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Mortgage Terms Glossary

Learn mortgage terms and jargon before you start shopping for your mortgage.

When you go out to shop for a mortgage you probably are going to hear many unfamiliar mortgage terms. Because of all the options available, obtaining a mortgage loan can be a real adventure. And since so much is at stake, your knowledge of the mortgage terms will help you get the best possible deal.

Adjustable Rate Mortgage: Any: type of mortgage that includes an adjustment in the interest rate during the term of the mortgage. Such interest rate adjustments may be made monthly, semi-annually, at three years or even at five years.

Annual Percentage Rate: Commonly called APR, this interest rate reflects the total amount of all finance charges including interest, points, origination fees and mortgage insurance. This APR allows consumers to compare mortgage costs among several lenders. Lenders must provide this information to all loan applicants. The higher the APR, the higher the cost of the mortgage to you.

Application Fee: Many lenders charge an upfront fee to cover their cost for the credit report and appraisal. This fee is usually not refundable, but will be credited at closing.

Appraisal: An evaluation of the market and reproduction value of a house by a qualified appraiser.

Bridge Loan A form of second mortgage that is collateralized by the borrowers present home (which is usually for sale) that allows the proceeds to be used for closing on a new house before the present home is sold.

Building Codes Regulate the design, construction, and materials used to meet standardized guidelines for building integrity.

Building Permits Legal permission from the local government agency authorizing construction. Permits are applied for by the builder or owner and fees are paid for the permitting process.

Buy Down: This refers to the practice of paying larger loan fees up front to provide a lower interest rate during the term of a loan. Buy downs only make sense when the borrower is going to have the loan for a long time and can recoup the cost of the buy down. Even then if rates drop and the borrower refinances, the buy down fee is lost.

Closing: The consummation of the sale of real property. The closing includes the delivery of a deed, financial adjustments, the signing of notes, and the disbursement of funds necessary to complete the sale and loan transaction.

Closing Costs: All of the costs paid at the loan closing. Typically closing costs include loan fees, appraisal fees, credit report fees, title insurance, survey, documentary stamps, recording fees and other lender costs assessed at closing. Prepaid tax and insurance escrows and prepaid interest are also included.

Commitment Letter A form letter issued by a lender stating the terms under which it agrees to loan money to a homebuyer.

Credit Report: A borrower's history of meeting financial obligations on a timely basis.

Community Homebuyers' Program: A low down payment loan designed for first time homebuyers. Applicants must complete a course in the responsibilities of home ownership. Like the FHA loans, applicants do not have to be as financially strong as with conventional loans.

Debt Ratio: A borrower's total monthly debt payments divided by his or her monthly income. It is sometimes called "back end ratio" in mortgage slang.

Down Payment: The portion of the home purchase price that the borrower pays. The remainder of the cost of the home is financed with a mortgage. Mortgages are now available with as little as 3% down.

Escrow: Money held by a lender to assure timely payments of insurance and taxes for the borrowers. Typically, part of each mortgage payment goes into an escrow fund that the lender uses to pay the borrower's tax and insurance bills.

Escrow:An item of value, money or documents, deposited with a third party, to be delivered upon the fulfillment of a condition. For example, the deposit by a borrower with the lender of funds to pay taxes and insurance premiums when they become due, or the deposit of funds or documents with an attorney or escrow agent to be disbursed upon the closing of a sale of real estate. In some states, escrows of taxes and insurance premiums are called impounds or reserves.

FICO Score: A numerical rating developed and maintained by Fair Isaac and Company that indicates a consumers creditworthiness.

FHA: These are government insured loans designed for homebuyers with little money for a down payment. Anyone may apply for a FHA loan and the underwriting criteria are more lenient than they are for conventional loans.

Fixed Rate Mortgage: A mortgage where the interest rate is fixed for the term of the loan.

Flood Insurance: All homes that are identified as being in a flood zone are required to have flood insurance. Flood Zones have been determined by the US Government and published on maps for this purpose. Lenders use a "Flood Certification" to determine if the house you are purchasing is in a flood zone.

The charge for this certification is passed onto the borrower and ranges from $15 to $25. The cost of the actual flood insurance is paid by the borrower in addition to normal homeowners insurance.

