Essential Terms to Understand About Mortgages

Understanding essential mortgage terms can empower you to make informed decisions throughout your home financing journey. Here, we break down commonly used mortgage terms to help you navigate the process from application to closing.

Amortization: The full period over which a loan will be repaid.

Application Fees: Nonrefundable fees paid when applying for credit, which may cover items such as credit reports and appraisals.

Appraisal: An evaluation of a property’s market value, typically conducted by a licensed appraiser.

Appreciation: The increase in a property’s value over time.

APR (Annual Percentage Rate): The APR reflects the total cost of the mortgage, including interest and fees, as an annualized rate.

ARM (Adjustable-Rate Mortgage): A mortgage with an interest rate that may vary after an initial fixed period.

• Initial Cap: The maximum change in interest rate after the fixed period.
• Periodic Cap: The limit on rate adjustments from one period to the next.
• Lifetime Cap: The maximum total increase allowed over the life of the loan.

Assessed Value: The value assigned to a property by a tax assessor, which serves as the basis for property taxes.

Balloon Mortgage: A loan with low or no monthly payments initially, requiring a lump sum at the end of the term.

Basis Points: Equal to 1/100th of 1% (e.g., 25 basis points = 0.25%).

Bridge Loan: A short-term loan to bridge the gap between buying a new home and selling an existing property, helping buyers cover costs temporarily.

Broker: A person or company who arranges financing transactions for a commission.

CD (Closing Disclosure): A document outlining the final loan terms, interest rate, payments, and closing costs, provided three days before closing.

Clear Title: A title free from liens or legal claims by creditors or other parties.

Closing Date: The date on which the loan is finalized and ownership is transferred.

Closing Costs: Fees paid at the end of a real estate transaction, typically covering services like appraisals, title insurance, and taxes.

Closing: The final step in purchasing a home, where the buyer signs documents and takes responsibility for the mortgage.

CLTV (Combined Loan-to-Value): The ratio of all loans on a property to its appraised value.

Co-Borrower: An additional borrower whose income and credit are used to qualify for the loan; both parties are equally responsible for repayment.

Collateral: Property or assets pledged to secure a loan.

Comparables (Comps): Similar properties used to determine a property’s value.

Construction Loan: A short-term loan used to finance the building of a new home, which can later be converted into a permanent mortgage.

Debt Consolidation: A financing strategy where a homeowner uses a refinance or home equity loan to pay off high-interest debts, combining multiple debt payments into one lower-interest loan.

Deed: A legal document proving property ownership.

Down Payment: The cash payment made upfront for a home, usually ranging from 3% to 20%.

DTI (Debt-to-Income): The ratio of monthly debt payments to gross income, typically capped at a specific percentage by lenders.

Earnest Money: A deposit showing the buyer’s serious intent to purchase a property.

Escrow Account: An account managed by a third party to hold funds for future payments, such as property taxes and insurance.

Fixed-Rate Mortgage: A mortgage with an interest rate that remains constant throughout the loan term.

Flood Insurance: Insurance covering property losses due to flooding, required in certain areas.

GFE (Good Faith Estimate): An estimate of closing costs provided by the lender at the beginning of the loan process.

HELOC (Home Equity Line of Credit): A line of credit borrowed against the equity in your home, allowing for flexible withdrawals.

Homeowners Association (HOA) Fees: Monthly or annual fees paid by homeowners in a community for the upkeep of common areas, amenities, and sometimes certain services.

Jumbo Loan: A mortgage that exceeds the conforming loan limits set by the Federal Housing Finance Agency (FHFA).

Lien: A legal claim on a property as security for a debt, which must be satisfied before the property can be sold.

Liabilities: Debts or financial obligations, including credit cards, loans, and other payments.

LTV (Loan-to-Value): The ratio of a loan amount to the appraised property value, used by lenders to assess risk.

Mixed-Use Property: A property used for both residential and commercial purposes.

Notice of Default: Notification to a borrower that payments are overdue and the loan is in default.

PITI (Monthly Mortgage Payment): The combined cost of principal, interest, taxes, and insurance in a monthly mortgage payment.

PMI (Private Mortgage Insurance): Insurance protecting the lender if the borrower defaults, often required until the borrower has 20% equity.

PPI (Prepaid Interest): Interest paid at closing before the first scheduled mortgage payment.

Points: Optional fees paid to the lender at closing to reduce the mortgage interest rate; one point equals 1% of the loan amount.

Pre-Qualification: An initial assessment of how much a borrower may qualify to borrow, based on basic financial information.

Recast: Conversion of an adjustable-rate mortgage into a fixed-rate mortgage.

Refinance Loan: A loan replacing an existing mortgage, often at a lower interest rate.

Reserves: Funds saved for emergencies, demonstrating financial stability to lenders.

Rolling Lates: Consecutive missed payments that continue into following months.

Seasoned Loan: A mortgage that has been active for over a year, showing a track record of payments.

Subject Property: The property for which financing is being sought.

Suspension: A status where a loan application is neither approved nor denied, often pending further documentation.

Term: The duration of a loan (e.g., 15, 20, or 30 years).

UFMIP (Up-Front Mortgage Insurance Premium): An upfront insurance fee, usually on FHA loans, that protects the lender if the borrower defaults.

Underwriting: The process in which the lender verifies financial and property information to decide on loan approval.