Common Mortgage Terminology

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The mortgage process is complex and dealing with it can be intimidating, especially for first-timers. Even for those who are refinancing or buying their second home, the amount of information that needs to be understood can seem overwhelming.

The key to feeling more comfortable and ensuring a successful mortgage/refinance process is to have a strong grasp of the special terminology of mortgages and home buying, the processes involved, and what to expect along the way.

This list of mortgage terms should be useful. For convenience, we’ve grouped terms by the part of the process in which you’ll encounter them. For more help and answers to your questions, feel free to contact a Bethpage mortgage expert.

We invite you to learn more about the mortgage options available to you from Bethpage. And when you’re ready to apply for your mortgage or refinance, it’s easy to get started.

Shopping for a Mortgage

Adjustment period: The period of time between adjustment dates for an adjustable-rate mortgage (ARM).

Annual percentage rate (APR): A standardized method of calculating the cost of a mortgage, stated as a yearly rate, which includes interest, mortgage insurance, points and credit costs.

Adjustable-rate mortgage or ARM: A home loan in which the interest rate changes periodically based on a standard financial index such as the Prime rate, although most ARMs have rate caps.

Balloon mortgage: A mortgage that has level monthly payments that would amortize it over a stated term, but that has a lump sum payment due at the end of an earlier specified term.

Cap: Limit on how much the variable interest rate of an adjustable-rate mortgage can increase. ARMs may have annual (or semiannual) rate caps and lifetime caps.

Cash-out refinance: A refinance transaction in which the amount of money received from the new loan exceeds the total of the money needed to repay the existing first mortgage, closing costs, points, and the amount required to satisfy any outstanding subordinate mortgage liens. In other words, a refinance transaction in which the borrower receives additional cash that can be used for any purpose.

Conventional mortgage: A mortgage that is not insured or guaranteed by the federal government.

Credit limit: The maximum a homeowner can borrow through a home equity line of credit.

Debt consolidation: Using a single loan to pay off multiple debts. One common use of a home equity line of credit is to pay off higher-interest loans or credit cards.

Fixed-rate mortgage: A home loan in which the interest rate and payments remain the same throughout the life of the loan.

FHA mortgage: A mortgage that is insured by the Federal Housing Administration (FHA). Also known as a government mortgage. FHA loans require lower minimum down payments and credit scores than most conventional loans.

Home equity line of credit (HELOC): A revolving line of credit secured by a borrower's residence. Often used for home maintenance or improvements, debt consolidation or other major expenses.

Index: The measurement used to decide how much the annual percentage rate will change at the beginning of each adjustment period of an adjustable-rate mortgage. Lenders use various financial index rates. such as the Prime rate.

Initial rate: The starting interest rate on an adjustable-rate loan.

Insured mortgage: A mortgage that is protected by the Federal Housing Administration (FHA) or by private mortgage insurance (PMI). If the borrower defaults on the loan, the insurer must pay the lender the lesser of the loss incurred or the insured amount.

Interest rate: The percentage of a loan charged by a lender for the use of their money.

Investment property mortgage: A fixed- or adjustable-rate loan for investment properties.

Jumbo mortgage: A home loan available in amounts up to $5 million for 1-4 unit properties. Similar to conventional mortgages but are issued for larger amounts.

Prime rate: the interest rate that commercial banks charge their most creditworthy customers, usually large corporations. Used as an index for some adjustable-rate mortgages.

Refinance: Getting a new mortgage to pay off an earlier home loan, most commonly to take advantage of lower interest rates and/or lower monthly payments.

Term: The number of years it will take a borrower to pay off a loan.

VA mortgage: A mortgage available to service members, veterans, and eligible surviving spouses, a portion of which is guaranteed by the Veterans Administration (VA). These loans have standard credit and income requirements, but more favorable terms, including a $0 down payment option.

Applying For a Mortgage and Pre-Qualification/Pre-Approval

Certificate of eligibility: Federal document certifying home buyer’s eligibility for a Department of Veterans Affairs (VA) loan.

Credit bureau: An organization that gathers, updates and stores public records and credit histories on borrowers and provides this information to lenders. The three major credit bureaus are Equifax, Experian, and TransUnion.

Credit report: A report of an individual’s credit history prepared by a credit bureau and used by a lender in determining a loan applicant’s creditworthiness.

Credit score: A numerical evaluation of an individual’s creditworthiness, ranging from 300 to 850. Borrowers with higher credit scores generally are more likely to be approved and pay a lower interest rate for a mortgage.

Creditworthiness: The relative likelihood that a specific borrower will repay debt.

Debt-to-income ratio: Total monthly debt payments as a percentage of gross monthly income.

Discount points: Same as “Points.”

Fair Credit Reporting Act (FCRA): Federal law that outlines borrowers’ rights when dealing with credit bureaus.

