Acceleration Clause
Condition in a mortgage that permits the lender to demand payment of the entire principal balance if a monthly payment is missed or some other default takes place.

Additional Principal Payment
The option to reduce the remaining balance on the loan by paying more than the scheduled amount due.

Adjustable-Rate Mortgage (ARM)
A mortgage with an interest rate that adjusts throughout the life of the loan in accordance to changes in an index rate. Adjustable-rate mortgages are sometimes referred to as AMLs (adjustable mortgage loans) or VRMs (variable-rate mortgages).

Adjusted Basis
The cost of a property in addition to the value of any capital expenditures for upgrades to the property minus any depreciation.

Adjustment Date
The calendar day that the interest rate adjusts on an adjustable-rate mortgage (ARM).

Adjustment Period
The duration between adjustment dates for an adjustable-rate mortgage (ARM).

Affordability Analysis
An analysis of a buyers capability to afford the payments of a home. This involves a review of income, liabilities, available funds, and takes into accont the type of mortgage being used, the area where the home will be purchased, and the projected closing costs.

Amortization
The steady repayment of a mortgage loan, both principal and interest, by installments.

Amortization Term
The duration of time necessary to amortize the mortgage loan stated as a number of months. For example, 360 months is the amortization term for a thirty-year fixed-rate mortgage.

Annual Percentage Rate (APR)
The price of credit, stated as an annual rate including interest, mortgage insurance, and loan origination costs. This makes it possible for the buyer to compare loans, however APR should not be mistaken for the actual note rate.

Appraisal
A written evaluation prepared by a licensed appraiser estimating the value of a property.

Appraised Value
An estimation of a property’s fair market value, based on an appraiser’s expertise, information, and examination of the property.

Asset
Something owned of monetary worth including real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, etc.).

Assignment
The transmission of a mortgage loan from one person to another person.

Assumability
An mortgage that can be signed over from the seller to the new buyer. An assumable mortgage requires a credit review of the new borrower and the lender may charge a fee for the assumption. If a mortgage has a due-on-sale clause, it cannot be assumed by a new buyer.

Assumption Fee
The charge paid to a lender (usually by the buyer of real property) when an assumption occurs.

Balance Sheet
A financial statement that lists assets, liabilities, and net worth on a specific date.

Balloon Mortgage
A mortgage with unchanged monthly payments that amortizes over an expressed term but also calls for a lump sum payment be paid at the end of an earlier specified term.

Balloon Payment
The last lump sum paid at the maturity date of a balloon mortgage.

Before-tax Income
Earnings before taxes are subtracted.

Biweekly Payment Mortgage
A means to decrease the amount owed every two weeks (instead of the typical monthly payment plan). The 26 (or possibly 27) biweekly payments are each equivalent to half of the monthly payment required if the loan were a normal 30-year fixed-rate mortgage. The outcome for the borrower is a significant savings in interest.

Bridge Loan
A second trust that is collateralized by the borrower’s current home allowing the funds to be used to close on a new home prior to the current home being sold. Also known as a “swing loan.”

Broker
A person or business that connects borrowers to lenders with the intention of loan origination.

Buydown
A buydown is when the seller, builder or buyer pays a sum of money up front to the lender to decrease monthly payments during the initial years of a mortgage. Buydowns are able to take place in both fixed and adjustable rate mortgages.

Cap
Places a ceiling on how high the interest rate or the monthly payment can increase, either at each adjustment or throughout the duration of the mortgage. Payment caps do not limit the amount of interest the lender is receiving and may cause reverse amortization.

Certificate of Eligibility
A certificate issued by the federal government verifying that a veteran is entitled to a Department of Veterans Affairs (VA) mortgage.

Certificate of Reasonable Value (CRV)
A certificate issued by the Department of Veterans Affairs (VA) that determines the highest value and loan amount for a VA mortgage.

Change Frequency
The rate of recurrence (in months) of payment and/or interest rate adjustments in an adjustable-rate mortgage (ARM).

