2/1 Buy-Down Mortgage: The 2/1 buy-down mortgage allows the borrower to qualify at below-market rates so they can borrow more. The initial starting interest rate increases by 1% at the end of the first year and adjusts again by another 1% at the end of the second year. It then remains at a fixed interest rate for the remainder of the loan term. Borrowers often refinance at the end of the second year to obtain the best long-term rates. However, even keeping the loan in place for three full years or more will keep their average interest rate in line with the original market conditions.

Acceleration Clause: This provision in a mortgage allows the lender to demand payment of the entire principal balance if a monthly payment is missed or some other default occurs.

Additional Principal Payment: This is a way to reduce the remaining balance on the loan by paying more than the scheduled principal amount due.

Adjustable-Rate Mortgage (ARM): This is a mortgage with an interest rate that changes during the life of the loan according to movements in an index rate. These loans are sometimes called AMLs (adjustable mortgage loans) or VRMs (variable-rate mortgages).

Adjusted Basis: This is the cost of a property plus the value of any capital expenditures for improvements to the property minus any depreciation taken. In other words, it is the value of the property based on critical adjustments.

Adjustment Date: This date is when the interest rate changes on an adjustable-rate mortgage (ARM).

Adjustment Period: This period elapses between adjustment dates for an adjustable-rate mortgage (ARM).

Affordability Analysis: This analysis assesses a buyer's ability to afford the purchase of a home. It will review income, liabilities, and available funds. It will also consider the type of mortgage you plan to use, the area where you want to purchase a home, and the likely closing costs.

Amortization: Amortization is the gradual repayment of a mortgage loan in installments. This includes both principal and interest.

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

Annual Percentage Rate (APR): APR is the cost of credit, expressed as a yearly rate including interest, mortgage insurance, and loan origination fees. This allows the buyer to compare loans. APR should not be confused with the actual note rate.

Appraisal: An appraisal is a written analysis prepared by a qualified appraiser. It estimates the value of a property.

Appraised Value: This is an opinion of a property’s fair market value, based on an appraiser’s knowledge, experience, and analysis of the property.

Asset: An asset is anything owned of monetary value. This can include real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, and so on).

Assignment: The transfer of a mortgage from one person to another is called assignment.

Assumability: An assumable mortgage can be transferred from the seller to the new buyer. Generally, this requires a credit review of the new borrower. Lenders may charge a fee for the assumption. If a mortgage contains a due-on-sale clause, it may not be assumed by a new buyer.

Assumption Fee: This fee is paid to a lender (usually by the purchaser of real property) when an assumption takes place.

Balance Sheet: This financial statement shows assets, liabilities, and net worth as of a specific date.

Balloon Mortgage: These mortgages have level monthly payments that amortize over a stated term. They also require that a lump sum payment be paid at the end of an earlier specified term.

Balloon Payment: This is the final lump sum paid at the maturity date of a balloon mortgage.

Before-Tax Income: This refers to income before taxes are deducted.

Biweekly Payment Mortgage: This plan reduces the debt every two weeks (instead of the standard monthly payment schedule). The 26 (or possibly 27) biweekly payments are each equal to one-half of the monthly payment required if the loan were a standard 30-year fixed-rate mortgage. The result for the borrower is a substantial savings in interest.

Bridge Loan: A bridge loan is a second trust that is collateralized by the borrower’s present home. It allows the proceeds to be used to close on a new house before the present home is sold. It is also known as a swing loan.

Broker: A broker is an individual or company that brings borrowers and lenders together for the purpose of loan origination.

Buydown: A buydown occurs when the seller, builder, or buyer pays an amount of money upfront to the lender to reduce monthly payments during the first few years of a mortgage. Buydowns can occur in both fixed-rate and adjustable-rate mortgages.

Cap: Caps limit how much the interest rate or the monthly payment can increase, either at each adjustment or during the life of the mortgage. Payment caps don’t limit the amount of interest the lender is earning and may cause negative amortization.

Certificate of Eligibility: This is a document issued by the federal government certifying a veteran’s eligibility for a Department of Veterans Affairs (VA) mortgage.

Certificate of Reasonable Value (CRV): This document is issued by the Department of Veterans Affairs (VA). It establishes the maximum value and loan amount for a VA mortgage.

Change Frequency: This refers to the frequency (in months) of payment and/or interest rate changes in an adjustable-rate mortgage (ARM).

Closing: This meeting is held to finalize the sale of a property. The buyer signs the mortgage documents and pays closing costs. It may also be called a settlement.

Closing Costs: These are expenses over and above the price of the property that are incurred by buyers and sellers when transferring ownership of a property. Closing costs normally include an origination fee, property taxes, charges for title insurance and escrow costs, appraisal fees, and so on. Closing costs will vary according to the area of the country and the lenders used.

