Understanding Mortgage Terms

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Adjustable rate mortgage (ARM)
A mortgage in which the interest rate, after an initial period, is adjusted periodically according to a pre-selected index..

Agreement of sale
A contract signed by buyer and seller stating the terms and conditions under which a property will be sold.

Amortization
The repayment of principal from scheduled mortgage payments that exceed the interest due. The scheduled payment less the interest equals amortization. The loan balance declines by the amount of the scheduled payment, plus the amount of any extra payment.

Amortization Schedule
A timetable for payment of a mortgage showing the amount of each payment applied to interest and principal and the remaining balance

Application
A request for a loan that includes the information about the potential borrower, the property and the requested loan that the solicited lender needs to make a decision.

Application fee
A fee that some lenders charge to accept an application. It may or may not cover other costs such as a property appraisal or credit report, and it may or may not be refundable if the lender declines the loan.

Appraisal
A written estimate of a property's current market value prepared by an appraiser.

APR
The Annual Percentage Rate, which must be reported by lenders under Truth in Lending regulations. It is a comprehensive measure of credit cost to the borrower that takes account of the interest rate, points, and flat dollar charges. It is also adjusted for the time value of money, so that dollars paid by the borrower up-front carry a heavier weight than dollars paid ten years down the road. However, the APR is calculated on the assumption that the loan runs to term, and is therefore potentially deceptive for borrowers with short time horizons.

Assumable mortgage
A mortgage contract that allows, or does not prohibit, a creditworthy buyer from assuming the mortgage contract of the seller. Assuming a loan will save the buyer money if the rate on the existing loan is below the current market rate, and closing costs are avoided as well. A loan with a "due-on-sale" clause stipulating that the mortgage must be repaid upon sale of the property, is not assumable.

Balance
The amount of the original loan remaining to be paid. It is equal to the loan amount less the sum of all prior payments of principal.

Balloon mortgage
A mortgage which is payable in full after a period that is shorter than the term. In most cases, the balance is refinanced with the current or another lender. On a 7-year balloon loan, for example, the payment is usually calculated over a 30-year period, and the balance at the end of the 7th year must be repaid or refinanced at that time. Balloon mortgages are similar to ARMs in that the borrower trades off a lower rate in the early years against the risk of a higher rate later. They are riskier than ARMs because there is no limit on the extent of a rate increase at the end of the balloon period.

Biweekly mortgage
A mortgage on which the borrower pays half the monthly payment every two weeks. Because this results in 26 (rather than 24) payments per year, the biweekly mortgage amortizes before term.

Bridge loan
A short-term loan, usually from a bank, that "bridges" the period between the closing date of a home purchase and the closing date of a home sale. To qualify for a bridge loan, the borrower must have a contract to sell the existing house.

Builder-financed construction
Having the builder finance the construction.

Cash-Out Refinance
Refinancing for an amount in excess of the old mortgage loan plus settlement costs. The borrower takes "cash-out" of the transaction. This way of raising cash is usually an alternative to taking out a home equity loan.

Closing
On a home purchase, the process of transferring ownership from the seller to the buyer, the disbursement of funds from the buyer and the lender to the seller, and the execution of all the documents associated with the sale and the loan. On a refinance, there is no transfer of ownership, but the closing includes repayment of the old lender.

Closing costs
Costs that the borrower must pay at the time of closing, in addition to the down payment. These include the origination fee, discount points, appraisal, credit report, title insurance, attorney's fees, survey and prepaid items such as tax and insurance escrow payments.

Closing date
The date on which the closing occurs.

Co-borrowers
One or more persons who have signed the note, and are equally responsible for repaying the loan. Unmarried co-borrowers who live together are advised to agree beforehand on what happens if they split.

Commitment Letter
A formal offer by a lender stating the terms under which it agrees to loan money to a homebuyer.

Conforming mortgage
A loan eligible for purchase by the two major Federal agencies that buy mortgages, Fannie Mae and Freddie Mac.

Construction financing
The method of financing used when a borrower contracts to have a house built, as opposed to purchasing a completed house.

Conventional loan
A mortgage that is not obtained under a government insured program (such as FHA or VA).

