Glossary of Mortgage Terms
The purchase of a home can be overwhelming. So too, can the prospect of securing financing. Some terms in frequent use with regard to mortgages are as follows:
Adjustable rate mortgage (ARM) – The interest rate on an adjustable rate mortgage fluctuates in accordance with an index, as specified in the mortgage document itself.
Amortization schedule – A schedule which reflects the repayment of a mortgage obligation in terms of the portion of each payment applied to principal, as well as interest.
Annual percentage rate (APR) – The cost of a loan, on a yearly basis, expressed in terms of a percentage.
Appraisal – A determination of the value of a property by an individual with the expertise to do so. Generally speaking, most lenders require a satisfactory appraisal as a pre-requisite to granting approval on a mortgage loan.
Assumability – The ability of another party to take over a borrower’s obligations on a mortgage loan.
Balloon payment – A loan with a “balloon payment” provision is a loan that requires the borrower to make a large, lump-sum payment at a specified time.
Closing costs – The costs associated with the transfer of real estate from one party to another. Closing costs fall into three specific categories: title fees, government fees, and the costs of obtaining the mortgage itself.
Credit score – A numerical designation which helps a lender determine whether or not to make a loan. The numerical designation is based on information contained in a borrower’s credit report.
Escrow – An account maintained by a lender for the purpose of paying certain expenses due on a mortgaged property, including taxes and insurance. The account is funded from a portion of the borrower’s monthly mortgage payments.
Fixed-rate mortgage – A fixed rate mortgage is based upon a specified interest rate, for example 7.5%, which is applicable during the entire term of the mortgage.
Interest rate – A charge to a borrower, expressed as a percentage, for money advanced by a lender on credit.
Loan-to-value ratio (LTV) – LTV refers to the relationship between the amount of a borrower’s mortgage and the value of the mortgaged property.
Lock-in – The terms “lock” or “lock-in” refer to a lender’s agreement to guarantee a borrower a specified rate of interest on a mortgage loan for a certain period of time.
Points – A fee charged by a lender at closing; usually, one point is equal to one percent of the loan amount.
Pre-payment penalty – A penalty assessed against a borrower for paying a mortgage loan off before the expiration of the original term of the loan.
Principal – The amount of money borrowed or, in the alternative, the balance due on a mortgage loan.
Private Mortgage Insurance (PMI) – A fee which provides compensation to the lender in the event the borrower defaults on the mortgage. A borrower is usually required to purchase PMI if the borrower is unable to make a down payment of at least 20% of the purchase price of a home.
Real Estate Settlement Procedures Act (RESPA) – A federal law which governs real estate settlements. In part, the law requires lenders to make certain disclosures to borrowers with regard to closing costs.
Settlement statement (also referred to as a HUD-1) – A form utilized to itemize the costs associated with the transfer of real estate from a seller to a buyer.
Title examination – An examination of land records to determine the ownership of property, as well as the existence of any encumbrances.
Truth In Lending Act (TILA) – A federal law which requires lenders to make certain disclosures to borrowers. The purpose of TILA is to require lenders to provide borrowers with enough information about the cost of a loan so as to allow borrowers to comparison shop for the best deal on a loan.