Closing
A gathering held to complete the sale of a property. The buyer signs the mortgage contract and pays closing expenses. Also known as “settlement.”

Closing Costs
These are fees – in addition to the price of the property- that are incurred by buyers and sellers when reassigning ownership of a property. Closing costs typically include an origination fee, property taxes, fees for title insurance and escrow costs, appraisal charge, etc. Closing costs are subject to the geographic location of the loan and the lenders used.

Compound Interest
Interest paid on the initial principal balance as well as the accrued and unpaid interest.

Consumer Reporting Agency (or Bureau)
An establishment that manages the preparation of reports used by lenders to decide a potential borrower’s credit history. The agency gets information for these reports from a credit repository and other sources.

Conversion Clause
A condition in an ARM permitting the loan to be changed to a fixed-rate at certain point during the term. Usually conversion is permitted at the end of the first adjustment phase. The conversion option may cost more.

Credit Report
A document detailing an persons credit history that is prepared by a credit bureau and used by a lender to decide a loan applicant’s creditworthiness.

Credit Risk Score
A credit score quantifies an individual’s credit risk in relation to the rest of the U.S. population, based on the individual’s credit usage history. The credit score most often used by lenders is the FICO® score, done by Fair, Issac and Company. This 3-digit number, ranging from 300 to 850, is computed by a mathematical equation that assesses various forms of information that is on a credit report. Higher FICO® scores signify lower credit risks, which generally means more favorable loan terms. Credit scores are key in the mortgage underwriting process.

Deed of Trust
The legal record used in some states in place of a mortgage. Title is conveyed to a trustee.

Default
Failure by a borrower to issue mortgage payments on time or fulfill with other obligations of a mortgage.

Delinquency
Failure by a borrower to issue mortgage payments on time.

Deposit
An amount of money given to oblige the sale of real estate, or an amount of money given to guarantee payment or an advance of money in the processing of a loan.

Discount
In an ARM with an opening rate discount, the lender forfeits a number of percentage points in interest to decrease the rate and lower the payments for a part of the mortgage term (generally for one year or less). After the discount period, the ARM rate generally goes up in accordance to its index rate.

Down Payment
A portion of the purchase price of a property that is paid in cash and not included in the mortgage.

Effective Gross Income
A borrowers regular yearly income, which includes overtime that is regular or guaranteed. Salary is generally the main source, however other income may qualify if it is noteworthy and lasting.

Equity
The total amount the borrower can financially claim in a property. Equity is the difference between the true price of the property and the sum still owed on the mortgage.

Escrow
A resource of worth, money, or documentation deposited with a third party to be released upon the completion of a condition. An example would be when money is deposited into an escrow account and then disbursed once the closing of a sale of real estate occurs.

Escrow Disbursements
The use of escrow monies for the purpose of paying real estate taxes, mortgage insurance, hazard insurance, and other property expenses as they are due.

Escrow Payment
The portion of a mortgagor’s monthly payment that is set aside by the servicer for the purpose of paying taxes, mortgage insurance, hazard insurance, lease payments, etc.

Fannie Mae
A federally chartered, shareholder-owned corporation that is the largest supplier of home mortgage funds in the United States.

FHA Mortgage
A mortgage that is insured by the Federal Housing Administration (FHA). An FHA mortgage is also known as a government loan/mortgage.

FICO Score
FICO® scores are the most common used credit score in mortgage loan underwriting. It is a three digit number, ranging from 300 to 850, computed by a mathematical formula that assesses information that is on your credit report. Higher FICO® scores signal lower credit risks, which generally results in better loan terms.

First Mortgage
The main lien against a property.

Fixed Installment
The monthly payment on a mortgage loan that includes both principal and interest.

Fixed-Rate Mortgage (FRM)
A mortgage in which the interest rate is fixed for the duration of the loan.

