Mortgage Terms

Adjustable-Rate Mortgage (ARM)

A mortgage in which the rate of interest is adjusted based on a standard rate index. Most ARMs have a cap on how much the rate may increase.

Amortization

The process through which the mortgage debt is altered, usually declining, as payments are made to the lender. "Negative-amortization" occurs when monthly payments are too small to cover either the principal or interest reductions.

Annual Percentage Rate (APR)

The rate of interest to be paid on a loan projected life; sometimes referred to as the "true" rate of interest.

Appraisal

A professional evaluation of the value of a home or other piece of property. It is often required by the lender.

Balloon Mortgage

A real estate loan in which some portion of the debt will remain unpaid at the end of the term of the loan. A balloon will usually result in a single payment due when the loan ends.

Cap

A limit on how much a mortgage interest rate may increase or decrease for an adjustable-rate mortgage.

Conventional Mortgage

A home loan that follows a fixed rate.

Debt-to-Income ratio

A ratio used by lending institutions to determine whether a person is qualified for a mortgage. Debt-to-Income is the total amount of debt, including credit cards and other loans, divided by the total gross monthly income.

Default

Failure to pay the mortgage payments over a specified period of time.

Discount Points

A percentage of the mortgage paid to the lender to lower the interest rate on a loan. One point equals one percent of the mortgage.

Equity

The difference between the market value of a house and the amount still owed on the mortgage.

Escrow

Money and documents deposited in a trust account to be held by one party for another. Often used by brokers to hold deposit money prior to closing. Also used by lenders to hold money for taxes and insurance on a home.

FHA Loan

A loan insured by the Federal Housing Administration. FHA issues specific guidelines for mortgages.

Lifetime Cap

A limit on how high the interest rate on an adjustable-rate mortgage can rise over the life of the loan.

Loan-to-Value Ratio (LTV)

The amount of the loan divided by the purchase price of the house. If a refinance, the loan is divided by appraised value.

Margin

A set number of percentage points a lender adds to the index to determine the interest rate for an ARM.

Mortgage Insurance (MI)

Insurance designed to cover the lender should the borrower default on the loan. Depending on the lender, this may be required by the lender.

Paper Trail

Copies of all paperwork to cover the lender should the borrower default on the loan. Depending on the lender, this may be required by the lender.

PITI

PITI stands for the principal, interest, taxes and insurance. (Taxes and insurance are mortgage categories in which money is held in escrow.)

Points

An interest fee charged by the lender. One point is equal to one percent of the mortgage. The use of points allows the lender to raise its yield above the apparent interest rate.

Prepayment Penalty

A fee imposed on a borrower who pays off a mortgage before it is due.

Pre-qualification

Pre-qualification is usually the first step after initial contact is made to the lender. When pre-qualifying a borrower, the lender gathers information about the income and debts of the borrower and makes a financial determination about how much house the borrower may be able to afford.

Principal

The amount of a home loan.

Second Mortgage

An additional mortgage on a property. It often carries a shorter term and a higher interest rate that then original mortgage.

Title Company

A company that searches for titles and insurance claims. Your loan will close at a title company.

Truth-in-Lending Act

A federal law that requires lenders to reveal all the terms of the mortgage.

VA

A low-income loan guaranteed by the Veterans Administration to obtain a VA, the borrower must have served in the armed forces.