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>> Mortgage Glossary

Glossary of Mortgage Terms

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Abstract or title search
The process of reviewing all publicly recorded transactions to determine whether any title defects exist that could interfere with a clear transfer of property ownership.

Accelerated depreciation
A bookkeeping method that provides faster property depreciation in the early years of ownership.

The seller's written approval of a buyer's offer.

An addition or change to an existing contract between two (2) or more parties.

Additional principal payment
Additional funds outside of the scheduled loan payment to reduce the principal balance and shorten the term of the loan.

Adjustable rate mortgage (ARM)
A home loan with an interest rate that periodically adjusts to reflect changes in a specified financial index.

Adjustment period
The amount of time between interest rate adjustments in an adjustable-rate mortgage.

Agreement of sale
A legal document the buyer and seller approve detailing the price & terms of the transaction. 

The process of paying the principal and interest on a loan through regularly scheduled payments.

Amortization tables
Mathematical tables used to calculate a borrower's monthly payment. 

Amortization term
The length of time required to amortize the mortgage loan expressed as a number of months. For example, 360 months is the amortization term for a 30-year fixed-rate mortgage.

Appraisal report
A written report on the value of a property based on recent sales of comparable property in the area. 

An increase in the value of a home or other property. 

ARM (adjustable rate mortgage)
A home loan with an interest rate that periodically adjusts to reflect changes in a specified financial index. 

ARM index
A publicly published number used as the basis for adjusting the interest rates of adjustable rate loans (ARM).

Assessed value
A tax assessor's determination of the value of a home in order to calculate a tax base.

Assumable mortgage
A mortgage that can be transferred to another borrower. 

Balloon loan
A mortgage loan where the monthly payments are not large enough to repay the loan by the end of the term resulting in a lump sum due on the final payment date.

Balloon payment
The final lump sum payment due at the end of a balloon mortgage.

Base loan amount
The loan amount upon which payments are based.  If the borrower chooses to finance closing costs or other fees these costs will be added to the base loan amount and payments adjusted to reflect the larger loan balance.

Basis point
A basis point is one one-hundredth of one percentage point.  For example, the difference between a home loan at 5.25 percent and one at 5.37 percent is 12 basis points.

A report detailing the condition of a property's title.  Usually issued by a title insurance company to provide guidelines for issuing a title insurance policy.

Call option
A loan clause allowing a lender to ask for repayment of the entire balance at any time.

A limit on the amount the interest rate or monthly payment can increase in an adjustable rate mortgage.

A mathematical formula investors use to calculate property value based on net income.

Capitalization rate
The rate of return estimated from the net income of a piece of property, expressed as a percentage.

Carryback financing
Financing in which a seller agrees to hold back a note for a set amount of the sales price.

Cash-out refinance
The refinancing of a mortgage in which the money received from the new loan is greater than the amount due on the old loan.

Certificate of eligibility
A document issued by the Veterans Administration that verifies the eligibility of a veteran for a loan program.

Certificate of occupancy (CO)
A document stating that a home or other building has met all building codes and is suitable for habitation.

Certificate of Reasonable Value (CRV)
An appraisal issued by the Veterans Administration showing a property's current market value

Chain of title
The official record that details the ownership history of a piece of property.

The final procedure in which loan and title documents are signed between the buyer and seller and their respective representation.

Closing costs
Expenses related to the sale of real estate including loan, title, and appraisal fees.  These costs are above and beyond the price of the property and are paid at closing.  Most closing costs are one-time expenses however a few are recurring.

Closing statement
A document which details the final financial details of a property sale between a buyer and seller and the costs paid by each party.

COFI Index (Cost of Funds Index)
This index reflects the weighted-average interest rate paid by 11th Federal Home Loan Bank District savings institutions for savings and checking accounts, advances from the FHLB, and other sources of funds.  The 11th District represents the savings institutions (savings & loan associations and savings banks) headquartered in Arizona, California and Nevada.  The COFI index is a popular index used for determining interest rates on adjustable rate mortgages.

Properties used as comparisons to determine the value of a certain property.

Compound interest
The interest paid on the principal balance of a mortgage plus accrued interest.

Conforming loan
A home loan that meets qualifications to be purchased by Fannie Mae or Freddie Mac.

Conventional loan
A long term loan a lender makes for the purchase of a home.

Convertible adjustable-rate mortgage
A mortgage which starts as an adjustable rate loan, but contains a provision that allows the borrower to convert the loan to a fixed-rate mortgage during a specified period of time.

Credit life insurance
Insurance that pays off a mortgage in the event of the borrower's death.