Convertible ARM
An adjustable-rate mortgage that can be converted to a fixed-rate mortgage under specified conditions

Co-signing a note
Assuming responsibility for someone else's loan in the event that that party defaults. A risk not to be taken lightly.

Credit report
A report from a credit bureau containing detailed information bearing on credit-worthiness, including the individual's credit history.

Credit score
A single numerical score, based on an individual's credit history, that measures that individual's credit worthiness.

Delinquency
A mortgage payment that is more than 30 days late.

Down payment
The difference between the purchase price of the property and the loan amount, expressed in dollars, or as a percentage of the price. For example, if the house sells for $100,000 and the loan is for $80,000, the down payment is $20,000 or 20%.

Earnest Money
A portion of the down payment delivered with a purchase offer by the purchaser of real estate. Delivered to the seller, or an escrow agency, by the purchaser with the purchase offer as evidence of good faith. Also known as a deposit.

Equity
In connection with a home, the difference between the value of the home and the balance of outstanding mortgage loans on the home.

Escrow
An agreement that money or other objects of value be placed with a third party for safe keeping, pending the performance of some promised act by one of the parties to the agreement. It is common for home mortgage transactions to include an escrow agreement where the borrower adds a specified amount for taxes and hazard insurance to the regular monthly mortgage payment. The money goes into an escrow account out of which the lender pays the taxes and insurance when they come due.

Federal Home Loan Mortgage Corporation - FHLMC (FREDDIE MAC)
A quasi-governmental agency that purchases conventional mortgages in the secondary mortgage market from insured depository institutions and HUD-approved mortgage bankers. It sells participation sales certificates secured by pools of conventional mortgage loans, their principal, and interest guaranteed by the federal government through the FHLMC. It also sells Government National Mortgage Association bonds to raise funds to finance the purchase of mortgages. Popularly know as Freddie Mac.

Federal National Mortgage Association - FNMA (FANNIE MAE)
A taxpaying corporation created by Congress to support the secondary mortgage market. It purchases and sells residential mortgages insured by the Federal Housing Administration (FHA) or guaranteed by the Veterans Administration (VA) as well as conventional home mortgages.

Fees
The sum of all up front cash payments required by the lender as part of the charge for the loan.

FHA mortgage
A mortgage on which the lender is insured against loss by the Federal Housing Administration, with the borrower paying the mortgage insurance premium. The major advantage of an FHA mortgage is that the required down payment is very low, but the maximum loan amount is also low.

First Mortgage
A mortgage that has a first-priority claim against the property in the event the borrower defaults on the loan. For example, a borrower defaults on a loan secured by a property worth $100,000 net of sale costs. The property has a first mortgage with a balance of $90,000 and a second mortgage with a balance of $15,000. The first mortgage lender can collect $90,000 plus any unpaid interest and foreclosure costs. The second mortgage lender can collect only what is left of the $100,000.

Fixed rate mortgage (FRM)
A mortgage in which the interest rate and monthly mortgage payment remain unchanged throughout the term of the loan.

Float
Allowing the rate and points to vary with changes in market conditions. The borrower may elect to lock the rate and points at any time but must do so a few days before the closing. .

Foreclosure
The legal process by which a lender acquires possession of the property securing a mortgage loan when the borrower defaults.

Gift of equity
A sale price below market value, where the difference is a gift from the sellers to the buyers. Such gifts are usually between family members. Lenders will usually allow the gift to count as down payment.

Good faith estimate
A document, which the lender is obliged to provide the borrower within three business days of receiving the loan application. It specifies the settlement charges the borrower will have to pay at closing. Comparing good faith estimates is an important step in the mortgage process, as it allows the borrower to more accurately compare lenders' offers.

Government National Mortgage Association (GNMA)
A Federal agency that guarantees mortgage securities that are issued against pools of FHA and VA mortgages.

Grace period
The period after the payment due date during which the borrower can pay without being hit for late fees. Grace periods apply only to mortgages on which interest is calculated monthly. Simple interest mortgages do not have a grace period because interest accrues daily.

Hazard insurance
Insurance purchased by the borrower, and required by the lender, to protect the property against loss from fire and other hazards. Also known as "homeowner insurance."