Fully Amortized ARM
An adjustable-rate mortgage (ARM) with monthly payments that are enough to amortize the remaining balance on the mortgage at the interest accrual rate.

GNMA
A federally owned company in charge of the special assistance loan program which was formerly under the administration of Fannie Mae. GNMA is popularly referred to as Ginnie Mae.

Growing-Equity Mortgage (GEM)
A fixed-rate mortgage that has planned payment increases over a scheduled period of time. The increase amount in the monthly payment is applied towards decreasing the balance left on the mortgage.

Guarantee Mortgage
A mortgage pledged by a third party.

Housing Expense Ratio
The percentage of gross monthly earnings allocated to pay housing costs.

HUD-1 statement
A document that shows, line by line, the funds that are due at closing. Items that appear on the HUD are real estate commissions, loan costs, points, and initial escrow payments. Each item on the HUD is categorized by a number within a standardized numbering system. The total figures at the end of the HUD-1 statement delineate the seller’s net proceeds and the buyer’s net payment at closing.

Hybrid ARM (3/1 ARM, 5/1 ARM, 7/1 ARM)
A combination of a fixed rate and an adjustable rate loan, also known as 3/1,5/1,7/1. A hybrid ARM can provide the following: lower interest rates (like ARMs) and a fixed payment for a longer duration than most adjustable rate loans. For example, a “5/1 loan” has a fixed monthly payment and interest for the initial five years and then becomes a traditional adjustable rate loan, based on the current rates for the remaining 25 years. This is a good choice for individuals who anticipate moving or refinancing, before or shortly after, the adjustment take place.

Index
An index is a vehicle a lender uses to measure the changes in interest rates in order to determine how much the interest rate on an ARM will change over time.The index is usually a published figure or percentage. An example is the average interest rate or yield on Treasury bills. Some index rates can be higher than others and some more fickle than others.

Initial Interest Rate
The original interest rate of the mortgage when closing takes place. This rate changes in an adjustable-rate mortgage (ARM). It is also known as the ‘start rate’ or ‘teaser rate.’

Installment
The recurring payment that a borrower makes to a lender.

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

Interest
The cost of borrowing money.

Interest Accrual Rate
The rate that interest accrues on a mortgage. Generally, it is the rate used to determine the monthly payments.

Interest Rate Buydown Plan
An agreement that permits the property seller to deposit funds to an account. Afterwards, that money is released every month to decrease the mortgagor’s monthly payments during the initial years of a mortgage.

Interest Rate Ceiling
This term is relevant to an adjustable-rate mortgage (ARM), the highest interest rate, as stated in the mortgage note.

Interest Rate Floor
This term is relevant to an adjustable-rate mortgage (ARM), the lowest interest rate, as stated in the mortgage note.

Late Charge
The fee a borrower is obligated to pay when a payment is not made before the specified time (usually 15 days) after the due date.

Lease-Purchase Mortgage Loan
A financing option that permits low- and medium-income home buyers to lease a home with the option to buy. Each month’s rent payment in composed of principal, interest, taxes and insurance (PITI) payments on the first mortgage in addition to an extra sum that is gathered in a savings account for a downpayment.

Liabilities
An individual’s financial commitments. Liabilities are composed of long-term and short-term debt.

Lifetime Payment Cap
Applies to an adjustable-rate mortgage (ARM) – A limit on the amount that payments can increase or decrease over the duration of a mortgage.

Lifetime Rate Cap
Applies to an adjustable-rate mortgage (ARM) – A limit on the amount that the interest rate can increase or decrease over the duration of the loan. See cap.

Line of Credit
An agreement, by a commercial bank or other financial institution, to offer credit up to a certain amount for a certain time.

Liquid Asset
A cash asset or an asset in general that is easily converted into cash.

Loan
The lending of money to an individual (principal) that is usually repaid with interest.

Loan-to-Value (LTV) Percentage
The correlation between the principal balance of a mortgage and the appraised value (or sale price if it is less than the appraised value) of the home. For example, a $100,000 home with an $80,000 mortgage has a loan-to-value (LTV) of 80 percent.

