Mortgage Terms Glossary

Adjustable cap rate:

Interest rates that fluctuate according to the general bank rate. Buyers may find themselves paying more or less than they did at the start of the loan. USDA loans do not allow adjustable-rate mortgages, 30 year fixed rate loans are compulsory.

Amortization:

This is a way of repaying a loan through monthly installments paying off both the interest and the capital sum borrowed. Over the initial years of the loan, the majority of the payment goes towards interest. Towards the end of the term, payments are used to reduce the principal.

Annual Percentage Rate:

Usually shortened to APR, this is what credit costs each year, shown as a percentage. Lenders are obliged to disclose their APR by Regulation Z of the federal Truth in Lending Act. The APR must include all fees paid in order to procure a loan, and so will normally be greater than the interest rate set out in the mortgage agreement. The figure for calculating the APR does not include the costs of credit reports, appraisals, or title insurance.

Application:

This is what borrowers provide to lenders when they are seeking approval for a loan: it will show information about your status and finances, including your income, your assets, and proof of identity.

Appraisal Fee:

This is the fee paid to an appraiser who will check over a property and give their assessment of its current market value. No bank or lender will give a loan on a property if it has not undergone an appraisal. With a jumbo loan, appraisal fees will usually be in excess of $500.

Appraised Value:

This is the sum put forward by the appraiser which, in their professional opinion, is a fair price for a property.

The assumption of Mortgage:

This is when a buyer agrees to take over the seller’s mortgage and become responsible for all payments. Unless the lender specifically states differently, a seller may still be responsible for payments if the buyer defaults. USDA loans do not allow for assumptions.

Cap:

This is the maximum a borrower is allowed to increase interest rates for repayment totals over a specific period if offering an adjustable rate loan.

Cash Out Refinance:

This refers to a program whereby a homeowner can refinance their mortgage and take a proportion of the refinance out in cash. This type of refinancing is only available for those who have enough equity in their homes to cover the amount taken out. USDA loans do not allow refinancing that includes cash withdrawal.

Ceiling:

The highest rate a lender can charge on an adjustable rate mortgage at any time during the loan’s term.

Closing Costs:

All the fees demanded of both buyer and vendor when a mortgage deal is completed. These costs will usually include prepaid taxes and insurance, appraisal costs, survey costs, legal fees, title insurance, origination fees, and discount points.

Contract of Sale (purchase):

A document which sets out the agreed terms between the purchaser and vendor, which will include the agreed sale price and all terms and conditions needed for effecting the sale of the property.

Credit Risk Score:

Credit scores assess how risky it is to loan to an individual, compared to other US borrowers. It is calculated on the individual’s previous use of credit. The benchmark credit score employed by loan companies is normally FICO, created by Fair, Isaac and Company. This score has a spread from 350 to 850 and derives from a math formula that considers the data from your credit history. The higher the score is, the less risky it is to give you credit; higher scores attract preferential interest rates and terms. Your credit score is a crucial part of obtaining a mortgage.

Delinquency:

Means falling behind with your mortgage payments.

Deed of Trust:

Common in Western states, the deed of trust agrees, as with a mortgage, that your property is a security against credit; i.e., if you default on your loan your lender may repossess and sell your home.

Discount Points:

A sum that you can pay in order to obtain lower interest rates, or keep them steady. A point equals 1% of your mortgage; e.g., if you have a $400,000 mortgage, a point equals $4000.

Down payment:

Down payments are used to bridge the gap between the cost of the property and the amount of the loan. The majority of lenders expect purchasers to find the down payment themselves, although gift funds from friends and relatives may also be used, as long as the lender is informed.

Effective Interest Rate:

This is what you will pay for your credit each year, shown as a percentage of your loan. It includes not only the cost of interest but fees, etc. paid when getting your loan; thus it generally is larger than the interest rate stated in mortgage documents. It is a good baseline figure for comparisons between different loans.

Encumbrance:

Claims made on a property by a third party, e.g., a spouse, that may prevent a vendor transferring the property to a buyer.

Equity:

The part of the value of your home that belongs to you, i.e., has been paid for with a down payment or in monthly repayments of principal. Calculated by subtracting the amount of loan still owing from the value of your home.

Fixed Interest Rate:

Interest rates that do not change or the life of a loan, usually for 15 or 30 years. The amount you will pay is also therefore fixed. All USDA loans have 30 year fixed rate terms.

FHA Loan:

Not actually a loan from the FHA, but a loan insured by the FHA. Essentially, the Federal Housing Association agrees to pay your lender if you default on the loan. There is a minimum requirement of a 3.5% down payment for this type of loan, and they are one of the most commonly used loans in the country. The amount you can borrow on an FHA loan is different in every county, but usually it is lower than the limit for a conforming loan.