Home equity line of credit (HELOC)
A mortgage set up as a line of credit against which a borrower can draw up to a maximum amount, as opposed to a loan for a fixed dollar amount. For example, using a standard mortgage you might borrow $150,000, which would be paid out in its entirety at closing. Using a HELOC instead, you receive the lender’s promise to advance you up to $150,000, in an amount and at a time of your choosing. You can draw on the line by writing a check, using a special credit card, or in other ways.

Home equity loan
A loan with a second-priority claim against a property in the event that the borrower defaults. The lender who holds the second mortgage gets paid only after the lender holding the first mortgage is paid.

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. On ARMs, a predetermined margin is added to the index to compute the interest rate adjustment.

Initial interest rate
The interest rate that is fixed for some specified number of months at the beginning of the life of an ARM.

Interest due
The amount of interest, expressed in dollars, computed by multiplying the loan balance at the end of the preceding period times the annual interest rate divided by the interest accrual period. It is the same as interest payment except when the scheduled mortgage payment is less than the interest due, in which case the difference is added to the balance and constitutes negative amortization.

Interest-only mortgage
A loan in which the borrower pays only the interest that accrues on the loan balance each month. During the interest-only period, the outstanding balance of the loan does not decline. After the interest-only period ends, the monthly mortgage payment is recalculated to include full principal repayment over the remaining years left on the loan. The longer the interest-only period, the larger is the new monthly mortgage payment.

Interest rate adjustment period
The frequency of rate adjustments on an ARM after the initial rate period is over. The rate adjustment period is sometimes but not always the same as the initial rate period. As an example, a 3/3 ARM is one in which both periods are 3 years while a 3/1 ARM has an initial rate period of 3 years after which the rate adjusts every year.

Interest rate index
The specific interest rate series to which the interest rate on an ARM is tied, such as "Treasury Constant Maturities, 1-Year," or "Eleventh District Cost of Funds." All the indices are published regularly in readily available sources.

Jumbo mortgage
A mortgage larger than the maximum eligible for purchase by the two Federal agencies, Fannie Mae and Freddie Mac, $333,700 in 2004. However, some lenders use the term to refer to programs for even larger loans, such as, e.g., greater than $500,000.

Junk fees
A derogatory term for lender fees expressed in dollars rather than as a percent of the loan amount.

Late fees
Fees that lenders are entitled to collect from borrowers who don't pay within the grace period. Most mortgage notes offer borrowers a 10 or 15-day grace period, with a late charge of about 5% on payments received on the 16th or later.

Late payment
A payment received after the grace period stipulated in the note. Most mortgage grace periods are 10 or 15 days.

Lease-to-own purchase
A transaction in which a hopeful home buyer leases a home with an option to buy it within a specified period.

Lien
The lender’s right to claim the borrower’s property in the event the borrower defaults. If there is more than one lien, the claim of the lender holding the first lien will be satisfied before the claim of the lender holding the second lien, which in turn will be satisfied before the claim of a lender holding a third lien, etc.

Loan amount
The amount the borrower promises to repay, as set forth in the mortgage contract. It differs from the amount of cash disbursed by the lender by the amount of points and other upfront costs included in the loan.

Loan modification
A change in the terms of a loan, usually the interest rate and/or term, in response to the borrower's inability to make the payments under the existing term.

Loan-to-value ratio
The loan amount divided by the lesser of the selling price or the appraised value. Also referred to as LTV. The LTV and down payment are different ways of expressing the same set of facts.

Lock
An option exercised by the borrower, at the time of the loan application or later, to "lock in" the rates and points prevailing in the market at that time. The lender and borrower are committed to those terms, regardless of what happens between that point and the closing date.

Mandatory disclosure
The array of laws and regulations dictating the information that must be disclosed to mortgage borrowers, and the method and timing of disclosure.

Maximum loan to value ratio
The maximum allowable loan-to-value ratio on the selected loan program.

Mortgage
A written document evidencing the lien on a property taken by a lender as security for the repayment of a loan. The term “mortgage” or “mortgage loan” is used loosely to refer both to the lien and the loan. In most cases, they are defined in two separate documents: a mortgage and a note.

Mortgage broker
An independent contractor who offers the loan products of multiple lenders, termed wholesalers. A mortgage broker counsels on the loans available from different wholesalers, takes the application, and usually processes the loan. When the file is complete, but sometimes sooner, the lender underwrites the loan. In contrast to a correspondent, a mortgage broker does not fund a loan.