Compound Interest: Compound interest is paid on the original principal balance and the accrued and unpaid interest.

Consumer Reporting Agency (or Bureau): This organization handles the preparation of reports used by lenders to determine a potential borrower’s credit history. The agency gets data for these reports from a credit repository and other sources.

Conversion Clause: This is a provision in an ARM allowing the loan to be converted to a fixed rate at some point during the term. Usually, conversion is allowed at the end of the first adjustment period. The conversion feature may cost extra.

Credit Report: A credit report details an individual’s credit history. It is prepared by a credit bureau and used by a lender to determine a loan applicant’s creditworthiness.

Credit Risk Score: A credit score measures a consumer’s credit risk relative to the rest of the population in the United States based on the individual’s credit usage history. The credit score most widely used by lenders is the FICO score, developed by Fair, Issac and Company. This three-digit number, ranging from 300 to 850, is calculated by a mathematical equation that evaluates many types of information that are on your credit report. Higher FICO scores represent lower credit risks, which typically equate to better loan terms. In general, credit scores are critical in the mortgage loan underwriting process.

Deed of Trust: This document is used in some states instead of a mortgage. The title is conveyed to a trustee.

Default: Failure to make mortgage payments on a timely basis or to comply with other requirements of a mortgage is called default.

Delinquency: Failure to make mortgage payments on time is called delinquency.

Deposit: This is a sum of money given to bind the sale of real estate or a sum of money given to ensure payment or an advance of funds in the processing of a loan.

Discount: In an ARM with an initial rate discount, the lender gives up a number of percentage points in interest to reduce the rate and lower the payments for part of the mortgage term (usually for one year or less). After the discount period, the ARM rate usually increases according to its index rate.

Down Payment: This is part of the purchase price of a property that is paid in cash and not financed with a mortgage.

Effective Gross Income: A borrower’s normal annual income with regular or guaranteed overtime is known as effective gross income. Salary is usually the principal source, but other income may qualify if it is significant and stable.

Equity: Equity refers to the amount of financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on the mortgage.

Escrow: Escrow is an item of value, money, or documents deposited with a third party to be delivered upon the fulfillment of a condition. One example could be the deposit of funds or documents into an escrow account to be disbursed upon the closing of a sale of real estate.

Escrow Disbursements: Escrow disbursement is the use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, and other property expenses as they become due.

Escrow Payment: An escrow payment is the part of a mortgagor’s monthly payment that is held by the servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due.

Fannie Mae: Fannie Mae is a congressionally chartered, shareholder-owned company that is the nation’s largest supplier of home mortgage funds.

FHA Mortgage: A FHA mortgage is insured by the Federal Housing Administration (FHA). It is also known as a government mortgage.

FICO Score: FICO scores are the most widely used credit score in U.S. mortgage loan underwriting. This three-digit number, ranging from 300 to 850, is calculated by a mathematical equation that evaluates many types of information that are on your credit report. Higher FICO scores represent lower credit risks, which typically equate to better loan terms.

First Mortgage: The primary lien against a property is called the first mortgage.

Fixed Installment: A fixed installment is the monthly payment due on a mortgage loan. It includes payment of both principal and interest.

Fixed-Rate Mortgage (FRM): A fixed-rate mortgage has interest rates that are fixed throughout the entire term of the loan.

Fully Amortized ARM: This is 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.

GNMA: This is a government-owned corporation that assumed responsibility for the special assistance loan program formerly administered by Fannie Mae. It is popularly known as Ginnie Mae.

Growing-Equity Mortgage (GEM): A GEM is a fixed-rate mortgage that provides scheduled payment increases over an established period of time. The increased amount of the monthly payment is applied directly toward reducing the remaining balance of the mortgage.

Guaranteed Mortgage: A mortgage that is guaranteed by a third party is known as a guaranteed mortgage.

Housing Expense Ratio: The percentage of gross monthly income budgeted to pay housing expenses is known as the housing expense ratio.

HUD-1 Statement: This document provides an itemized listing of the funds that are payable at closing. Items that appear on the statement include real estate commissions, loan fees, points, and initial escrow amounts. Each item on the statement is represented by a separate number within a standardized numbering system. The totals at the bottom of the HUD-1 statement define the seller’s net proceeds and the buyer’s net payment at closing.

Hybrid ARM (3/1 ARM, 5/1 ARM, 7/1 ARM): This is a combination fixed-rate and adjustable-rate loan also called 3/1,5/1,7/1. It can offer the best of both worlds: lower interest rates (like ARMs) and a fixed payment for a longer period of time than most adjustable-rate loans. For example, a 5/1 loan has a fixed monthly payment and interest for the first five years and then turns into a traditional adjustable rate loan, based on then-current rates for the remaining 25 years. It’s a good choice for people who expect to move or refinance, before or shortly after the adjustment occurs.