Good Faith Estimate:

Three days after receiving your loan application, your lender should supply you with a Good Faith Estimate, which shows the probable fees and closing costs associated with your loan.

Grace Period:

The length of time you have to make a payment on a loan after it is due without being penalized; this is usually 15 days. Even if you are not penalized, making a late payment like this may show up on your credit report.

Gross Income:

When your suitability for a loan is calculated, this is all your monthly income before any expenses or taxes are paid.

Home Equity Loan:

Normally referred to as HELOC, a loan made against the equity you have in your property (either fixed or adjustable rate). Any interest paid on such a loan can usually be offset against tax. These loans are frequently employed for home improvements or to release equity for investment purposes. Many financial advisers suggest using this mechanism to get funds to pay off loans where the interest cannot be offset against tax, e.g., an auto loan, credit card debts, loans for education or medical expenses.

Hazard Insurance/Home Insurance:

Insurance whereby the homeowner pays premiums to an insurer so that their losses will be covered if their property is destroyed or damaged by a hazard, e.g., earthquakes, fire, tornado, etc.

HUD 1 Settlement Statement:

This form is filled out at the closure of a loan to detail all the costs incurred during the home buying process. The Department of Housing and Urban Development has made this compulsory.

Index:

The figure – generally a percentage – employed for the calculation of interest rates on adjustable-rate mortgages. Indexes commonly employed are average return rates on one-year Government Treasury Securities, or the Cost of Funds for the 11th Federal District of Banks.

Interest Rate:

The charge made in return for the supply of credit, represented by a percentage of your loan.

Jumbo Loan:

Generally a loan that is higher than the conforming loan limit set by Fannie Mae and Freddie Mac. For the majority of the USA in 2018, this limit is $451,000.

Loan to Value Ratio (LTV):

This ratio expresses what percentage of your home’s value is represented by a loan, e.g. a home purchased for $1 million with a loan of $800,000 would have an LTV of 80%. For conventional loans, if the LTV is higher than 80%, Private Mortgage Insurance (PMI) is generally required. It is possible to obtain jumbo loans with LTV as high as 95% without PMI.

Lock Interest:

A promise from your lender that interest rate you have been offered on application will be the one applied at closure, no matter what happens in the interim. This means that if interest rates go up in the period between applying for your loan and closing on it, you will not lose out. Conversely, if you have asked for rates to be locked, if they drop over the same period, you will not benefit.

Margin:

A percentage figure (generally) tacked onto the index interest rate to calculate the rates for adjustable rate mortgages (only applicable to this type of mortgage).

Mortgage Banker:

The creator of a mortgage loan from which the money for your mortgage comes.

Mortgage Broker:

Mortgage brokers process your loan application and look for the best loan for you. Mortgage brokers do not actually provide loans, but act as a go-between for mortgage institutions and customers.

Mortgage Insurance (MIP or PMI):

This is insurance a purchaser takes out which guarantees that the government or a lender will be recompensed if the purchaser defaults on their loan. This has to be paid on loans backed by the government (FHA, USDA, VA) no matter what the LTV. If you manage to complete payments on a government-backed loan early, you may get a small proportion of MIP refunded. Private Mortgage Insurance (PMI) is usually required for loans from private companies if your LTV is over 80%. Once you have built up a 20% equity in your property, you may be able to stop paying PMI. Jumbo loans frequently don’t demand PMI, no matter what your LTV.

Mortgage Loan:

This is a loan against which your property is the security; i.e., if you can’t repay your loan, you may have to surrender your property in view of payment. A mortgage/Deed of Trust is the formal instrument that underpins this loan.

Mortgagee:

The person/entity making a mortgage loan.

Mortgagor:

The person borrowing with a mortgage loan

Piggyback Loan:

When a borrower takes more than one loan for their required amount. This is generally employed to stop a single loan having an LTV of over 80% so that PMI requirements can be avoided.

PITI:

Principal, interest, taxes, and insurance, all of which make up what you pay each month on your mortgage.

Prepayment Penalty:

Prepayment penalty, a.k.a. “early payoff penalty,” this is a fee charged by lenders if you want to pay off your loan before the agreed final payment date. Home loans backed by the government do not attract these fees.

Qualifying Debt Ratios:

The difference between a loan applicant’s monthly income (gross) and their monthly debt repayments.

Right to Rescission:

In law, this is a right to cancel a mortgage in a fashion that means it effectively was never created. This cannot be done with home loan mortgages, although other types of mortgages, e.g., refinancing mortgages, may qualify.

Servicing a Loan:

The mechanism whereby your lender takes your monthly repayments for your loan, taxes and/or insurance.

Title:

A document that proves who owns a particular property.

Title Insurance:

If there are any legal mistakes in a title document, Title Insurance protects you against any losses this may cause.

Underwriting:

Underwriters check all data submitted by the applicant, as well as data from other sources, and, all being well, approve their loan.