Mortgage insurance
See private mortgage insurance.

Mortgage payment
The monthly payment of interest and principal made by the borrower.

Non-conforming mortgage
A mortgage that does not meet the purchase requirements of the two Federal agencies, Fannie Mae and Freddie Mac, because it is too large or for other reasons such as poor credit or inadequate documentation.

Note
A document that evidences a debt and a promise to repay. A mortgage loan transaction always includes both a note evidencing the debt, and a mortgage evidencing the lien on the property, usually in two documents.

Origination fee
An upfront fee charged by some lenders, usually expressed as a percent of the loan amount. It should be added to points in determining the total fees charged by the lender that are expressed as a percent of the loan amount. Unlike points, however, an origination fee does not vary with the interest rate.

Payment period
The period over which the borrower is obliged to make payments. On most mortgages, the payment period is a month, but on some it is biweekly.

Payoff month
The month in which the loan balance is paid down to zero. It may or may not be the term.

PITI
Shorthand for principal, interest, taxes and insurance, which are the components of the monthly housing expense.

Points
An upfront cash payment required by the lender as part of the charge for the loan, expressed as a percent of the loan amount; e.g., "3 points" means a charge equal to 3% of the loan balance. It is common today for lenders to offer a wide range of rate/point combinations, especially on fixed rate mortgages (FRMs), including combinations with negative points. On a negative point loan the lender contributes cash toward meeting closing costs. Positive and negative points are sometimes termed "discounts" and "premiums," respectively.

Pre-approval
A commitment by a lender to make a mortgage loan to a specified borrower, prior to the identification of a specific property. It is designed to make it easier to shop for a house. Unlike a pre-qualification, the lender checks the applicant's credit.

Prepayment
A payment made by the borrower over and above the scheduled mortgage payment. If the additional payment pays off the entire balance it is a "prepayment in full"; otherwise, it is a "partial prepayment."

Prepayment penalty
A charge imposed by the lender if the borrower pays off the loan early. The charge is usually expressed as a percent of the loan balance at the time of prepayment, or a specified number of months interest.

Primary residence
The house in which the borrower will live most of the time, as distinct from a second home or an investor property that will be rented.

Principal
The amount of money you borrow to buy a home, and to the outstanding loan balance at any point during the mortgage term.

Private mortgage insurance (PMI)
Insurance written by a private company protecting the mortgage lender against loss in the event of borrower default.

Processing
Compiling and maintaining the file of information about a mortgage transaction, including the credit report, appraisal, verification of employment and assets, and so on. The processing file is handed off to underwriting for the loan decision.

Purchase money mortgage
A mortgage offered by a house buyer as partial payment for the house. From the seller's point of view, it is seller financing.

Qualification
The process of determining whether a prospective borrower has the ability, meaning sufficient assets and income, to repay a loan. Qualification is sometimes referred to as "pre-qualification" because it is subject to verification of the information provided by the applicant. Qualification is short of approval because it does not take account of the credit history of the borrower. Qualified borrowers may ultimately be turned down because, while they have demonstrated the capacity to repay, a poor credit history suggests that they may be unwilling to pay.

Qualification requirements
Standards imposed by lenders as conditions for granting loans, including maximum ratios of housing expense and total expense to income, maximum loan amounts, maximum loan-to-value ratios, and so on. They are less comprehensive than underwriting requirements, which take into account the borrower's credit record.

Rate cap
The limit of how much the interest rate may change on an ARM at each adjustment and over the life of the loan.

Rate protection
Protection for a borrower against the danger that rates will rise between the time the borrower applies for a loan and the time the loan closes. This protection can take the form of a "lock" where the rate and points are frozen at their initial levels until the loan closes; or a "float-down" where the rates and points cannot rise from their initial levels but they can decline if market rates decline. In either case, the protection only runs for a specified period. If the loan is not closed within that period, the protection expires and the borrower will either have to accept the terms quoted by the lender on new loans at that time, or start the shopping process anew.

Refinance
Paying off an old loan while simultaneously taking a new one. This may be done to reduce borrowing costs under conditions where the borrower can obtain a new loan at an interest rate below the rate on the existing loan. It may be done to raise cash, as an alternative to a home equity loan. Or it may be done to reduce the monthly payment.