Credit rating
The degree of creditworthiness assigned to a person based on their credit history and financial status.

Credit Risk Score
A credit risk score is a statistical summary of the information contained in a consumer's credit report.  The most well known type of credit risk score is the Fair Isaac or FICO score.  This score represents the answer from a mathematical formula that assigns numerical values to various pieces of information in a credit report.


Debt-to-Income Ratio
The ratio, expressed as a percentage, which results when a borrower's monthly payment obligation on long-term debts is divided by his or her gross monthly income.

Deed of trust
A document that gives a lender the right to foreclose on a piece of property if the borrower defaults on the loan.

A statement to a potential buyer listing information relevant to a piece of property, such as the presence of radon or lead paint.

Discount points
Fees charged by a lender to provide a lower interest rate.  One discount point equals one percent (1%) of the loan amount.

Due on Sale clause
Standard language in a mortgage that states the loan must be repaid upon sale.

Earnest money
Money a buyer provides with an offer to purchase a property.  Also called a deposit.

Earthquake insurance
An insurance policy that provides coverage against damage to a home from an earthquake.

A right given to a third party to use a portion of the property for certain purposes, such as power lines or sewage mains.

Any right or interest in property interfering with its use or transfer.

End loan
The conversion from a construction loan to permanent financing.

Equal Credit Opportunity Act (ECOA)
Federal law that prohibits a lender or other creditor from refusing to grant credit based on the applicant's sex, marital status, race, religion, national origin or age.

One of the main credit-reporting bureaus.

Errors and omissions insurance
A policy that insures against mistakes made by a builder or architect.

A neutral third party holds documents and money for a real estate transaction and ensures that all conditions of a sale are met before any disbursement of funds or articles.

Escrow account
An account that a mortgage lender or mortgage servicing company establishes to hold funds for the payment of expenses such as homeowners insurance and property taxes.  Also commonly referred to as an impound account.

Escrow agent
A neutral third party who ensures that all conditions of a real estate transaction are met before any transfer of funds or property is recorded.

Escrow closing
Escrow closes when all conditions of a real estate transaction are met and the title of the property is transferred to the buyer.

Escrow payment
Funds that a mortgage servicer withdraws from a borrower's escrow account to pay property taxes and insurance.

Examination of title
An inspection by a title company of public records and other documents to determine the chain of ownership of a property.

Executed contract
A contract in which all parties have fulfilled their promises.

Experian is one of the main credit reporting bureaus.

Fair Credit Reporting Act
Federal law designed to regulate procedures and prevent old or inaccurate information from staying in consumer credit files.  This act provides individuals the right to inspect their own credit files, although the credit bureau may charge a fee.

Fair Housing Act
Federal law making it illegal to refuse to rent or sell to anyone based on race, color, religion, sex, national origin, family status or disability.

Fannie Mae
The official name of the Federal National Mortgage Association - it is a congressionally chartered, shareholder-owned company that buys mortgages from lenders and resells them as securities on the secondary mortgage market.

Firm commitment
A written promise made by a lender to loan money for the purchase of property.

First mortgage
The primary mortgage on a property.  As the most senior voluntary lien, the first mortgage takes priority over all other voluntary liens.

Fixed time
The specific weeks in a year that an owner of a timeshare arrangement has access to accommodations.

Fixed-rate mortgage
A home loan with an interest rate that will remain at a specific rate for the term of the loan.

Flood certification
The process of determining whether a property is located within a known flood zone.

Flood insurance
Insurance coverage that is required in designated flood areas.

Freddie Mac
A congressionally chartered institution that buys mortgages from lenders and resells them as securities on the secondary mortgage market.  Freddie Mac is the common name for the Federal Home Loan Mortgage Corporation (FHLMC).

Front-end ratio
A lender calculation that compares a borrower's monthly housing expense (principal, interest, taxes, and insurance) to gross monthly income.

Fully Amortized ARM
An adjustable-rate mortgage (ARM) with a monthly payment that is sufficient to amortize the remaining balance, at the interest accrual rate, over the amortization term.


Good faith estimate
An estimate from an mortgage lender or broker showing the all the costs associated with obtaining a home loan including loan processing, title and inspection fees.

Government National Mortgage Association (GNMA)
This government agency buys home loans from lenders, pools them with other loans and sells shares to investors.  However, unlike Fannie Mae and Freddie Mac, Ginnie Mae only purchases loans backed by the federal government.  (Commonly known as Ginnie Mae)

Grace period
A specified amount of time in which a borrower may make a loan payment after its due date without penalty.