Lock-In Period
The promise of an interest rate for a certain period of time by a lender, including loan term and points, if any, to be paid at closing. Short term locks (under 21 days), are typically available after lender loan approval only. However, many lenders will allow a borrower to lock a loan for thirty days or more before submitting the loan application.

Margin
The amount of percentage points the lender adds to the index rate to compute the ARM interest rate at every adjustment.

Maturity
The date which the principal balance of a loan is due and payable.

Monthly Fixed Installment
The part of the total monthly payment that is applied to principal and interest. When a mortgage negatively amortizes, the monthly fixed installment does not include any funds for principal reduction and does not cover all of the interest. Due to this the loan balance increases instead of decreasing.

Mortgage
A legal document that guarantees a property to the lender as insurance against the possibility of a borrower not making his/her payments.

Mortgage Banker
A business that originates mortgages solely for resale in the secondary mortgage market.

Mortgage Broker
An individual or business that connects borrowers to lenders for the purpose of loan origination.

Mortgage Insurance
A financial contract that insures the lender against loss caused by a mortgagor’s default on a government or conventional mortgage. Mortgage insurance can be issued by a private company or by a government agency.

Mortgage Insurance Premium (MIP)
The amount of money paid by a mortgagor for mortgage insurance.

Mortgage Life Insurance
A form of term life insurance. In the event that the borrower dies while the policy is in force, the debt is paid by insurance proceeds.

Mortgagor
The borrower in a mortgage contract.

Negative Amortization
Amortization is defined as making monthly payments that are large enough to pay the interest and reduce the principal on a mortgage. Negative amortization or reverse amoritization occurs when the monthly payments do not pay for all of the interest cost. The interest cost that is not paid is added to the principal balance. This means that despite making many payments, an individual could owe more than he/she did at the beginning of the loan. Negative amortization may occur when an ARM has a payment cap that results in monthly payments that are not high enough to cover the interest due.

Net Worth
The value of a person’s assets, including cash.

Non Liquid Asset
An asset that is difficult to convert into cash.

Note
A legal contract that holds a borrower responsible to repay a mortgage loan at a defined interest rate during a specified period of time.

Origination Fee
A fee paid to the lender for processing the loan application. The origination fee is revealed in the form of points. One point is equal to 1 percent of the mortgage amount.

Owner Financing
A home transaction in which the party selling the property provides all or part of the financing.

Payment Change Date
The date when a new monthly payment amount goes into effect on an adjustable-rate mortgage (ARM) or a graduated-payment mortgage (GPM). Usually, the payment modification date occurs in the month immediately after the adjustment date.

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

Periodic Rate Cap
A threshold on the amount that the interest rate can be increased or decreased during any one adjustment period, regardless of how high or low the index may be.

PITI Reserves
A cash amount determined that a borrower must have on hand after making a down payment and paying all closing costs for the purchase of a home. The principal, interest, taxes, and insurance (PITI) reserves must be equal to the amount that the borrower would need to pay for PITI for a predefined amount of months (typically three).

Points
A point is equal to one percent of the principal amount of the mortgage. For example for a mortgage of $165,000, one point would mean $1,650 to the lender. Points are usually collected at closing and can be paid by the borrower, the home seller, or it can be split between them.

Prepayment Penalty
A charge that may be placed on the borrower if he/she pays off a loan before it is due.

Pre-Approval
The procedure to determine how much money a borrower will be able to borrow before they apply for a loan.

Prime Rate
The interest rate that banks charge to their preferred customers. Changes in the prime rate affect changes in other rates, including mortgage rates.

Principal
The amount of money borrowed or the balance to be paid. The portion of a monthly payment that decreases the balance of a mortgage.

Principal Balance
The remaining balance on a mortgage not including interest or any other charges.

