally 30 to 45 days. Commitment remains as long as the borrower still meets the qualification requirements at the time of purchase.
Pre-approval Letter: A letter from a mortgage lender indicating that you qualify for a mortgage of a specific amount. It also shows a home seller that you are a serious buyer.
Pre-qualify: A lender informally determines the maximum amount an individual is eligible to borrow.
Pre-qualification Letter: A letter from a mortgage lender that states that you are pre-qualified to buy a home but does not commit the lender to a particular mortgage amount.
Pre-foreclosure Sale: Allows a defaulting borrower to sell the mortgaged property to satisfy the loan and avoid foreclosure. Also known as as Short Sale.
Premium: An amount paid on a regular schedule by a policyholder that maintains insurance coverage.
Prepayment: Payment of the mortgage loan before the scheduled due date; may be subject to a prepayment penalty.
Principal: The amount of money borrowed to buy your house or the amount of the loan that has not yet been paid back 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 at any given time. It is the original loan amount minus the total repayments of principal you have made to date.
Points: Paid at closing and calculated as a percentage of the total loan amount, for example, if a loan is made for $50,000, one point equals $500.
Predatory Lending: Abusive lending practices that include making a mortgage loan to an individual who does not have the income to repay it or repeatedly refinancing a loan, charging high points and fees each time and “packing” credit insurance on to a loan.
Replacement Cost: The cost to replace damaged personal property without a deduction for depreciation.
Rate Cap: The limit on the amount that the interest rate on an ARM can increase or decrease during any one adjustment period.
Ratified Sales Contract: A contract that shows both you and the seller of the house have agreed to your offer. This offer may include sales contingencies, such as obtaining a mortgage of a certain type and rate, obtaining acceptable inspections on the home, making repairs, closing by a certain date, etc.
Real Estate Professional: An individual who provides services in buying and selling homes. The real estate professional is paid a percentage of the home sale price by the seller. Unless you have specifically contracted with a buyer’s agent, the real estate professional represents the interest of the property seller. Real estate professionals may be able to refer you to local lenders or mortgage brokers, but are generally not involved in the lending process.
Refinancing: Paying off one loan by obtaining another; refinancing is generally done to secure better loan terms (like a lower interest rate).
REALTOR: A real estate agent or broker who is a member of the NATIONAL ASSOCIATION OF REALTORS, and its local and state associations.
RESPA: Real Estate Settlement Procedures Act. A law protecting consumers from abuses during the residential real estate purchase and loan process by requiring lenders to disclose all settlement costs, practices, and relationships.
Securities: A financial form that shows the holder owns a share or shares of a company (stock) or has loaned money to a company or government organization (bond).
Settlement: Another name for closing.
Subordinate: To place in a rank of lesser importance or to make one claim secondary to another.
Survey: A property diagram that indicates legal boundaries, easements, encroachments, rights of way, improvement locations, etc.
Sweat Equity: Using labor to build or improve a property as part of the down payment.
Title: The right to, and the ownership of, land by the owner. Title is sometimes used to mean the evidence or proof of ownership of land, although another term used for that is “deed.”
Title Company: Firms that ensure that the title to a piece of property is clear and provide title insurance.
Title Insurance: Insurance that protects lenders and homeowners against loss of their interest in the property because of legal problems with the title.
Truth in Lending Act (TILA): Federal law which 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.
Underwriting: The process a lender uses to determine loan approval. It involves evaluating the property, the borrower’s credit, and ability to pay the mortgage.
Uniform Residential Loan Application: A standard mortgage application that your lender will ask you to complete; the form requests your income, assets, liabilities and a description of the property you plan to buy, among other things.
Warranties: Written guarantees of the quality of a product and the promise to repair or replace defective parts free of charge.