Graduated Payment Mortgage
A mortgage that requires a borrower to make larger monthly payments over the term of the loan.  Payments are lower for the first few years but gradually rise until year three or five, when payments become fixed.

Growing-equity mortgage
A fixed rate mortgage that increases payments over a specific period of time. The extra funds are applied to the principal.

Hazard insurance
Hazard insurance provides coverage for damage from items as fire and wind.  Mortgage lenders require coverage for at least the replacement value of the home.  (Also known as homeowner's insurance or fire insurance)

Home equity loan
A loan that allows owners to borrow against the equity in their homes however unlike a home equity line this product provides a defined amount at closing without an option to redraw in the future.

Homeowner's insurance
Insurance that includes coverage for any damages that may affect the value of a house, in addition to personal liability and theft coverage.

Housing expense ratio
The percentage of gross monthly income devoted to housing costs.

Abbreviation of (the U.S. Department of) Housing and Urban Development.  HUD is a federal agency that oversees the Federal Housing Administration (FHA) and a variety of housing and community development programs.

A portion of the monthly mortgage payment that is placed in an account and used to pay for hazard insurance, property taxes and private mortgage insurance( if applicable).

Financial tables used by lenders to calculate interest rates on adjustable mortgages.  Commonly used indexes are the Prime Rate, the LIBOR and Treasury bills.

Indexed Rate
The sum of the published index plus a margin.  For example if the index were 5% and the margin 2.75%, the "fully indexed rate" would be 7.75%.

Initial interest rate
The original interest rate on an adjustable rate mortgage.  This rate may be subject to various adjustment at points throughout the mortgage.

Initial rate cap
A specific limit defined by some adjustable rate loans (ARMs) for the maximum amount the interest rate may increase at the expiration of the initial interest rate.

Initial rate duration
Most adjustable rate loans (ARMs) offer an initial interest rate below the current market rate. This initial or "teaser" rate expires after a period called the initial rate duration, which may last months or years.

Insurance binder
A temporary insurance arrangement usually put in force until a permanent policy can be obtained.

Insured Mortgage
A mortgage that is insured (guaranteed) by the Federal Housing Administration (FHA) or by private mortgage insurance (PMI).

Interest accrual rate
The rate at which interest accrues on a mortgage.

Interest paid over life of loan
The total amount paid to the lender for the use of money during the time the money is borrowed.

Interest rate cap
The maximum interest rate charge allowed on the monthly payment of an adjustable rate mortgage during an adjustment period.

Interest rate ceiling
The highest interest rate a lender can charge for an adjustable rate mortgage.

Interest Rate Floor
For an adjustable-rate mortgage (ARM), the minimum possible interest rate, as specified in the mortgage note.

Interest only loan
The borrower pays only the interest that accrues on the loan balance each month.  Because each payment goes toward interest, the outstanding balance of the loan does not decline with each payment.

Interim financing
Short-term financing used by sellers to bridge the gap between the sale of one house and the purchase of another (also known as bridge or swing loans).  A construction loan is also a form of interim financing.


Joint liability
The responsibility of two or more people to fulfill the terms of a home loan or other financial debt.

The lease purchase contract sets the closing date and provides remedies to the seller if the buyer defaults. (a type of delayed closing)

Legal blemish
Blemishes on a piece of property such as a zoning violation or fraudulent title claim.

Legal description
A specific way of identifying and locating a piece of real estate that is acceptable to a court.

A borrower's debts and financial obligations.

Liability insurance
An insurance policy that protects owners against claims of negligence, personal injury or property damage.

A claim laid by one person or company on the property of another as security for money owed.

Life cap
Limits the amount a loan's interest rate can change during the mortgage term.  For example, if the rate on an adjustable-rate mortgage begins at 4 percent and has a life cap of 6 percentage points, it can not go over 10 percent.

Lifetime Payment Cap
For an adjustable-rate mortgage (ARM), a limit on the amount payments can increase or decrease over the life of the mortgage. 

Lifetime Rate Cap
A maximum interest rate or "ceiling" that may not be exceeded under any circumstances over the entire life of the loan.

Loan application
A document that details a borrower's income, debt and other obligations to determine credit worthiness.  Also includes information on the subject property.

Loan application fee
A fee charged by lenders to cover expenses incidental to reviewing a loan application.

Loan commitment
A promise by a lender or other financial institution to make or insure a loan for a specified amount and on specific terms.

Loan term
The time set by a lender for a buyer to pay a mortgage.  Most conforming loans have 30 or 15-year terms.

Loan-to-value ratio (LTV)
The ratio of the total loan amount to the value of the property.  For lending purposes, the property value is equal to the purchase price or the appraised value, whichever is lower.