FICO: Fair Isaac Corporation, which developed the formulas used to calculate credit scores.

Floating rate: A loan rate that has not yet been locked in or committed to by the lender.

Loan commitment: Formal notification to a borrower of approval and the specific terms of a loan.

Loan estimate: Paperwork delivered to a potential borrower within three days after filing a mortgage application describing the loan terms, any special features, and potential costs, including closing costs, the interest rate and monthly payments (principal, interest, taxes and insurance).

PITI: Stands for principal, interest, taxes and insurance, which make up a home buyer’s total monthly housing costs.

Pre-approval: A commitment in writing for an exact loan amount, based on a lender’s verification of a borrower’s financial situation and history.

Pre-qualification: A ballpark estimate of how much a home buyer may be able to borrow, based solely on the unverified information offered in their loan application.

Points: A one-time charge by the lender for originating a loan. A point is 1 percent of the amount of the mortgage.

Proof of income: Paperwork backing up a borrower’s income as stated on their application. Can include most recent pay stubs, W-2 forms, bank statements and/or federal tax returns.

Qualifying ratios: Calculations that are used in determining whether a borrower can qualify for a mortgage. There are two important ratios: housing expense as a percent of income and total debt obligations as a percent of income. (See Debt-to-income ratio)

Rate lock: Guarantee of a specific interest rate on a loan for a stated period of time. If the lock expires, the rate will move to the current market rate.

Reserves: Savings above and beyond the amount for a down payment, put aside for emergencies. Many lenders require homebuyers to have reserves, typically equal to 2-3 months of mortgage payments.

Uniform Residential Loan Application: The standard loan application form published by the Federal National Mortgage Association (Fannie Mae) and used by most lenders; gathers information on creditworthiness of a borrower.

House Shopping and Making an Offer

Acceptance: An offeree’s consent to enter into a contract and be bound by the terms of the offer.

Appraisal contingency: A requirement in a sales contract that the property must appraise at a value equal to or greater than the offering price.

Condominium: A real estate project in which each unit owner has title to a unit in a building, an undivided interest in the common areas of the project, and sometimes the exclusive use of certain limited common areas.

Contingency: A condition that must be met before a contract is legally binding. For example, home purchasers often include a contingency that specifies that the contract is not binding until the purchaser obtains a satisfactory home inspection report from a qualified home inspector.

MLS: Multiple Listing Service, an online service used by real estate agents that reflects the most up-to-date real estate inventory in a given market.

Earnest money deposit: A deposit made by a potential home buyer to show that he or she is serious about a purchase.

Easement: A right of way giving persons other than the owner access to or across a property.

Encroachment: An improvement that intrudes illegally on another’s property.

Exclusive listing: A written contract that gives a licensed real estate agent the exclusive right to sell a property for a specified time, but reserves the owner’s right to sell the property alone without the payment of a commission.

Fair market value: The highest price that a buyer, willing but not compelled to buy, would pay for a property, and the lowest a seller, willing but not compelled to sell, would accept.

Homeowners’ association (HOA): A nonprofit association that manages the common areas of a planned unit development (PUD) or condominium project.

Investment property: Property purchased to generate rental income or for resale after it appreciates in value.

Purchase agreement: The written contract signed by buyer and seller agreeing to the terms and conditions under which a property will be sold.

Mortgage Processing and Underwriting

Appraisal: A written analysis of the estimated value of a property prepared by a qualified appraiser. Typically this is arranged by the lender once an offer has been written and accepted by the seller.

Appraised value: An opinion of a property’s fair market value, based on an appraiser’s knowledge, experience, and analysis of the property.

Commitment letter: A formal offer by a lender stating the terms under which it agrees to lend money to a home buyer. Also known as a “loan commitment.”

Collateral: Some form of property that is pledged as a security to debt if the borrower fails to repay the loan. If a borrower defaults (fails to pay), the lender may take ownership and sell it to recover their money.

Comparables: An abbreviation for “comparable properties”; used in the appraisal process. Comparables are properties similar to the property being appraised; they have reasonably the same size, location, and amenities and have recently been sold. Comparables help an appraiser determine the approximate fair market value of the subject property.

Covenant: A promise in a mortgage or deed that requires or prevents certain uses of the property. Violating a covenant may cause loss of the property.

Home inspection: A thorough inspection that evaluates the structural and mechanical condition of a property. A satisfactory home inspection is often included as a contingency by the purchaser.

Lien: A legal claim against a property that must be paid off when the property is sold.

Lien holder: Person or business who has a lien on a property. (See Lien)

Loan-to-value (LTV) percentage: The relationship between the principal balance of a mortgage and the appraised value of the property. For example, a $100,000 home with an $80,000 mortgage has a LTV percentage of 80 percent. Or the ratio between the credit limit on a home equity line of credit and the value of the owner’s equity in the home.

