Mortgage Terms

1-year ARM - An adjustable-rate mortgage (ARM) that has an initial interest rate for one year, and thereafter has an adjustment interval of one year. The adjustment is based on a comparison of interest caps and the indexed rate.

3/1 ARM, 5/1 ARM, 7/1 ARM, 10/1 ARM - An adjustable-rate mortgage (ARM) that has an initial interest rate for three, five, seven or ten years, and thereafter has an adjustment interval of one year. The adjustment is based on a comparison of interest caps and the indexed rate.

Abstract of title - A written history of all the transactions that bear on the title to a specific piece of land. An abstract of title covers the time from when the property was first sold to the present. Used by the title company to produce a title binder.

Adjustable Rate Mortgage, or ARM - Mortgage in which the rate of interest is adjusted based on a standard rate index. Most ARMs have caps on how much the interest rate may increase.

Amortization schedule - A timetable for the gradual repayment of a mortgage loan. An amortization schedule indicates the amount of each payment applied to interest and principal, and also the remaining balance after each payment is made.

Amortization term - The amount of time required to amortize (repay) a mortgage loan. The amortization term is usually expressed in months. A 30-year fixed-rate mortgage, for example, has an amortization term of 360 months.

Annual Percentage Rate (APR) - A standardized method of calculating the cost of a mortgage, stated as a yearly rate which includes such items as interest, mortgage insurance, and certain points or credit costs.

Appraisal - A written report by a qualified appraiser estimating the value of a property.

Appraised value - An opinion of a property's fair market value, based on an appraiser's inspection and analysis of the property.

Appreciation - An increase in the value of a property due to changes in market conditions or improvements to the property.

Assessed value - The value of a property as determined by a public tax assessor for the purpose of taxation.

Balloon mortgage - A loan that has regular monthly payments which amortize over a stated term but call for a final lump sum (balloon payment) at the end of a specified term, or maturity date, such as 10 years.

Basis points - 1/100th of 1 percent. If an interest rate changes 50 basis points, for example, it has moved 1/2 of 1 percent.

Buydown - The process of trading money for a lower mortgage rate. The borrower "buys down" the interest rate on a mortgage by paying discount points up front. It can also be a mortgage in which an initial lump-sum payment is made to temporarily reduce a borrower's monthly payments during the first few years of a mortgage.

Caps - The maximum amount the interest rate can change annually or cumulatively over the life of an adjustable-rate mortgage.

Certificate of title - A statement provided by a title company or attorney stating that the title to the real estate is legally held by the current owner.

Closing - The meeting at which the sale of a property is finalized. The buyer signs the lender agreement for the mortgage and pays closing costs and escrow amounts. The buyer and seller sign documents to transfer ownership of the property. Also known as the settlement.

Closing costs - Expenses incurred by buyers and sellers in transferring ownership of a property. Closing costs normally include an origination fee, an attorney's fee, taxes, escrow payments, and charges for title insurance. Lenders or Realtors provide estimates of closing costs to prospective home buyers.

Closing statement - A financial disclosure accounting for all funds changing hands at the closing.

Commission - In real estate, the broker or salesperson's fee for assisting the transaction, usually expressed as a percentage of the total paid by the buyer.

Commitment letter A formal offer by a lender stating the approved terms for lending money to a home buyer.

Comparables or "comps" - Refers to "comparable properties," which are used for comparative purposes in the appraisal process. Comps help an appraiser determine the fair market value of a property.

Contingency - A condition that must be met before a contract is legally binding. For example, home buyers often include a contingency that specifies that the contract is not binding until after a satisfactory report from a qualified home inspector.

Contract - In real estate, the contract is the legal document by which buyer and seller make offers and counteroffers. More formally known as agreement for sale, purchase agreement or earnest money contract.

Conventional mortgage - Usually refers to a fixed-rate, 30-year mortgage that is not insured by the FHA, Farmers Home Administration (FmHA) or Veterans Administration.

Credit report - A report on a person's credit history prepared by a credit bureau and used by a lender in determining a loan applicant's record for paying debts in a timely manner.

Debt-to-income ratio - The percentage of a person's monthly earnings used to pay off all debt obligations.

Deed - The legal document conveying title to a property.

Depreciation - A decline in the value of property; the opposite of appreciation.

Down payment - The amount of a property's purchase price that the buyer pays in cash and does not finance with a mortgage.

Earnest money deposit - A deposit made by potential home buyers during negotiations with the seller. The sum shows a seller that a buyer is serious about purchasing the property.

Equity - The value of a homeowner's unencumbered interest in real estate. Equity is the difference between the home's fair market value and the unpaid balance of the mortgage and any outstanding liens. Equity increases as the mortgage is paid down or as the property enjoys appreciation.