Floating Rate: The interest rate on a loan waiting to close may float up down until five days before closing at which time it is locked.

Good Faith Estimate: Lenders must provide a good faith estimate of your closing cost within three days of your loan application. This document shows an estimate of all closing costs and must be accurate within 1% or $100 of actual closing costs, whichever is less. Save this document and compare it with your closing statement. If the closing costs are over $100 more than estimated, don't close your loan without a satisfactory explanation.

HUD Settlement Statement A government form that is issued at the closing and indicates all of the costs of the real estate transaction.

Homeowners Insurance Protects the buyer and the lender against hazards and losses caused by fire, vandalism and some natural causes.

Index:A published interest rate, such as the prime rate, LIBOR, T-Bill rate, or the 11th District COFI. Lenders use indexes to establish interest rates charged on mortgages or to compare investment returns. When ARM loans adjust, a predetermined margin is added to the index to determine the new rate.

Inspections: Depending upon the property's location or condition, some lenders may require an additional inspection of the property. In southern climates, for example, pest or termite inspections are commonly required. If the lender suspects building code violations, it may require a certificate of compliance from local authorities for a particular property. Of course, all inspection reports must be carefully reviewed.

Inspections are always a good idea for the homeowner and generally your Realtor will recommend a good home inspector. These inspections can find problems in the house and you can renegotiate the price or demand the problems be fixed if there are extensive repairs needed.

Junk Fees: Miscellaneous fees that lenders charge for processing mortgage loans. For example, these fees may be called underwriting, processing, courier, and document preparation or service fees.

Lien A legal claim or attachment against real property for money owed.

Loan to Value Ratio: The amount of the loan divided by the value of the property being lent on. The purchase price or appraisal determines the value, whichever is less.

Mortgage FAQ

Negative Amortization / Deferred Interest / Level Payment: Some lenders offer these loans as adjustable rate loans. The increase in payments is limited and interest can be added to the principal of the loan. Thus a homebuyer can have a larger loan at the end of five years than when he or she started the loan. When discussing any type of adjustable rate loan with a lender be sure to ask whether it has the negative amortization feature. You may not want this type of loan.

Points: Fees charged up front by a lender. One point is equal to 1 per cent of the loan amount. These fees usually include loan origination fees and discount points. Typically points amount to 1% to 3% of the loan amount. Be careful that they are quoting you the total points and ask to see a "Good Faith Estimate" on each loan offer before signing up. (see See also APR)

Prepayment Penalty: A fee charged by a lender if a loan is paid off early. These fees are becoming more popular for certain residential mortgage loans, so borrowers should ask about a possible prepayment penalty."

Private Mortgage Insurance (PMI): Most lenders require PMI insurance for loans that exceed 80% of the home's value. The insurance protects the lender, but the borrower pays a premium of .5% to 1% up front and a monthly charge. This insurance allows the borrower to obtain loans for which they would not ordinarily qualify.

Rate Cap: the limit on the amount an interest rate may change for an adjustable rate loan. For example, the term 2/6 means the rate may change up or down a maximum of 2% per year and 6% over the life of the loan.

Rate Lock: the lender agrees to protect the interest rates, points, and term of the loan while it is processed.

Survey: A survey shows the exact outline of the property, including lot lines and placement of any improvements. Surveys are useful in determining if any encroachments exist. These can be a source of litigation or other difficulties affecting clear title. For example, a neighbor’s garage may extend over the property's lot line, resulting in possible legal complications. Surveys also identify property correctly. A survey from a registered surveyor may be required when large parcels of land have been divided or when irregularities, such as streams or hills, affect the land.

Title: A document that shows evidence of ownership of a piece of property.

Title Insurance: Insurance designed to protect the buyer against defects in the title of the property being purchased. Defects may include encumbrances to the property such as tax liens or past improper conveyance of the property. Depending on the local practices, the buyer or the seller may pay title insurance.

Zero Point Loans and No Closing Cost Loans: The: The borrower trades a higher interest rate on his/her mortgage for lower closing costs. These loans make sense for refinancing and when the borrower expects to have the mortgage for only a short period. This is the opposite of a buy

About the Author

Gary Crum is a nationally published author with over twenty five years of management experience in the banking industry. He has a BSBA in Human Resources Management from Florida State University and an MBA from Florida Atlantic University.