Lock period: The length of time prior to closing that an interest rate can be locked in for a mortgage.

Truth in Lending Act: A federal law requiring credit terms be disclosed by all lenders in a standard, comparable format.

Underwriting: A lender’s process of appraising the credit worthiness of a potential customer and determining whether or not to take on the risk of providing a loan.

Closing on a Mortgage

Certificate of occupancy: Legal document that allows the buyer of a newly constructed house to move in.

Certificate of title: A statement provided by an abstract company, title company, or attorney stating that the title to real estate is held legally by the current owner.

Chain of title: The history of all of the documents that transfer title to a parcel of real property, starting with the earliest existing document and ending with the most recent.

Clear title: A title that is free of liens or legal questions as to ownership of the property.

Closing: An on-site or virtual meeting at which a sale of a property or funding of a line of credit is finalized by the borrower signing the loan documents and paying closing costs. (See Settlement)

Closing costs: Expenses incurred by sellers and buyers when transferring ownership, including items such as origination fees, attorney fees, taxes, escrow payments, and title insurance.

Closing Disclosure: A document that provides an itemized listing of the funds that are payable at closing. Items that appear on the statement include real estate commissions, loan fees, points, and initial escrow amounts. Also known as the “closing statement,” “settlement sheet,” or “HUD-1.”

Deed: The legal document conveying title to a property.

Deed of trust: The document used in some states instead of a mortgage; title is conveyed to a trustee.

Insurable title: A property title that a title insurance company agrees to insure against defects and disputes.

Insurance binder: A document that states that insurance is temporarily in effect. Because the coverage will expire by a specified date, a permanent policy must be obtained before the expiration date.

No closing cost loan: A loan for which the borrower pays nothing out-of-pocket for the normal closing expenses.

Origination date: Date on which a loan is funded or the funds are disbursed.

Promissory note: A written promise to repay a specified amount over a specified period of time.

Quitclaim deed: A deed that transfers without warranty whatever interest or title a grantor may have at the time the transfer is made.

Real Estate Settlement Procedures Act (RESPA): A consumer protection law that requires lenders to give borrowers advance notice of closing costs.

Settlement: Same as “Closing.”

Three-day review period: Time prior to closing during which the borrower has an opportunity to review the Closing Disclosure and ensure that all of the terms of the loan are as agreed upon.

Title: Written legal evidence of a person’s ownership of a property.

Title company: A company that performs a “Title search.”

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.

Title search: A check of the title records to ensure that the seller is the legal owner of the property and that there are no liens or other claims outstanding.

Transfer tax: State or local tax payable when title passes from one owner to another.

Walk-through: A final review of the property during which the buyer has the right to ensure the seller has vacated, any contractual repairs are complete, everything paid for is present, and the condition of the property is as expected.

Making Payments and Building Equity

Additional principal payment: A payment by a borrower of more than the scheduled principal amount in order to reduce the remaining balance on the loan.

Amortization schedule: A timetable for repayment of a mortgage loan. An amortization schedule shows the amount of each payment applied to interest and principal and the remaining balance after each payment is made.

Appreciation: An increase in the value of a property due to changes in market conditions or other causes. The opposite of depreciation.

Assessed value: The valuation placed on a property by a public tax assessor for purposes of taxation.

Assessment: The process of placing a value on property for the purpose of taxation. May also refer to a levy against property for a special purpose, such as a sewer assessment.

Balloon payment: The final lump sum payment that is made at the maturity date of a balloon mortgage.

Collection: Process of trying to bring a delinquent loan current and/or, if necessary, to file legally for foreclosure.

Default: Failure to make mortgage payments on a timely basis or to comply with other requirements of a mortgage.

Delinquency: Failure to make mortgage payments on time.

Depreciation: A decline in the value of a property; the opposite of appreciation.

Draw: Spending funds available from a home equity line of credit.

Draw period: Time during which a borrower can draw from a home equity line of credit.

Equity: A homeowner’s financial interest in a property. Equity is the difference between the fair market value of the property and the amount the homeowner still owes on it, through the first mortgage and any home equity borrowing.

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.

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.

Hazard insurance: Insurance coverage that compensates for physical damage to a property from fire, wind, vandalism, or other hazards.

Homeowner’s insurance: An insurance policy that combines personal liability insurance and hazard insurance coverage for a dwelling and its contents.

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: 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 (PMI) company.

Payoff: The amount necessary to pay the outstanding balance of a loan in full.

Private mortgage insurance (PMI): A contract issued by a private non-government company that insures the lender against loss caused by a borrower’s default. PMI is commonly required when Home buyers put less than 20 percent down on a property.

Short sale: An alternative to foreclosure in which a lender allows a homeowner to sell their home to pay off the mortgage; the lender also agrees to accept an amount less than the balance of the loan.



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