Real Estate Glossary
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Mortgage Glossary, Real Estate Glossary
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 a earnest money deposit
A deposit made by the potential home buyer to show that
he or she is serious about buying the house.
equity
A homeowner's financial interest in a property. Equity
is the difference between the fair market value of
the property and the amount still owed on its mortgage.
equity loan
A loan based on the borrower's equity in his/her home.
escrow
An item of value, money, or documents deposited with
a third party to be delivered upon the fulfillment
of a condition. For example, the deposit by a borrower
with the lender of funds to pay taxes and insurance
premiums when they become due, or the deposit of funds
or documents with an attorney or escrow agent to be
disbursed upon the closing of a sale of real estate.
fair market value
The highest price that a buyer, willing but not compelled
to buy, would pay, and the lowest a seller, willing
but not compelled to sell, would accept.
FHA mortgage
A mortgage that is insured by the Federal Housing Administration
(FHA). Also known as a government mortgage.
finance charge
The cost of credit as a dollar amount (i.e. total amount
of interest and specific other loan charges to be paid
over the term of the loan and other loan charges to
be paid by the borrower at closing). Loan charges include
origination fees, discount points, mortgage insurance,
and other applicable charges. If the seller pays any
of these charges, they cannot be included in the finance
charge.
first mortgage
A mortgage that is the primary lien against a property.
fixed installment
The monthly payment due on a mortgage loan. The fixed
installment includes payment of both principal and
interest.
fixed rate mortgage (FRM)
A mortgage in which the interest rate does not change
during the entire term of the loan.
floating
The term used when a purchaser elects not to lock-in
an interest rate at the time of application.
forbearance
The lender's postponement of foreclosure to give the
borrower more time to catch up on payments.
foreclosure
The legal process by which a borrower in default under
a mortgage is deprived of his or her interest in the
mortgaged property. This usually involves a forced
sale of the property at public auction with the proceeds
of the sale being applied to the mortgage debt.
fully amortized ARM
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.
good faith estimate (GFE)
A disclosure required under the Real Estate Settlement
Procedures Act (RESPA) that must be given to all mortgage
loan applicants at application time. The disclosure
is an estimate of all settlement charges likely to
be incurred at closing.
government mortgage
A mortgage that is insured by the Federal Housing Administration
(FHA) or guaranteed by the Department of Veterans Affairs
(VA) or the Rural Housing Service (RHS). Contrast with
conventional mortgage.
graduated payment mortgage
A mortgage that starts with low monthly payments that
increase at a predetermined rate.
growing-equity mortgage (GEM)
A fixed-rate mortgage that provides scheduled payment
increases over an established period of time, with
the increased amount of the monthly payment applied
directly toward reducing the remaining balance of the
mortgage.
hazard insurance
Insurance coverage that compensates for physical damage
to a property from fire, wind, vandalism, or other
hazards.
home equity line of credit
A mortgage loan, which is usually in a subordinate position,
that allows the borrower to obtain multiple advances
of the loan proceeds at his or her own discretion,
up to an amount that represents a specified percentage
of the borrower's equity in a property.
index
A number used to compute the interest rate for an adjustable-rate
mortgage (ARM). The index is generally a published
number or percentage, such as the average interest
rate or yield on Treasury bills. A margin is added
to the index to determine the interest rate that will
be charged on the ARM.. This interest rate is subject
to any caps that are associated with the mortgage.
inflation
An increase in the amount of money or credit available
in relation to the amount of goods or services available,
which causes an increase in the general price level
of goods and services. Over time, inflation reduces
the purchasing power of a dollar, making it worth less.
initial interest rate
The original interest rate of the mortgage at the time
of closing. This rate changes for an adjustable-rate
mortgage (ARM). Sometimes known as "start rate" or "teaser."
interest
The fee charged for borrowing money.
interest accrual rate
The percentage rate at which interest accrues on the
mortgage. In most cases, it is also the rate used to
calculate the monthly payments, although it is not
used for an adjustable-rate mortgage (ARM) with payment
change limitations.
interest rate
The rate of interest in effect for the monthly payment
due.
interest rate buy-down plan
An arrangement wherein the property seller (or any other
party) deposits money to an account so that it can
be released each month to reduce the mortgagor's monthly
payments during the early years of a mortgage. During
the specified period, the mortgagor's effective interest
rate is "bought down" below the actual interest
rate.
