Mortgage Glossary Adjustable Rate Mortgage (ARM) A mortgage in which the interest rate is adjusted periodically based on an index. The adjustment is based on the term of the term of the ARM (1 year, 3 year, 5 year, etc) Adjustment Interval For an adjustable rate mortgage, the time between changes in the interest rate charged. Amortization A payment schedule that breaks down (per month) how much of each payment goes towards principal and how much goes towards interest. Annual Percentage Rate (APR) The interest rate which reflects the cost of a mortgage as a yearly rate. This rate is usually higher than the stated loan rate for the mortgage, because it takes into account points and other charges. Appraisal The determination of property value based on recent sales of similar homes (within the last 6 months) in your area with similar features that your home would contain. Assumable Loan A loan that may be passed on from a seller of a home to the buyer. The buyer “assumes” all outstanding payments at the current interest rate of the seller. Balloon Mortgage A fixed rate loan for a definite amount of time, (usually 5, 7 or 10 years). Balloon loans are popular with those expecting to sell or refinance their property within a definite period of time. Broker An individual in the business of assisting in arranging funding or negotiating contracts for a client but who does not loan the money himself. Brokers usually charge a fee or receive a commission for their services. Caps A set percentage amount by which an adjustable rate mortgage may adjust each adjustment period. For adjustable loans, caps are usually quoted as two numbers as in 2/6. The first number indicates how much a loan may adjust at each adjustment period while the second number indicates how much a loan may adjust over its lifetime. Closing Costs Fees paid by the borrower when property is purchased or refinanced. These typically include a loan origination fee, discount points, appraisal fee, title search, title insurance, survey, taxes, deed recording fee, and credit report charges. PMI costs are also excluded from this figure. Title Insurance is usually in the range of $1 per $1,000 borrowed. Commitment A written letter of agreement detailing the terms and conditions by which the lender will lend and the borrower will borrow funds to finance a home. Conforming Loan A mortgage loan for up to $333,700. Any loan amount higher than this is considered a Jumbo loan. Construction Loan A short term loan for funding the cost of construction. The lender advances funds to the builder as the work progresses. Conventional Loan A mortgage neither insured by the FHA nor guaranteed by the VA. Conversion The right of a borrower to convert an adjustable or balloon loan into a fixed loan. Credit Report A report issued that determines the credit worthiness of a prospective buyer. Deed A legal document which affects the transfer of ownership of real estate from the seller to the buyer. Default The failure to make payments on a loan. Down Payment Money paid by a buyer from his own funds towards the purchase of the home. Equity The difference between the current market value of a property and the principal balance of all outstanding loans. FHA Loan A government-backed mortgage loan insured by the Department of Housing and Urban Development (HUD) Finance Charge The total dollar amount your loan will cost you. It includes all interest payments for the life of the loan, any interest paid at closing, your origination fee and any other charges paid to the lender and/or broker. Fixed-Rate Mortgage A mortgage where the interest rate does not change for the life of the loan. Float Between the time of application and closing, a borrower may choose to re-lock the interest rate at a lower rate (if rates decrease after the initial lock-in) Foreclosure A legal procedure in which real estate is sold by the lender to pay a defaulting borrower’s debt. Good Faith Estimate An estimate of charges which a borrower is likely to incur in connection with a loan closing. Gross Monthly Income The total amount the borrower earns per month, before taxes. Hazard Insurance A form of insurance in which the insurance company protects the insured from certain losses, such as fire, vandalism, storms and certain other natural causes. Housing Ratio The ratio of the monthly housing payment to total gross monthly income. Also called Payment-to-Income Ratio or Front-End Ratio. Index A published interest rate to which the interest rate on an Adjustable Rate Mortgage (ARM) is tied. The index and the interest rate linked to it may increase or decrease. Interest Rate The rate at which money is borrowed from a lender and paid back over a certain amount of time Jumbo Loan A loan for $333,700 or more. These limits are set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Lender The bank, mortgage company, or mortgage broker offering the loan. Many institutions only “originate” loans and then resell the obligation to third parties on the secondary market. Loan-To-Value Ratio The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage. For example: A LTV ration of 90 means that a borrower is borrowing 90% of the value of the property and paying 10% as a down payment. Lock The period, expressed in days, during which a lender will guarantee a rate. Locking in The act of committing to a mortgage rate. Margin The amount a lender adds to the quoted index rate for an adjustable rate loan to determine the new interest rate. Monthly Housing Expense Total principal, interest, property taxes, homeowners insurance, and mortgage insurance paid by the borrower on a monthly basis. Mortgagee The lender. Mortgagor The borrower. Origination Fee The fee imposed by a lender to cover certain processing expenses in connection with making a loan. Usually a percentage of the amount loaned. Points Prepaid interest paid by the borrower to the lender at closing. A point is equal to 1 percent of the loan amount. Generally, by paying more points at closing, the borrower reduces the interest rate of his loan and thus future monthly payments. Prepaids Expenses such as taxes, homeowners insurance, and mortgage insurance which are paid i n advance of their due date and which must by paid by the buyer on a prorated basis at closing. Prepayment The ability to pay off the remaining balance of a loan without a penalty Principal The amount of debt, not counting interest, left on a loan. Private Mortgage Insurance (PMI) Paid by a borrower to protect the lender in case of default. PMI is typically charged to the borrower when the Loan-to-Value Ratio is greater than 80% Qualifying Ratio The ratio of the borrower’s fixed monthly expenses to his gross monthly income. The Front-End Ratio is the percentage of a borrower’s gross monthly income (before income taxes) that would cover the cost of PITI (Mortgage Principal Payment + Mortgage Interest Payment + Property Taxes + Homeowners Insurance). The Back-End Ratio is the percentage of a borrower’s gross monthly income that would cover the cost of PITI plus any other monthly debt payments like car or personal loans and credit card debt. Tax Lien A claim against a real estate for the amount of its unpaid taxes. Title A document that gives evidence of an individual’s ownership of property. Title Insurance Title Insurance policies typically insure a homebuyer against any title-search errors or mistakes, and against loss due to disputes over property ownership. Title Insurance can additionally offer protection to the lender under similar circumstances. The cost of title insurance is usually a set value per thousand of dollars of the total loan amount. Title Search An examination of city, town, or county records to determine the legal ownership of real estate. VA Loan A government insured mortgage supported by the US Veterans Administration.