Online Mortgage Glossary

Acceleration Clause

The lender’s right to demand repayment of the entire outstanding balance amount of the loan due to violations such as late payments and transfer of property by the borrower.

Adjustable Rate Mortgage (ARM)

A mortgage loan in which interest rates and payments change periodically over the life of a loan according to changes in a pre-selected index.

Adjustment Date

The date on which the interest rate for an adjustable rate mortgage is slated to change.

Amortization

A mortgage loan is repaid through periodic payments of principal and interest for a specified period of time.

Adjustment Period

The time period between interest rate change dates for an adjustable rate mortgage.

Amortization Schedule

A repayment plan or schedule lists out the amount of each payment, the amount paid towards principal and interest and the balance after each payment is made.

Annual Percentage Rate (APR)

The cost of the loan is expressed as a yearly interest rate. It includes interests, points, mortgage insurance and all other costs associated with a loan.

Application

A form used by a borrower to apply for a mortgage loan with relevant personal and financial information.

Appraisal

A professional appraiser evaluates and provides a written estimate of the current market value of a property.

Approval

Borrower’s loan application is accepted on the basis of meeting lender’s qualification and underwriting requirements. Automated underwriting may require further verification of information provided by the borrower before granting an approval.

Assignment

Refers to a document that proves the transfer of ownership of a mortgage from one person to another.

Assumable Mortgage

A mortgage transferred from a seller to a buyer on approval from the lender of the original mortgage.

Assumption

A transaction in which a buyer takes over the seller’s existing mortgage.

Assumption Fee

A fee charged by a lender on a buyer who takes over the seller’s existing mortgage.

Balloon Mortgage

A mortgage with low rates and low initial payments for periods up to 5, 7 or 10 years after which the large outstanding amount is paid as a lump sum or refinanced.

Balloon Payment

A final loan payment made at the end of the balloon mortgage that is significantly higher than the periodic payments preceding it.

Bankruptcy

The course adopted by debtors to protect themselves from legal action by creditors, when they are unable to pay off their debts.

Bi-weekly Payment Mortgage

Half the monthly mortgage payments are made every two weeks resulting in thirteen full payments in a year, instead of twelve. This helps in paying off the mortgage faster as principal is reduced.

Blanket Mortgage

Obtaining a mortgage by pledging more than one property or collateral.

Bridge Loan

Allows a borrower, with an agreement to sell, to use equity from the existing home for down payment and settlement charges on the new house. It “bridges” the period between the closing dates of a home purchase and home sale.

Broker

An individual or firm acting as an intermediary between borrowers and lenders for a fee or commission.

Budget Mortgage

A budget mortgage has monthly payments for taxes and insurance apart from those for interest and principal.

Buydown Mortgage

A lump sum payment is made to lower interest rates on a mortgage loan. A temporary buydown mortgage reduces the borrower’s monthly payments during the initial period of the loan whereas a permanent buydown mortgage lowers the mortgage rates throughout the life of the loan.

Cap

A limit set to determine how much the interest rate or the monthly payments could change, either at the time of adjustment or during the life of the loan. Interest rate caps are a common feature in most ARMs as a protection against steep rise in monthly payments. Lifetime caps limit the increase in interest rates over the life of the loan.

Cash-out Refinance

A refinance transaction in which the borrower receives additional cash from the new loan amount that is greater than what is required to repay the existing loan. The additional cash can be used for any other purpose.

Closing

Settlement of a loan involves signing mortgage loan documents and transferring legal title of the property to the buyer.

Closing Costs

Fees paid by a borrower when closing a mortgage loan that includes charges for origination, appraisal, discount points, title search and insurance, taxes, credit report and other costs. Closing costs can range between 3%-6% of the loan amount.

Collateral

Property pledged as security for a mortgage loan. When the borrower defaults, the lender can repossess the collateral.

Construction Loan

A short-term, temporary loan used to finance the construction of homes and buildings. The lender advances funds to the builder as work progresses.

Credit Reporting Agency or Bureau

An organization that collects financial data of individuals. The information relates to how people handle credit, manage debts, make their payments and also on loan applications made and credit available with them. Equifax, Experian and Trans Union are the three major national credit bureaus.

Conventional Mortgage

A mortgage obtained from an institutional lender such as a bank or company where the loan amount does not exceed 75% of the value of the property, conforming to conventional norms. The Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA) does not insure it.

Credit Report

A report prepared by a credit bureau that contains detailed accounts of an individual’s credit history and is used by a lender to determine credit worthiness of a borrower. It gives details on credit, employment, residence, judgments, tax liens and bankruptcies.

Debt Consolidation

Multiple loans are replaced and better managed by a single new loan at lower rates, lower monthly payments and longer repayment periods.

Debt-to-Income Ratio

It is the ratio of the borrower’s total monthly debts including those on credit cards, auto loans and other long-term obligations to the gross monthly income. Lenders use the ratio to qualify borrowers for a mortgage loan.

Delinquency

A term used to describe borrowers who fall behind on their mortgage payments.

Discount Points

Points are 1% of the loan amount and are paid by the borrower to lower interest rates.

Down Payment

It is the difference between the value of the property and the loan amount and is paid at the closing of the mortgage. Though zero-down loans are available, generally down payments range from 5% to 25% of the purchase price of the house. A larger down payment lowers the loan amount and thereby the monthly payments.

Earnest Money Deposit

A deposit made by a potential buyer to a seller indicating seriousness in purchasing the property.

Escrow Account

The borrower makes periodic payments into an account set up by the lender to meet obligations on property tax, homeowners insurance and private mortgage insurance. The lender on behalf of the borrower pays them when the bills become due.

Equity

It is the difference between the market value of a property and the debts still owed on it. Equity can be turned into cash, as it is easy to secure loans against it.

First Mortgage

A mortgage registered first against a property and having first claim in the event of a sale or default.

class="content_txt" Fixed Rate Mortgage (FRM)

A mortgage loan characterized by a fixed interest rate and fixed monthly payments throughout the life of the loan. The most common mortgage terms are for 30 years and 15 years.

Float

Lenders offer options of allowing the interest rates to “float” or change with the market instead of a lock-in. The rates can change between the time of applying for a loan and closing it.

Flood Insurance

The insurance used to safeguard homeowners against losses due to floods. Lenders require flood insurance before approving for a loan in flood prone areas.

Foreclosure

When the borrower defaults, the mortgaged property is sold to pay off the loan in a legal process.

Good Faith Estimate

Written estimate of closing costs provided by a lender within 3 days of applying for a mortgage loan.

Government Loan

A mortgage insured by the federal government through agencies such as the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA) or the Rural Housing Service (RHS).