interest rate cap
A provision of an arm limiting how much interest rates
may increase or decrease per adjustment period or over
the life of the loan.
interest rate ceiling
For an adjustable-rate mortgage (ARM), the maximum interest
rate, as specified in the mortgage note.
interest rate floor
For an adjustable-rate mortgage (ARM), the minimum interest
rate, as specified in the mortgage note.
jumbo loan
A loan that exceeds Fannie Mae’s legislated mortgage
amount limits. Also called a nonconforming loan.
lease
A written agreement between the property owner and a
tenant that stipulates the conditions under which the
tenant may possess the real estate for a specified
period of time and rent.
lease-purchase mortgage loan
An alternative financing option that allows low- and
moderate-income home buyers to lease a home from a
nonprofit organization 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 is earmarked for deposit
to a savings account in which money for a down payment
will accumulate.
liabilities
A person's financial obligations. Liabilities include
long-term and short-term debt, as well as any other
amounts that are owed to others.
liability insurance
Insurance coverage that offers protection against claims
alleging that a property owner's negligence or inappropriate
action resulted in bodily injury or property damage
to another party.
lien
A legal claim against a property that must be paid off
when the property is sold.
liquid asset
A cash asset or an asset that is easily converted into
cash.
loan-to-value (LTV) percentage
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 a LTV percentage
of 80 percent.
lock-in
A written agreement in which the lender guarantees a
specified interest rate if a mortgage goes to closing
within a set period of time. The lock-in also usually
specifies the number of points to be paid at closing.
margin
For an adjustable-rate mortgage (ARM), the amount that
is added to the index to establish the interest rate
on each adjustment date, subject to any limitations
on the interest rate change.
maturity
The date on which the principal balance of a loan, bond,
or other financial instrument becomes due and payable.
merged credit report
A credit report that contains information from three
credit repositories. When the report is created, the
information is compared for duplicate entries. Any
duplicates are combined to provide a summary of your
credit.
monthly fixed installment
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.
monthly payment mortgage
A mortgage that requires payments to reduce the debt
once a month.
mortgage
A legal document that pledges a property to the lender
as security for payment of a debt.
mortgage banker
A company that originates mortgages exclusively for resale
in the secondary mortgage market.
mortgage broker
An individual or company that brings borrowers and lenders
together for the purpose of loan origination. Mortgage
brokers typically require a fee or a commission for
their services.
mortgage insurance
A contract that 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 such
as the Federal Housing Administration (FHA). Depending
on the type of mortgage insurance, the insurance may
cover a percentage of or virtually all of the mortgage
loan.
mortgage insurance premium (MIP)
The amount paid by a mortgagor for mortgage insurance,
either to a government agency such as the Federal Housing
Administration (FHA) or to a private mortgage insurance
(MI) company.
negative amortization
A gradual increase in mortgage debt that occurs when
the monthly payment is not large enough to cover the
entire principal and interest due. The amount of the
shortfall is added to the remaining balance to create "negative" amortization.
net cash flow
The income that remains for an investment property after
the monthly operating income is reduced by the monthly
housing expense, which includes principal, interest,
taxes, and insurance (PITI) for the mortgage, homeowners'
association dues, leasehold payments, and subordinate
financing payments.
non-liquid asset
An asset that cannot easily be converted into cash.
note
A legal document that obligates a borrower to repay a
mortgage loan at a stated interest rate during a specified
period of time.
notice of default
A formal written notice to a borrower that a default
has occurred and that legal action may be taken.
original principal balance
The total amount of principal owed on a mortgage before
any payments are made.
origination fee
A fee paid to a lender for processing a loan application.
The origination fee is stated in the form of points.
One point is 1 percent of the mortgage amount.
owner financing
A property purchase transaction in which the property
seller provides all or part of the financing.
periodic payment cap
For an adjustable-rate mortgage (ARM), a limit on the
amount that payments can increase or decrease during
any one adjustment period.
periodic rate cap
For an adjustable-rate mortgage (ARM), a 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
principal, interest, taxes, and insurance.
points
A one-time charge by the lender for originating a loan.
