Welcome to our comprehensive glossary of terms commonly used in the home mortgage and loan industry. Understanding these terms can help you navigate the complex process of home financing with confidence.
A mortgage loan with an interest rate that changes periodically based on an index. ARMs typically start with a lower interest rate than fixed-rate mortgages for a specified period, after which the rate adjusts at predetermined intervals.
The gradual reduction of a debt through regular payments of principal and interest over a set period. An amortization schedule shows how each payment is applied to both principal and interest.
A measure of the cost of credit that includes the interest rate plus other charges such as points, fees, and mortgage insurance. The APR is usually higher than the interest rate because it includes these additional costs.
A professional assessment of a property's market value, typically required by lenders before approving a mortgage loan to ensure the property is worth the amount being loaned.
A mortgage loan with a large payment due at the end of the loan term. Balloon mortgages typically have shorter terms than traditional mortgages and may have lower monthly payments, but require refinancing or a lump-sum payment at maturity.
A short-term loan used to "bridge" the gap between the purchase of a new home and the sale of an existing one. Bridge loans are typically used when a borrower needs funds for a down payment before their current home sells.
An individual or company that arranges mortgage loans between borrowers and lenders but does not use their own funds to originate mortgages. Mortgage brokers typically earn a fee or commission for their services.
Fees paid at the closing of a real estate transaction, including loan origination fees, appraisal fees, title insurance, taxes, and other expenses. Closing costs typically range from 2% to 5% of the loan amount.
Property or assets pledged as security for a loan. In a mortgage, the home itself serves as collateral, which means the lender can foreclose on the property if the borrower defaults on the loan.
A mortgage loan that is not insured or guaranteed by a government agency such as the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). Conventional loans typically require higher credit scores and down payments than government-backed loans.
A numerical representation of a borrower's creditworthiness based on their credit history, including payment history, amounts owed, length of credit history, and types of credit used. Higher credit scores generally result in more favorable loan terms.
A calculation that compares a borrower's monthly debt payments to their gross monthly income. Lenders use DTI to assess a borrower's ability to repay a loan, with lower ratios indicating better financial health.
A legal document that transfers ownership of real estate from one party to another. The deed includes a description of the property and is signed by the seller (grantor) and delivered to the buyer (grantee).
The initial payment made when purchasing a home, representing a percentage of the total purchase price. Larger down payments typically result in lower interest rates, lower monthly payments, and may eliminate the need for private mortgage insurance.
A deposit made by a buyer to demonstrate their commitment to purchasing a property. Earnest money is typically held in escrow and applied to the down payment at closing.
The difference between the market value of a property and the amount owed on the mortgage. Equity increases as the mortgage balance decreases and/or the property value increases.
An arrangement where a third party holds and regulates payment of funds or documents on behalf of two other parties in a transaction. In mortgages, an escrow account may hold funds for property taxes and insurance premiums.
A government-sponsored enterprise that purchases and guarantees mortgages from lenders to increase the availability of mortgage credit and make homeownership more accessible.
A mortgage loan insured by the Federal Housing Administration that allows for lower down payments and credit scores compared to conventional loans. FHA loans are designed to make homeownership more accessible to first-time buyers and low-to-moderate income borrowers.
A mortgage loan with an interest rate that remains the same for the entire term of the loan. Fixed-rate mortgages offer predictable monthly payments and protection from interest rate increases.
The legal process by which a lender takes possession of a property after the borrower fails to make mortgage payments. Foreclosure allows the lender to sell the property to recover the outstanding loan balance.
A document that provides an estimate of the fees and costs associated with a mortgage loan. The GFE helps borrowers compare loan offers and understand the costs involved in the mortgage process.
The period after a payment due date during which a borrower can make a payment without incurring a late fee or having the payment reported as late to credit bureaus. Typical grace periods for mortgages are 10-15 days.
A revolving line of credit secured by a home's equity. A HELOC allows homeowners to borrow funds as needed up to a credit limit during a draw period, with variable interest rates.
A type of loan that allows homeowners to borrow against the equity in their home. Unlike a HELOC, a home equity loan provides a lump sum with fixed interest rates and fixed monthly payments.
Insurance coverage that protects against damage to a home and its contents, as well as liability for accidents on the property. Lenders typically require homeowners insurance as a condition of the mortgage.
The percentage of a loan amount charged by a lender for the use of its money. The interest rate is one component of the total cost of borrowing, expressed as an annual percentage.
