Glossary of Terms
The following definitions may be helpful when you are exploring information about your mortgage.

Acceleration Clause
Allows the lender to demand immediate payment of the balance of the loan in the event the borrower defaults on payments.

Adjustable Rate Mortgage (ARM)
A mortgage in which the interest rate changes periodically based on a pre-selected financial index. Most ARMs have caps on how much an interest rate may increase. Also known as variable rate mortgage.

Adjustment Interval
The time between changes in the interest rate and/or monthly payment in an adjustable rate mortgage.

Amortization
The repayment of a mortgage loan by equal periodic payments to cover the principal and interest.

Annual Percentage Rate (APR)
A yearly rate of interest that includes fees and costs paid to acquire the loan. This rate may be higher than the stated note rate on the mortgage because it takes into account points and other credit costs. The APR allows borrowers to compare different types of mortgages based on the initial cost for each loan.

Appraisal
A written estimate of the property value prepared by a licensed real estate appraiser.

Balloon Mortgage
A mortgage with level monthly payments for a set period of time and one final lump sum payment at the end of a specified term.

Broker
A person or corporation who assists in negotiating loans for clients, but does not personally lend the money.

Cap
A provision of an adjustable rate mortgage (ARM) that limits how much the interest rate or mortgage payments may increase or decrease.

Closing Costs
Expenses incurred by buyers and sellers when transferring ownership of property. Closing costs typically include fees for appraisal, title, insurance, recording, credit report, underwriting, processing and document preparation.

Commitment
An agreement, often written, in which a lender promises to lend money on certain terms for a specified period.

Conventional Loan
A loan not insured or guaranteed by a government agency, such as the FHA, VA or Farmers Home Administration.

Deed of Trust
A document used in many states instead of a mortgage; title is conveyed to a trustee.

Discount Points
A sum a borrower pays to a lender to decrease the interest rate of a mortgage. A point equals one percent of the loan amount.

Due on Sale Clause
A condition of a mortgage or deed of trust that states the loan must be paid when the property is sold.

Earnest Money
Money given from the buyer to the seller when making a formal offer to bind a transaction. Also called a deposit.

Equity
The difference between the home’s fair market value and the unpaid principal balance of the mortgage and any liens. Equity increases as the mortgage is paid down and the property appreciates in value.

Escrow
An account in which a neutral third party holds the documents and money in a real-estate transfer until all conditions of sale are met. Escrow may also refer to an account held by the lender into which the borrower pays for tax or insurance payments.

FNMA - Federal National Mortgage Association (or Fannie Mae)
A tax-paying corporation created by Congress that purchases and sells conventional residential mortgages on the secondary market. This institution makes mortgage money more available and affordable.

Fixed Rate Mortgage
A home loan in which the interest rate remains constant for the life of the loan.

Gross Monthly Income
The total amount the borrower earns each month, before any taxes or deductions.

Hazard Insurance
Insurance coverage that compensates for physical damage to property from natural disasters, such as fire, windstorm or other hazards.

Index
The index is an important component of an adjustable rate mortgage ARM loan. After the initial fixed rate portion of an ARM loan (1 YR., 3 YR, 5 YR etc.), the newly calculated rate is based on the addition of the margin (fixed throughout the life of the loan) to the Index (subject to weekly or monthly changes). This sum is usually rounded up to the nearest one eighth of a percent and is subject to the rate cap limitations initially outlined in the NOTE. The most common indexes used are the One Year Treasury, One Year LIBOR, and 11th District Cost of Funds (COF).

Jumbo Loan
A loan that is larger than the limits set by the FHLMC (currently $417,000).

Lien
A claim against a property for the payment of a debt. A mortgage is a lien; other types of liens a property might have include a tax lien for overdue taxes or a mechanic's lien for unpaid debt to a subcontractor.

Margin
The amount, expressed as a percentage, that a lender adds to the index on an adjustable rate loan to establish the adjusted interest rate. For example, if at the anniversary the index is 4% and the margin is 2.25%, the renewal rate will be 6.25%.

Market Value
The price paid in an open competitive environment which is acceptable to both the buyer and seller and unaffected by the financing and sales concessions.

Mortgage Insurance
The amount paid by the borrower to insure the mortgage when the down payment is less than 20%. Mortgage insurance is also known as MI or PMI (private mortgage insurance).

Negative Amortization
Occurs when the payment rate is lower than the note rate. Instead of the principal balance declining, it increases.

Net Effective Income
The borrower's gross income minus federal income taxes.

Non-Assumption Clause
A provision of a home loan that prohibits the transfer of a mortgage to another borrower without the lender's permission.

Origination Fee
The fee a lender charges to process a loan. This fee is usually computed as a percentage of the face value of the loan and includes the cost to prepare loan documents, check a borrower's credit history, inspect the property, etc.

PITI
Acronym for the components of a mortgage payment: principal, interest, taxes, and insurance.

Points (Origination or Discount)
Prepaid interest charged at closing. They are generally used to buy down the interest rate, either permanently or temporarily. One point is equal to 1% of fhe loan amount.

Principal
The amount of money owed on a loan, not including interest.

Private Mortgage Insurance (PMI)
A policy that protects the lender by reducing their exposure on a house if the borrower stops paying the loan. The borrower pays the fees monthly. PMI is usually required if the loan is greater than 80% of the lesser of the appraised value or purchase price.

Rescission
A waiting period of 3 business days during which a borrower is given the opportunity to cancel the transaction. Only applies to owner-occupied refinances.

Recording Fees
A fee paid to the county for recording a mortgage or deed and making it part of the public records.

Servicing
The steps and operations a lender performs to keep a loan in good standing including the collection of payments, payment of taxes, insurance, and property inspections.

Survey
A precise measurement of land showing its border location in relation to known points and dimensions.

Underwriting
The process by which the lender decides whether to loan money based on credit, employment, assets, and other factors and matching this risk to an appropriate rate, term and loan amount.

Variable Rate Mortgage (VRM)
A mortgage in which the interest rate changes periodically based on a pre-selected financial index. Most VRMs have caps on how much an interest rate may increase. Also known as an adjustable rate mortgage (ARM).