A point is 1 percent of the amount of the mortgage.
prepaid interest
Mortgage interest that is paid in advance of when it
is due to obtain tax advantages.
prepayment
Any amount paid to reduce the principal balance of a
loan before the due date. Payment in full on a mortgage
that may result from a sale of the property, the owner's
decision to pay off the loan in full, or a foreclosure.
In each case, prepayment means payment occurs before
the loan has been fully amortized. Often, a fee may
be charged to a borrower who pays off a loan before
it is due.
prequalification
The process of determining how much money a prospective
home buyer will be eligible to borrow before he or
she applies for a loan.
prime rate
The interest rate that banks charge to their preferred
customers. Changes in the prime rate influence changes
in other rates, including mortgage interest rates.
principal
The amount borrowed or remaining unpaid. The part of
the monthly payment that reduces the remaining balance
of a mortgage.
principal balance
The outstanding balance of principal on a mortgage. The
principal balance does not include interest or any
other charges.
principal, interest, taxes, and insurance (PITI)
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 amounts that are paid into an escrow account
each month for property taxes and mortgage and hazard
insurance.
private mortgage insurance (PMI)
Mortgage insurance that is 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.
promissory note
A written promise to repay a specified amount over a
specified period of time.
pro rate
The allocation of proportionate shares of income, ownership,
or of an obligation, which a buyer and seller share
at the time of closing.
purchase and sale agreement
A written contract signed by the buyer and seller stating
the terms and conditions under which a property will
be sold.
rate lock
A commitment issued by a lender to a borrower or other
mortgage originator guaranteeing a specified interest
rate for a specified period of time.
realtor
A person licensed to negotiate and transact the sale
of real estate on behalf of the property owner.
real property
Land and appurtenances, including anything of a permanent
nature such as structures, trees, minerals, and the
interest, benefits, and inherent rights thereof.
remaining balance
The amount of principal that has not yet been repaid.
See principal balance.
repayment plan
An arrangement made to repay delinquent installments
or advances. Lenders' formal repayment plans are called "relief
provisions."
right of first refusal
A provision in an agreement that requires the owner of
a property to give another party the first opportunity
to purchase or lease the property before he or she
offers it for sale or lease to others.
second mortgage
A mortgage that has a lien position subordinate to the
first mortgage.
secured loan
A loan that is backed by collateral.
settlement
Another term for "closing".
sweat equity
Contribution to the construction or rehabilitation of
a property in the form of labor or services rather
than cash.
title
A legal document evidencing a person's right to or ownership
of a property.
title company
A company that specializes in examining and insuring
titles to real estate.
title insurance
Insurance that protects the lender (lender's policy)
or the buyer (owner's policy) against loss arising
from disputes over ownership of a property.
transfer tax
State or local tax payable when title passes from one
owner to another.
Treasury index
An index that is 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 is 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
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
An adjustable-rate mortgage (ARM) that has 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.
trustee
A fiduciary who holds or controls property for the benefit
of another.
underwriting
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.
unsecured loan
A loan that is not backed by collateral.
Uniform Residential Loan Application (URLA)
Standard form where mortgage applicants provide the lender
with information essential to loan approval.
VA mortgage
A mortgage that is guaranteed by the Department of Veterans
Affairs (VA). Also known as a government mortgage.
verification of deposit (VOD)
A form that requests and secures verifications of amounts
on deposit at financial institutions. When a depository
institution is also the applicant’s creditor,
the VOD verifies the obligation.
verification of employment (VOE)
A form that requests and secures documentation of a mortgage
applicant’s work history and/or occupation, to
assist in the lender’s credit investigation.
verification of mortgage (VOM)
A form that requests and secures verification of payments
made on an applicant’s current or past mortgage.
vested
Having the right to use a portion of a fund such as an
individual retirement fund. For example, individuals
who are 100 percent vested can withdraw all of the
funds that are set aside for them in a retirement fund.
However, taxes may be due on any funds that are actually
withdrawn.
Veterans Administration (VA)
A government agency that aids veterans of the U.S. armed
forces in various ways; its housing assistance takes
the form of a guarantee to the financial institution
on loans with low down payments to qualified veterans.
wraparound mortgage
A mortgage that includes 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 wraparound mortgagee, who then forwards
the payments on the first mortgage to the first mortgage.
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