Mortgage Glossary

Adjustable Rate Mortgage (ARM) - A mortgage loan on which the interest rate can be changed periodically, based on increases or decreases in specified economic indicators.

Amortization - The process of paying off a loan by making regularly scheduled payments against principal and interest, according to the terms of the mortgage note.

Annual Percentage Rate (APR) - A measure of the cost of credit, expressed as a yearly percentage rate. This is a federally required formula, designed to help the borrower compare the cost of credit.

Appraisal - An estimate of the fair market value of the property.

Assessed Value - A home or piece of real estate property has more than one value; the assessed value generally refers to the value set on the land by tax authorities for purposes of determining real estate taxes.

Closing - The conclusion or consummation of a transaction. In real estate, it includes the signing of a mortgage, closing statement, the signing of a note and the disbursement of funds necessary for the sale (sometimes called loan settlement).

Closing Costs - All of the costs to the buyer and the seller which are associated with the purchase, sale or refinancing of real estate property. These include (but are not limited to) origination points, the cost of title insurance policies, recording fees, escrow deposits and attorney's fees.

Commitment - In general, a commitment is a pledge by the lender to make mortgage funds available to a buyer for the express purpose of buying a home or residence. Such as an agreement is conditioned on the buyer having provided accurate qualifying information as well as satisfying all underwriting requirements.

Condominium - Individual ownership of a dwelling unit and an individual interest in the common areas and facilities which serve the multi-unit project.

Contract of Sale - Contract in which seller agrees to sell and buyer agrees to buy under certain specific terms and conditions spelled out in writing and signed by both parties.

Credit Report - A report issued by one or more national credit bureaus for the purpose of aiding a lender in determining the overall credit standing of a loan applicant.

Down payment - An amount of money, deposited by the buyer in accordance with the terms of the contract which may be forfeited if the buyer defaults, or applied to the purchase price at the time of closing.

Equity - In real estate, the difference between the property's fair market value and the current amount owed on the property. This represents the owner's interest in the property.

Escrow - A portion of monthly payments held by the lender on the borrower's behalf to pay taxes and insurance and other charges when they become due.

Fixed Rate Mortgage - A mortgage loan in which the interest rate remains the same throughout the life of the loan.

Homeowner's Insurance - A type of insurance whereby an insurer, for a premium, undertakes to compensate the insured for a loss on the specific property due to a specified hazards (e.g. fire, theft, etc.)

Index - The interest rate on a ARM is tied to an index rate. At the end of a mortgage's adjustment period, the lender is authorized to adjust the mortgage note rate depending on the movement of the index since the borrower's last adjustment. Most lenders use indexes based on U.S. Treasury securities, while others use cost-of-funds indexes.

Joint Tenancy with Right of Survivorship - One of the most common methods of homeownership. In the event of the death of one owner, the ownership interest held by that owner transfers to the other joint tenants.

Lien - A legal hold or claim which has been placed upon the property of another as security for some debt or charge.

Loan-to-Value Ratio - The relationship of the loan amount to the appraised value of the property or the sale price whichever is lower.

Margin - On an ARM, the margin is added to the index rate to determine the interest rate to be charged during the next adjustment period. Margins are usually constant for the life of the loan and generally reflect the lender's cost of doing business. Margins will differ from one product to another and from one lender to another.

Mortgage - A pledge of real estate as security for the payment of a debt.

Mortgagee - The lender in a mortgage loan transaction.

Mortgagor - The borrower who pledges property as security for a loan.

Origination Fee - Also known as points. A fee for work involved in the evaluation and preparation of a mortgage loan. One point equals 1% of the loan amount.

Private Mortgage Insurance - Insurance which protects a mortgage lender against default on a mortgage. The borrower pays the insurance cost.

RESPA - Real Estate Settlement Procedures Act is a federal law that requires lenders to provide home mortgage borrowers with information of known or estimated settlement costs and provides other consumer protection.

Tenants in Common - An optional method of home ownership. If an owner dies, the owner's interest in the property is passed to the owner's heirs, rather than to the other owners of the property.

Title Insurance - A type of insurance which can protect the lender and the borrower against any title defects when a new home is purchased. Protection for the borrower requires the payment of an additional premium.

Underwriting - The analysis of risk (the ability of the borrower to repay a loan) and the matching of it to an appropriate rate and term.