Escrow payment - The portion of a homeowner's monthly mortgage payment that is held by the loan servicer to pay for taxes and insurance. Also known as reserves. The loan servicer holds the escrow funds separately from money meant to pay off principal and interest.

Fair market value - A fair price for a home based on recent sales of properties of similar size and quality in the neighborhood.

Fannie Mae - Nickname for Federal National Mortgage Association. It is a government-chartered non-bank financial services company and the nation's largest source of financing for home mortgages.

Federal Housing Administration (FHA) - An agency of the U.S. Department of Housing and Urban Development (HUD) that insures residential mortgage loans made by private lenders.

Fixed-rate mortgage - A mortgage in which the interest rate does not change during the entire term of the loan, most often 15 years or 30 years.

Good Faith Estimate - A written estimate of closing costs that a lender must provide a prospective home buyer within three days of submitting a mortgage loan application. The best approach is to request this list before choosing a loan.

Home inspection - An inspection by a building professional that evaluates the structural and mechanical condition of a property. The inspection may reveal the need for repairs that the seller may have to complete before the sale of the house will go through. The buyer may also make the house sale contingent on a satisfactory inspection.

Homeowner's insurance - An insurance policy that combines personal liability insurance and hazard insurance coverage for a residence and its contents.

Jumbo mortgages - Mortgages larger than the limits set by Fannie Mae and Freddie Mac. A jumbo mortgage will carry a higher interest rate than a conventional mortgage.

Lien - A legal hold or claim from one person on the property of another. The lien placed by a first mortgage is special; it is called the first lien and takes precedence over others.

Lifetime rate cap - In an adjustable rate mortgage (ARM), it limits the amount that the interest rate can increase or decrease over the life of the loan.

Loan origination - The process by which a mortgage lender obtains a mortgage secured by real property. An origination fee is charged by the lender to process all the forms involved in obtaining a mortgage.

Loan-to-value (LTV) ratio - The ratio of the mortgage loan amount to the property's appraised value or selling price, whichever is less. For example, if a home is sold for $100,000 and the mortgage amount is $80,000, the house has an 80 percent LTV.

Lock or lock-in - Lender's guarantee that the mortgage rate quoted will be good for a specific amount of time.

Mortgage insurance - A policy that insures the lender against loss should the homeowner default on a mortgage. It is part of the monthly mortgage payment.

PITI - Stands for principal, interest, taxes, and insurance, which are the usual components of a monthly mortgage payment.

PITI reserve - is a cash amount that a home buyer must have on hand after making a down payment and paying all closing costs. The reserves required by the lender must equal the amount a home buyer would pay for PITI for a specified number of months.

Points - A point equals 1 percent of a mortgage loan. Lenders charge points as a way to make a profit. Borrowers may pay discount points to reduce the loan interest rate

Pre-approval - This process goes a step further than pre-qualification. It means the lender has contacted the borrower's employer, bank and other places to verify all claims of earnings and assets. In return, the borrower receives a letter stating the lender is willing to grant a mortgage for a specified amount, within a limited period of time.

Pre-qualification - An early evaluation by a lender of a potential home buyer's credit report plus earnings, savings and debt information. The home buyer gets a non-binding estimate of the mortgage amount the borrower would qualify for, or how much house the borrower can afford. Buyers who pre-qualify can go a step further and seek pre-approval.

Private mortgage insurance, or PMI - Insurance that protects mortgage lenders against default on loans by providing a way for mortgage companies to recoup the costs of foreclosure. PMI is usually required if the down payment is less than 20 percent of the sale price. Home buyers pay for the coverage in monthly installments. PMI is usually terminated when the home buyer has built up 20 percent equity in the property.

Refinancing - Securing a new loan in order to pay off the existing mortgage or to gain access to the existing equity in the home.

Sale agreement - A written contract signed by the buyer and the seller of a house stating the terms and conditions under which the property will be sold.

Title - A legal document proving a person's right to claim entitlement to a property, including the history of the property's ownership.

Title binder - Written evidence of temporary title insurance coverage.

Title insurance - Insurance that protects against loss from disputes over ownership of a property. A policy may protect the mortgage lender and/or the home buyer.

Title search - A check of the title records to ensure that the seller is the legal owner of the property and that there are no liens or other claims against the property.

Transfer tax - State or local tax levied when title passes from one owner to another.

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

Underwriter - A company or person undertaking the responsibility for issuing a mortgage. Underwriters analyze a borrower's creditworthiness and set the loan amount.

VA mortgage - A loan backed by the Veterans Administration. Members of the U.S. armed forces are eligible for the loans under certain qualifying conditions.

Definitions courtesy of Bankrate.com