mortgage dictionary

There are a lot of moving parts in the mortgage process, we want you to be confident as you move forward. So, we’ve compiled this list of common terms associated with home loans:

Adjustable-Rate Mortgage (ARM)

A mortgage in which the rate of interest is adjusted at regular intervals based on a standard rate index. Most ARMs have a cap on how much the rate may increase.

Amortization

The process through which the mortgage debt is altered, usually declining, as payments are made to the lender. “Negative-amortization” occurs when monthly payments are too small to cover either the principal or interest reductions.

Annual Percentage Rate (APR)

The rate of interest to be paid through the projected life of a loan; sometimes referred to as the “true” rate of interest.

Appraisal

A professional evaluation of the value of a home or other piece of property. It is often required by the lender.

Balloon Mortgage

A real estate loan in which some portion of the debt will remain unpaid at the end of the term. A balloon will usually result in a single large payment due when the loan term ends.

Cap

A limit on how much a mortgage interest rate may increase or decrease for an adjustable-rate mortgage.

Conventional Mortgage

A home loan that is typically purchased by government agencies such as Fannie Mae and Freddie Mac. They will follow the government assigned loan limits for each county.

Debt-To-Income Ratio

A ratio used by lending institutions to determine whether a person is qualified for a mortgage. Debt-to-income is the total amount of debt, including credit cards and other loans, divided by the total gross monthly income.

Default

Failure to pay the mortgage payments over a specified period of time.

Equity

The difference between the market value of a house and the amount still owed on the mortgage.

FHA Loan

A loan guaranteed by the Federal Housing Administration. FHA issues specific guidelines for mortgages that can be more lenient than a Conventional loan.

Loan-To-Value Ratio (LTV)

The amount of the loan divided by the purchase price of the house. If a refinance, the loan is divided by appraised value.

Margin

A set number of percentage points a lender adds to the index to determine the interest rate for an ARM.

Mortgage Insurance (MI)

Insurance designed to cover the lender should the borrower default on the loan. Typically this is required when the down payment is less than 20% of the sales price of the home.

PITI

PITI stands for principal, interest, taxes and insurance – the components of the monthly housing expense. Principal is the portion of the monthly payment that is used to reduce the loan balance. Interest is the fee charged for borrowing money. Taxes refer to the property taxes paid by the homeowner. Insurance refers to homeowner’s insurance, purchased by the borrower and required by the lender, to protect the property against loss from fire and other hazards. It may be optional for taxes and insurance to be included in the monthly mortgage payment.

Points

An interest fee charged by the lender. One point is equal to one percent of the mortgage. The use of points allow the borrower to buy up or down their permanent interest rate.

Prepayment Penalty

A fee imposed on a borrower who pays off a mortgage before it is due.

Prequalification

A process by which a potential homebuyer qualifies for a home mortgage before making an offer on a house. A lending institution prequalifies a borrower for a specified amount so they know the maximum sale price for which they can qualify.

Principal

The amount of the loan outstanding to the bank.

Second Mortgage

An additional mortgage on a property. It often carries a shorter term and a higher interest rate than the original mortgage.

Title Company

A neutral third party heavily involved in the purchase of your property. The title company searches for liens and insurance claims to insure the property transfers to you free of liens.

Truth In Lending Act

A federal law that requires lenders to reveal all the terms of the mortgage.

VA Loan

A loan guaranteed by the Veterans Administration. To obtain a VA loan, the borrower must have served in the Armed Forces.