A lender's commitment to a borrower to guarantee (or "lock in") a specific interest rate for a limited amount of time.

Lock-in period
A period of time during which the borrower is guaranteed an agreed-upon interest rate, even if market rates rise.  The longer the period, the higher the cost (in points) to the borrower.


A percentage added to the index and fixed for the life of the loan.  When the initial interest rate on an adjustable-rate loan has expired, the interest rate moves toward the sum of its index plus a margin.

Merged credit report
A report that draws information from the three (3) main credit-reporting agencies incvluding: Equifax, Experian and Trans Union.

Modified annual percentage rate (APR)
The modified APR is an index of loan cost based on the standard APR and adjusted for the time the borrower expects to hold the loan.

Mortgage acceleration clause
A clause that allows a mortgage lender to demand repayment of the entire loan balance in a lump sum under certain circumstances, such as when the home is sold, title is changed, the loan is refinanced or the borrower defaults on a scheduled payment.

Mortgage Interest deduction
The tax write-off that the Internal Revenue Service allows most owners to claim for annual interest payments made on real estate loans.

Negative amortization
Occurs when a borrower's monthly payment is too small to cover both the principal and interest of a loan, so the outstanding balance of the loan actually grows larger with each payment.  Many adjustable rate mortgages are susceptible to this.

No-cash-out refinance
When the amount of the new mortgage covers the remaining balance of the first loan plus closing costs and any liens, and yields no more than 1 percent of the new loan's principal in cash.

No-documentation loan
A loan application that does not require verification of income or assets and is generally based on a combination of strong credit with a large down payment.

Non-assumption clause
A loan provision that prohibits the transfer of a mortgage to another borrower without lender approval.

Non-conforming loan
A non-conforming loan is any loan that doesn't meet the qualifications or is too large to be purchased by Fannie Mae or Freddie Mac.

Nonrecurring closing costs
Fees that are only payable once such as appraisal, loan points, credit report, title insurance and home inspection.

A legal document that requires a borrower to repay a mortgage at a certain interest rate over a specified period of time.

Note rate
The interest rate specified in a mortgage note.

One-year Adjustable Rate Mortgage
A mortgage whose interest rate changes yearly.  The rate is usually based on movements of a published index plus a specified margin.

A situation in which a buyer puts down money for the right to purchase a piece of real estate within a set time period but does not have an obligation to buy.

Option Arm Loan
A home loan where the borrower has multiple payment options each month.

Origination fee
A fee charged by most mortgage lenders to cover costs of arranging the loan.


Payment cap
A limit on the amount a monthly payment can increase on an adjustable rate mortgage.

Per-diem interest
Interest charged or accrued daily.

Periodic Payment Cap
A limit on the amount that payments can increase or decrease during any single adjustment period.

Periodic Rate Cap
A limit on the amount that the interest rate can increase or decrease during any one adjustment period, regardless of how high or low the index might be.

PITI (principal, interest, taxes, and insurance)
A payment amount calculated by a mortgage lender to include the total payment of all principal, interest, taxes and insurance due monthly.

Fees charged by a lender to provide a lower interest rate.  One point equals one percent (1%) of the loan amount.  Also referred to as a discount point.

A thorough assessment made by a lender of a potential borrower's ability to pay for a home and a confirmation of the amount to be borrowed.  The completion of a loan application is necessary to close the loan.

Pre-approval letter
A letter from a lender that states the amount of money a potential buyer can obtain.

Prepaid expenses
Expenses including taxes, insurance, and assessments that are paid before the due date.

Prepaid fees
Funds collected by the lender from the borrower to pay certain recurring items in advance, including interest, property taxes, hazard insurance and, if applicable, private mortgage insurance (PMI).

Prepaid interest
Interest paid before it is due.

Prepayment penalty
A penalty that a lender may impose on a borrower who pays a loan off before its expected end date.

A lender's preliminary assessment of a buyer's ability to pay for a home and an estimate of how much the buyer may borrow.

Principal paid over life of loan
The sum of scheduled principal payments calculated by the lender to equal the face amount of the loan.

Principle of conformity
The idea that a house will more likely appreciate in value if its size, age, condition and style are similar to other houses in the neighborhood.

Private mortgage insurance (PMI)
A form of insurance required by a lender when the borrower's down payment or home equity percentage is less than 20 percent of the home value.

Purchase-money mortgage (PMM)
A mortgage obtained by a borrower as partial payment for a property.

Qualifying ratio
A ratio calculated by a lender to determine how much a potential buyer can borrow.

Quitclaim deed
A document that releases a party from any interest in a piece of real estate.