Required cash
The total cash required of the home buyer to close the transaction, including down payment, points and fixed dollar charges paid to the lender, any portion of the mortgage insurance premium that is paid up-front, and other settlement charges associated with the transaction such as title insurance, taxes, etc. The total required cash is shown on the Good Faith Estimate of Settlement that every borrower receives.

RESPA
The Real Estate Settlement Procedures Act, a Federal consumer protection statute first enacted in 1974. RESPA was designed to protect home purchasers and owners shopping for settlement services by mandating certain disclosures, and prohibiting referral fees and kickbacks.

Reverse mortgage
A loan to home owners age 62 or older that allows them to borrow against the equity in their home, assuming they occupy the home as their principal residence for the majority of the year. Because borrowers are not required to make payments, the balance of the loan increases with each payment the borrower receives. The loan is not repaid until the owner dies, sells the house or moves out permanently. Reverse mortgages are relatively expensive transactions. They are not available through Edward Jones Mortgage.

Scheduled mortgage payment
The amount the borrower is obliged to pay each period, including interest, principal, and mortgage insurance, under the terms of the mortgage contract. Paying less than the scheduled amount results in delinquency. On most mortgages, the scheduled payment is the fully amortizing payment throughout the life of the loan. On some mortgages, however, the scheduled payment for the first 5 or 10 years is the interest payment (see Interest Only Mortgages).

Second mortgage
A loan with a second-priority claim against a property in the event that the borrower defaults. The lender who holds the second mortgage gets paid only after the lender holding the first mortgage is paid

Self-employed borrower
A borrower who must document income using tax returns rather than information provided by an employer. This complicates the process somewhat.

Seller contribution
A contribution to a borrower's down payment or settlement costs made by a home seller, as an alternative to a price reduction.

Servicing
Administering loans between the time of disbursement and the time the loan is fully paid off. This includes collecting monthly payments from the borrower, maintaining records of loan progress, assuring payments of taxes and insurance, and pursuing delinquent accounts.

Simple interest mortgage
A mortgage on which interest is calculated daily based on the balance at the time of the last payment. The daily interest charge within the month is constant -- interest is not charged on the interest charges of prior days.

Stated assets
A documentation requirement where the borrower discloses her assets but they are not verified by the lender.

Stated income
A documentation requirement where the lender verifies the source of the income but not the amount.

Term
The period used to calculate the monthly mortgage payment. The term is usually but not always the same as the maturity. On a 7-year balloon loan, for example, the maturity is 7 years but the term in most cases is 30 years.

Title insurance
Insurance against loss arising from problems connected to the title to property.

Title Search
An examination of public records to disclose the past and current facts regarding the ownership of a given piece of real estate.

Total interest payments
The sum of all interest payments to date or over the life of the loan. This is an incomplete measure of the cost of credit to the borrower because it does not include up-front cash payments, and it is not adjusted for the time value of money.

Truth in Lending (TIL)
The Federal law that requires full disclosure of credit terms using a standard format.

Underwriting
The process of examining all the data about a borrower's property and transaction to determine whether the mortgage applied for by the borrower should be issued. The person who does this is called an underwriter.

VA mortgage
A mortgage with no down payment requirement, available only to ex-servicemen and women as well as those on active duty, on which the lender is insured against loss by the Veterans Administration.

Waive escrows
Authorization by the lender for the borrower to pay taxes and insurance directly. This is in contrast to the standard procedure where the lender adds a charge to the monthly mortgage payment that is deposited in an escrow account, from which the lender pays the borrower’s taxes and insurance when they are due. On some loans lenders will not waive escrows, and on loans where waiver is permitted lenders are likely either to charge for it in the form of a small increase in points, or restrict it to borrowers making a large down payment.

Zero Point Option
An option which allows the borrower to opt to pay a slightly higher loan interest rate in lieu of paying the loan origination points generally charged for the particular loan product.

Financing is provided by Edward Jones Mortgage, LLC, an affiliate of Edward Jones. Edward Jones Mortgage, LLC is licensed by the New Hampshire Banking Department. Edward Jones Mortgage, LLC may not be available in your area. Equal Housing Lender. ©2007 Edward Jones Mortgage, LLC. All Rights Reserved.

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