Glossary Of Mortgage Terms

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Adjustable Rate Mortgage (ARM) - A loan that allows the interest rate to change periodically. These changes, up or down, are linked to changes in a financial index, such as Treasury bills. Some ARMs have a cap on interest rate increases.

Assumption - An agreement permitting the buyer to assume responsibility for a mortgage owed by the seller.

Buydown - Paying a lump sum up front to reduce the interest rate on a mortgage. The reduction may be temporary or for the term of the loan.

Buyer’s Agent - A real estate agent who helps the buyer find the house, price, terms and conditions most favorable to the buyer.

Cap - The maximum amount an interest rate or monthly payment can change, at established intervals over the term of the mortgage.

Closing - The final step in transferring ownership of a property from the seller to the buyer. Also refers to the actual meeting where this occurs.

Closing Costs - Fees and expenses, not including the price of the home, payable by the seller and the buyer at the closing.

Conventional Loan - A loan that is not backed by the federal government. May require private mortgage insurance (PMI).

Credit Check - A lender-initiated study to determine creditworthiness based on credit history.

Department of Housing and Urban Development (HUD) - A government agency established to implement certain federal housing and community development programs.

Department of Veterans Affairs (VA) - A government agency that provides services for eligible veterans of the armed forces. Among other programs, it guarantees mortgage loans made by private lenders to veterans.

Down Payment - A lump sum the buyer pays at closing. The amount varies according to the price of the home and the requirements of the lender or underwriting agency.

Earnest Money - A portion of the down payment, deposited on behalf of the seller by a potential buyer. Earnest money indicates the buyer’s intent to complete the purchase of the property and is usually applied toward payment of closing costs. Earnest money may or may not be required by state law.

Equity Loan - A loan based on the borrowers’ equity in their home.

Escrow - The placement of money and documents with a third party for safekeeping until a home sale closes or until specific contractual obligations have been fulfilled. Escrow also refers to an account, maintained by a loan servicing department, which serves as a trust fund to pay taxes, insurance or other costs associated with home ownership.

Federal Housing Administration (FHA) - An agency within the Department of Housing and Urban Development (HUD) that administers loan insurance programs to make more housing available.

Lien - A legal claim against a property. Liens must be paid when the property is sold.

Lock-In Rate - A lender’s commitment to freeze a mortgage loan rate during loan processing. Lock-in periods and fees vary.

Margin - A number above a financial index, usually expressed as a percentage, which a lender adds to the index to determine the interest rate of an adjustable rate mortgage.

Market Value - The most probable price that a property should bring in a competitive and open market.

Mortgage Broker - A company or an individual who obtains mortgages for others by finding lending institutions, insurance companies or private sources to lend the money. Brokers may also handle processing, collections and disbursements for the mortgage lender.

Mortgage Insurance Premium (MIP) - An insurance premium home buyers pay on FHA loans to protect the lender against default. Includes an "upfront" premium which may be financed and a monthly premium collected in the payment.

Mortgage Life Insurance - A policy that guarantees repayment of the loan by the insurer if the borrower becomes disabled or dies.

Multiple Listing Service - A computerized database listing pertinent information about local for-sale and sold homes and properties.

Points - A dollar amount paid to obtain a specific interest rate. One point is 1 percent of the loan amount. Also called discount points.

Prepaid Items - Recurring charges such as taxes, interest and insurance. These costs can be paid by the buyer or seller — or jointly — if the parties agree and if the type of loan chosen does not prohibit it. Usually only the buyer incurs prepaid items.

Principal Broker - An individual who is licensed to operate a real estate office. Brokers may work independently or hire other agents. All real estate agents must work under a principal broker’s license.

Principal, Interest, Taxes and Insurance (PITI) Payment - A periodic, usually monthly, payment which includes the principal and interest payment, plus a contribution to the escrow account established by the lender to pay insurance and property taxes on the mortgaged property.

Private Mortgage Insurance (PMI) - Insurance written by a private company protecting the lender against loss if the borrower defaults on the mortgage. Many lenders require PMI for conventional loans with down payments of less than 20 percent.

Purchase Money Second - A second mortgage that allows buyers to make a larger down payment and eliminate PMI premiums. Second mortgages carry fixed or variable rates, and in most cases, no prepayment penalties. They are initiated at the same time as the first mortgage.

Property Valuation - An assessment or estimate of value determined by an appraisal or an alternate method.

Radon - An odorless, radioactive gas occurring in nature. In certain areas of the country, radon is more prevalent, and tests may be necessary for homebuyers to determine the radon level inside a home. Exposure to high concentrations can lead to lung cancer. Tests are available to determine radon levels.

REALTOR® - A person engaged in the real estate business who is a board member or an individual member of the National Association of REALTORS®. As such, he or she is subject to the Association’s rules and regulations, entitled to its benefits and bound by the REALTOR’S® Code of Ethics.

Real Estate Broker - A person, corporation or partnership which sells, buys or negotiates the purchase, sale or exchange of real estate for others. A real estate broker must have a broker’s license.

Title - A document that provides evidence of ownership.

Title Insurance - Protection for lenders and homeowners against financial loss resulting from legal defects in the title.

VA Funding Fee - A fee the Department of Veterans Affairs charges veterans obtaining VA loans.