Index: The index is the measure of interest rate changes a lender uses to decide the amount an interest rate on an ARM will change over time. The index is generally a published number or percentage, such as the average interest rate or yield on Treasury bills. Some index rates tend to be higher than others and some are more volatile.

Initial Interest Rate: This refers to the original interest rate of the mortgage at the time of closing. This rate changes for an adjustable-rate mortgage (ARM). It’s also known as the start rate or teaser.

Installment: The regular periodic payment that a borrower agrees to make to a lender is called an installment.

Insured Mortgage: This is a mortgage that is protected by the Federal Housing Administration (FHA) or by private mortgage insurance (MI).

Interest: The fee charged for borrowing money is called interest.

Interest Accrual Rate: The percentage rate at which interest accrues on the mortgage is the interest accrual rate. In most cases, it is also the rate used to calculate the monthly payments.

Interest Rate Buydown Plan: This is an arrangement that allows the property seller to deposit money into an account. That money is then released each month to reduce the mortgagor’s monthly payments during the early years of a mortgage.

Interest Rate Ceiling: For an adjustable-rate mortgage (ARM), the maximum interest rate, as specified in the mortgage note, is known as the interest rate ceiling.

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

Late Charge: A late charge is the penalty a borrower must pay when a payment is made a stated number of days (usually 15) after the due date.

Lease-Purchase Mortgage Loan: This is an alternative financing option that allows low-income and moderate-income home buyers to lease a home with an option to buy. Each month’s rent payment consists of principal, interest, taxes, and insurance (PITI) payments on the first mortgage plus an extra amount that accumulates in a savings account for a down payment.

Liabilities: A person’s financial obligations are known as liabilities. Liabilities include long-term and short-term debt.

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

Lifetime Rate Cap: For an adjustable-rate mortgage (ARM), this is the limit on the amount that the interest rate can increase or decrease over the life of the loan.

Line of Credit: This is an agreement by a commercial bank or other financial institution to extend credit up to a certain amount for a certain time.

Liquid Asset: A cash asset or an asset that is easily converted into cash is known as a liquid asset.

Loan: A sum of borrowed money (principal) that is generally repaid with interest is known as a loan.

Loan-to-Value (LTV) Percentage: This is the relationship between the principal balance of the mortgage and the appraised value (or sales price if it is lower) of the property. For example, a $100,000 home with an $80,000 mortgage has an LTV of 80 percent.

Lock-In Period: The lock-in period is a guarantee of an interest rate for a specified 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 usually available after lender loan approval only. However, many lenders may permit a borrower to lock a loan for 30 days or more prior to submission of the loan application.

Margin: A margin is the number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment.

Maturity: The date on which the principal balance of a loan becomes due and payable is known as maturity.

Monthly Fixed Installment: A monthly fixed installment is that portion of the total monthly payment that is applied toward principal and interest. When a mortgage negatively amortizes, the monthly fixed installment does not include any amount for principal reduction and doesn’t cover all of the interest. The loan balance therefore increases instead of decreasing.

Mortgage: A legal document that pledges a property to the lender as security for payment of a debt is known as a mortgage.

Mortgage Banker: A company that originates mortgages exclusively for resale in the secondary mortgage market is known as a mortgage banker.

Mortgage Broker: A mortgage broker is an individual or company that brings borrowers and lenders together for the purpose of loan origination.

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

Mortgage Insurance Premium (MIP): The amount paid by a mortgagor for mortgage insurance is known as MIP.

Mortgage Life Insurance: This is a type of term life insurance. In the event that the borrower dies while the policy is in force, the debt is automatically paid by insurance proceeds.

Mortgagor: The borrower in a mortgage agreement is known as the mortgagor.

Negative Amortization: Amortization means that monthly payments are large enough to pay the interest and reduce the principal on your mortgage. Negative amortization occurs when the monthly payments do not cover all of the interest cost. The interest cost that isn’t covered is added to the unpaid principal balance. This means that even after making many payments, you could owe more than you did at the beginning of the loan. Negative amortization can occur when an ARM has a payment cap that results in monthly payments not high enough to cover the interest due.

Net Worth: The value of all of a person’s assets, including cash, is known as net worth.

Non-Liquid Asset: A non-liquid asset is an asset that cannot easily be converted into cash.

Note: A note is a legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.

Origination Fee: This fee is paid to a lender for processing a loan application. The origination fee is stated in the form of points. One point is 1% of the mortgage amount.

Owner Financing: Owner financing is a property purchase 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 takes effect on an adjustable-rate mortgage (ARM) or a graduated-payment mortgage (GPM) is called the payment change date. Generally, the payment change date occurs in the month immediately after the adjustment date.