A mortgage in which the borrower pays only the interest portion of the loan for a specified period. After the interest-only period ends, the borrower must begin paying both principal and interest, resulting in higher monthly payments.
A mortgage loan that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac. Jumbo loans typically have higher interest rates and stricter qualification requirements than conforming loans.
A legal claim against a property that must be paid when the property is sold. A mortgage is a type of lien, giving the lender a legal interest in the property until the loan is paid in full.
A fee charged by a lender for processing a new loan application, typically 0.5% to 1% of the loan amount. The origination fee covers the lender's administrative costs for underwriting and processing the loan.
A calculation that compares the amount of a loan to the value of the property securing the loan. LTV is expressed as a percentage, with higher ratios representing greater risk to the lender.
A loan used to purchase or maintain a home, land, or other types of real estate. The borrower agrees to pay the lender over time, typically in a series of regular payments that include principal and interest.
Insurance that protects the lender against loss if a borrower defaults on the loan. Private mortgage insurance (PMI) is typically required for conventional loans with down payments less than 20%.
A legal document that obligates a borrower to repay a mortgage loan at a specified interest rate over a specified period. The mortgage note is the borrower's promise to pay.
A situation in which the principal balance of a loan increases because the monthly payments are insufficient to cover the interest due. Negative amortization can occur with certain types of adjustable-rate mortgages.
The process of creating a mortgage loan, including the preparation of documents, verification of income and assets, and underwriting. Origination begins when a borrower applies for a loan and ends at closing.
An upfront fee paid to the lender at closing to reduce the interest rate on a mortgage. One point equals 1% of the loan amount and typically lowers the interest rate by 0.25%.
A process in which a lender evaluates a borrower's creditworthiness and provides a written commitment to loan a specific amount. Pre-approval is more formal than pre-qualification and often requires documentation of income, assets, and debts.
A fee charged by some lenders if a borrower pays off a mortgage before the end of the term. Prepayment penalties are designed to discourage early loan payoff and compensate the lender for lost interest income.
The original amount borrowed in a loan, excluding interest. As payments are made, the principal balance decreases, leading to less interest being accrued over time.
A category of loans that meet certain borrower protection requirements established by the Consumer Financial Protection Bureau. Qualified mortgages prohibit certain risky features and have limits on points and fees.
A commitment from a lender to hold a specific interest rate for a designated period, typically 30, 45, or 60 days. Rate locks protect borrowers from rate increases during the mortgage application process.
The process of replacing an existing mortgage with a new one, typically to obtain a lower interest rate, change the loan term, or access equity. Refinancing may result in lower monthly payments or reduced total interest costs.
A type of loan available to homeowners aged 62 or older that allows them to convert part of their home equity into cash. Unlike traditional mortgages, reverse mortgages do not require monthly mortgage payments.
A loan secured by a property that already has a mortgage. Second mortgages have a subordinate claim to the property in case of default and typically carry higher interest rates than first mortgages.
A loan offered to borrowers with lower credit scores who may not qualify for conventional loans. Subprime mortgages typically have higher interest rates and fees to compensate for the increased risk to the lender.
The legal right to ownership of a property. A clear title is free from liens or legal questions about ownership and is required for the transfer of property ownership.
Insurance that protects lenders and homebuyers from financial loss due to defects in a title, such as liens, encumbrances, or ownership disputes. Title insurance is typically required by lenders and paid for at closing.
The process of evaluating a loan application to determine the risk involved and whether to approve the loan. Underwriters assess factors such as credit history, income, assets, and property value.
A mortgage loan guaranteed by the United States Department of Agriculture. USDA loans are designed for low- to moderate-income borrowers in eligible rural areas and offer 100% financing with no down payment.
A mortgage loan guaranteed by the U.S. Department of Veterans Affairs for eligible veterans, active-duty service members, and certain surviving spouses. VA loans offer competitive interest rates and require no down payment.
An interest rate that can change periodically based on an index. Variable rates are commonly used in adjustable-rate mortgages and can increase or decrease over the life of the loan.
A financing arrangement in which a new mortgage encompasses the remaining balance of an existing mortgage plus an additional amount. The borrower makes payments to the wraparound lender, who then makes payments on the original mortgage.
A mortgage that finances 100% of the home's purchase price, requiring no down payment from the borrower. VA and USDA loans are common examples of zero down payment mortgage programs.