Principal, Interest, Taxes, and Insurance (PITI)
The 4 components of a monthly mortgage payment. Principal refers to the portion of the monthly payment that decreases the balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the monthly expense of property taxes and homeowners insurance, whether these funds are paid into an escrow account each month or not.

Private Mortgage Insurance (PMI)
Mortgage insurance given by a private mortgage insurance company to protect lenders from losses in the case a borrower defaults. Most lenders usually require MI for a loan with a high loan-to-value (LTV percentage in excess of 80 percent).

Qualifying Ratios
Ratios used to calculate whether a borrower will be eligible for a mortgage. Two calculations are used: a housing expense as a percent of income ratio and total debt obligations as a percent of income ratio.

Rate Lock
A promise made by a lender to a borrower or other mortgage originator guaranteeing an interest rate and lender fees for a specified period of time.

Real Estate Agent
A licensed individual qualified to negotiate and execute the sale of propert on behalf of the real estate owner.

Real Estate Settlement Procedures Act (RESPA)
A law used for consumer protection that obliges lenders to give borrowers prior notification of closing costs.

Real Estate Agent®
A real estate broker or associate that is an active member in a local real estate board which is associated with the National Association of Real Estate Agents.

Recording
The official documentation in the registrar’s office that explains all of the details of a properly executed legal document such as a deed, mortgage note, satisfaction of mortgage, or an extension of mortgage. The recording process makes it a part of the public record.

Refinance
To pay off one loan with the proceeds from a new loan and using the same property as collateral.

Revolving Liability
An arrangement, such as a credit card, that permits a consumer to borrow against a pre-approved line of credit when buying goods and services.

Secondary Mortgage Market
The market that existing mortgages are bought and sold.

Security
The property or home that is pledged as collateral for a loan.

Seller Carry-back
An arrangement in which the owner of a property provides financing, Most of the time in combination with an assumable mortgage. See Owner Financing.

Servicer
An association that collects principal and interest payments from the borrower and manages the borrowers’ escrow accounts. The servicer mostly services mortgages that have been bought by an investor in the secondary mortgage market.

Standard Payment Calculation
The formula used to compute the monthly payment required to pay the remaining balance of a mortgage in equal installments over the remaining term of the mortgage at the current interest rate.

Step-Rate Mortgage
A mortgage that permits the interest rate to increase in accordance to a schedule (i.e., seven years), resulting in higher payments as well. At the end of the specified period, the payments and rate will remain fixed for the remainder of the loan.

Third-party Origination
When a lender uses a third party to originate, underwrite, process, close, fund, or package the mortgages it plans to sell in the secondary mortgage market.

Total Expense Ratio
All obligations, as a percentage of gross monthly earnings, including monthly housing costs plus other monthly debts.

Treasury Index
The index used to determine interest rate adjustments for some adjustable-rate mortgages (ARM). The Treasury Index is based on the results of auctions that the U.S. Treasury holds for its Treasury bills and securities or derived from the U.S. Treasury’s daily yield curve.

Truth-in-Lending
A federal government law that ensures lenders will fully disclose, in writing, the terms and conditions of a mortgage, including the annual percentage rate (APR) and other costs.

Two-step Mortgage
An adjustable-rate mortgage (ARM) with a single interest rate for the initial five or seven years of the mortgage term and an adjusting interest rate for the rest of the amortization term.

Underwriting
The procedure for evaluating a loan application to clarify the risk involved for the lender. Underwriting is an analysis of the borrower’s creditworthiness and the quality of the property he/she wishes to purchase.

VA Mortgage
A mortgage that is insured by the Department of Veterans Affairs (VA). Also known as a government mortgage or loan.

“Wrap Around” Mortgage
A mortgage that includes the remaining balance of an existing first mortgage plus a sum requested by the mortgagor. Full payments on both mortgages are made to the “Wrap Around” mortgagee, which then forwards the payments for the first mortgage to the first mortgagee. These mortgages may not be permitted by the first mortgage holder, and if discovered, may be subject to a demand for full payment.