Periodic Payment Cap: A periodic payment cap is a limit on the amount that payments can increase or decrease during any one adjustment period.

Periodic Rate Cap: This is the 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 Reserves: This is a cash amount 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 equal the amount that the borrower would have to pay for PITI for a predefined number of months (usually three).

Points: A point is equal to one percent of the principal amount of your mortgage. For example, if you get a mortgage for $165,000 one point means $1,650 to the lender. Points usually are collected at closing and may be paid by the borrower or the home seller or may be split between them.

Prepayment Penalty: This is a fee that may be charged to a borrower who pays off a loan before it is due.

Pre-Approval: Pre-approval is the process of determining how much money you will be eligible to borrow before you apply for a loan.

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

Principal: The amount borrowed or remaining unpaid is the principal. This is the part of the monthly payment that reduces the remaining balance of a mortgage.

Principal Balance: The outstanding balance of principal on a mortgage not including interest or any other charges is known as the principal balance.

Principal, Interest, Taxes, and Insurance (PITI): These are the four components of a monthly mortgage payment. Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the monthly cost of property taxes and homeowners’ insurance, whether these amounts that are paid into an escrow account each month or not.

Private Mortgage Insurance (PMI): This is mortgage insurance provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults. Most lenders generally require MI for a loan with a loan-to-value (LTV) percentage in excess of 80 percent.

Qualifying Ratios: Qualifying ratios are calculations used to determine if a borrower can qualify for a mortgage. They consist of two separate calculations: housing expense as a percent of income ratio and total debt obligations as a percent of income ratio.

Rate Lock: A rate lock is a commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified interest rate and lender costs for a specified period.

Real Estate Agent: A person licensed to negotiate and transact the sale of real estate on behalf of the property owner is known as a real estate agent. This can include brokers and associates who are active members of local real estate boards affiliated with the National Association of Real Estate Agents.

Real Estate Settlement Procedures Act (RESPA): RESPA is a consumer protection law that requires lenders to give borrowers advance notice of closing costs.

Recording: Recording is the process of making legal documents part of the public record. This happens when the properly executed legal documents are noted in the registrar’s office. Items that can be recorded include a deed, a mortgage note, a satisfaction of mortgage, or an extension of mortgage.

Refinance: Refinancing occurs when you pay off one loan with the proceeds from a new loan using the same property as security.

Revolving Liability: This is a credit arrangement, such as a credit card, that allows a customer to borrow against a pre-approved line of credit when purchasing goods and services.

Secondary Mortgage Market: This is the market where existing mortgages are bought and sold.

Security: The property that will be pledged as collateral for a loan is known as security.

Seller Carry-Back: In these agreements, the owner of a property provides financing, often in combination with an assumable mortgage. It is related to owner financing.

Servicer: An organization that collects principal and interest payments from borrowers and manages borrowers’ escrow accounts is called a servicer. The servicer often services mortgages that have been purchased by an investor in the secondary mortgage market.

Standard Payment Calculation: This method is used to determine the monthly payment required to repay the remaining balance of a mortgage in substantially equal installments over the remaining term of the mortgage at the current interest rate.

Step-Rate Mortgage: A step-rate mortgage allows for the interest rate to increase according to a specified schedule (for example, seven years), resulting in increased payments as well. At the end of the specified period, the rate and payments will remain constant for the remainder of the loan.

Third-Party Origination: When a lender uses another party to completely or partially originate, process, underwrite, close, fund, or package the mortgages it plans to deliver to the secondary mortgage market it is known as third-party origination.

Total Expense Ratio: This is a ratio that expresses total obligations as a percentage of gross monthly income including monthly housing expenses plus other monthly debts.

Treasury Index: This is an index used to determine interest rate changes for certain adjustable-rate mortgage (ARM) plans. It 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, which is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market.

Truth-in-Lending: This is a federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the annual percentage rate (APR) and other charges.

Two-Step Mortgage: This mortgage is an adjustable-rate mortgage (ARM) with one interest rate for the first five or seven years of its mortgage term and a different interest rate for the remainder of the amortization term.

Underwriting: Underwriting is the process of evaluating a loan application to determine the risk involved for the lender. Underwriting involves an analysis of the borrower’s creditworthiness and the quality of the property itself.

VA Mortgage: A VA mortgage is guaranteed by the Department of Veterans Affairs (VA). These mortgages are also known as government mortgages.

“Wrap-Around” Mortgage: These mortgages include the remaining balance on an existing first mortgage plus an additional amount requested by the mortgagor. Full payments on both mortgages are made to the wrap-around mortgagee, who then forwards the payments on the first mortgage to the first mortgagee. These mortgages may not be allowed by the first mortgage holder, and if discovered, they could be subject to a demand for full payment.