Rate cap
The maximum interest rate allowed on the monthly payment of an adjustable rate mortgage during an adjustment period.

Rate lock
A lender's commitment to a borrower to guarantee (or "lock in") a specific interest rate for a limited amount of time.

Rate-improvement mortgage
A loan with a clause that entitles a borrower to a one-time interest rate cut without going through refinancing.

Recording fee
A fee charged by real estate agents for conveying the sale of a piece of property into the public record.

The process of replacing an older mortgage with a new mortgage.

Regulation Z
A federal code issued under the Truth in Lending Act that requires a borrower be advised in writing of all costs associated with the credit portion of a financial transaction.

Rehabilitation mortgage
A mortgage that provides for the costs of repairing and improving a resale home or building.

The cancellation of a contract by law or consent from the parties involved.

Reverse mortgage
A special type of loan available to equity-rich, older home owners.  Repayment is not necessary until the borrower sells the property.  Many downsides exist to these loans.


Seller carry-back
An agreement where the seller provides financing for a home purchase.

Settlement or closing fees
Fees paid to the escrow agent (often a title insurance company) for carrying out the written instructions of the agreement between buyer and seller and/or borrower and lender.

Settlement statement
A closing statement or settlement sheet that outlines all closing costs on a real estate transaction or refinancing for the buyer and seller.

Shared-appreciation mortgage
A loan that allows a lender or other party to share in the borrower's profits when the home is sold.

Shared-equity transaction
A transaction in which two buyers purchase a property, one as a resident co-owner and the other as an investor co-owner.

Step-rate mortgage
A loan that allows a gradual increase in the interest rate during the first few years of the loan.

Subsequent rate adjustments
The interest rate for adjustable rate loans (ARMs) adjusts at regular intervals.  This adjustment period could in some cases differ from the initial interest rate duration period.

Subsequent rate cap
A specific limit defined by most adjustable rate loans (ARMs) for the maximum amount the interest rate may increase at each regularly scheduled interest rate adjstment date.  This limit may differ from the initial rate cap.

Tax service fee
A fee collected to set up third-party monitoring of the borrower's property tax payments.  This is done to ensure that the payments are made on time and to prevent tax liens from occurring to the detriment of the lender.

Tenancy in common
A form of ownership in which two or more owners hold an undivided (though not necessarily equal) interest in the property, with no right of survivorship.

The legal document conferring ownership of a piece of real estate.

Title company
A firm that ensures that the property title is clear and provides title insurance.

Title Exam
An examination of the public record to determine that the seller is the legal owner and there are no encumbrances (such as claims or liens) affecting the property.

Title insurance
A policy issued to lenders and buyers to protect against loss due to disputed property ownership at a later date.

Title insurance binder
A title insurance company's written commitment to insure title to the property subject to the conditions and exclusions shown on the binder.

Title risk
Possible impediments to the transfer of a title from one owner to another.

Total expense ratio
The percentage of monthly debt obligations relative to gross monthly income.

Total lender fees
Fees required by the lender to obtain the loan, apart from other fees associated with transferring a property between buyer and seller.

Total of all payments
The total cost of the loan including repayment of the principal amount and the sum of monthly interest payments.

Trans Union Corporation
One of the major credit reporting bureaus.

Treasury Index
An index used to determine interest rate changes for adjustable rate mortgages.

Two-step mortgage
An adjustable mortgage with two interest rates: one for the first five or seven years of the loan, and the other for the remainder of the loan term.

U.S. Department of Housing and Urban Development
Also known as HUD.   This federal agency oversees the Federal Housing Administration and a variety of housing and community development programs.

The process in which lenders evaluate the risks posed by a particular borrower and set appropriate conditions for the loan.

Underwriting fee
A fee charged by mortgage lenders to verify information on the loan application and make a final decision about whether or not to approve the loan.

Unrecorded deed
A deed that transfers ownership from one party to another without being officially recorded.


Variable rate mortgage (VRM)
A mortgage with an interest rate that changes with fluctuations in such indexes as the prime rate, libor rate, or treasury bill.

Verification of deposit (VOD)
As part of the loan process a lender may ask a borrower's bank to sign a statement verifying the borrower's account balances and history.

Verification of employment (VOE)
As part of the loan process a lender may ask the borrower's employer for confirmation of the borrower's position and salary.

Warehouse fee
A closing cost fee representing the lender's cost of holding a borrower's loan temporarily before it is sold on the secondary mortgage market.

Yield spread
A form of compensation some brokers receive from a lender for originating and processing a loan.  The yield spread is based on the interest rate of the loan and can usually vary anywhere from zero to 6%.