Mortgage Lending Lingo: What Does It Mean?

Like all industries, the world of mortgage lending has its own language, or terminology. Following are some of the terms you will hear most frequently during the course of obtaining a mortgage loan.

Adjustable Rate Mortgage (ARM): also referred to as a variable rate loan; a mortgage in which the interest rate is adjusted at fixed intervals based on a pre-selected index

Amortization: the process by which the principal amount of the mortgage is reduced through periodic payments

Annual Percentage Rate (APR): an interest rate that reflects the cost of a mortgage as a yearly rate; takes into account any points and fees, and is based on the loan going to its full term

Appraisal: an expert evaluation of the fair market value of the property

Balloon: a type of mortgage where monthly payments are made until a certain date when the remaining balance becomes payable in full

Caps: a limit in the amount that an ARM may change at each adjustment period and over the life of the loan

Close of escrow: also referred to as settlement; the date on which the property (deed) and purchase funds are exchanged between the parties involved

Closing: also referred to as settlement; the time when legal title to a property passes from the seller to the buyer

Closing costs: the fees paid to obtain a mortgage loan

Conventional loan: any mortgage loan that does not have government backing

Credit score: a number which is developed from the information contained in your credit file; a credit score represents your credit risk

Debt ratio: the amount, expressed as a percentage, of the borrower’s monthly gross income that is spent on housing and consumer debt

Deed of Trust: the piece of paper that is recorded against a property to secure the mortgage loan

Down payment: the cash payable by the buyer of a property equal to the difference between the sale price and the mortgage loan amount

Equity: the cash value of a property after all liens have been paid off

Escrow: a neutral third party who holds the deed or other instrument for the seller and the buyer’s funds until the conditions of the transaction are met

First Mortgage: the mortgage that is in first lien position and has first claim in the event of a default

Fixed Rate Mortgage: a mortgage in which the interest rate remains constant over the life of the loan

Good Faith Estimate: a written estimate of the closing costs associated with obtaining a particular mortgage loan

HUD-1: the final settlement statement that is issued by escrow at closing showing the disbursement of all funds taken into escrow

Loan-to-value (LTV): expressed as a percentage; represents the percentage of your home’s value that is taken up by your mortgage(s); example: if your home’s value is $350,000 and your mortgage balance is $248,500, your LTV is 71%.

Margin: in an ARM, the spread between the rate of the index and the rate actually charged to the borrower

Mortgage insurance: an insurance policy paid by the borrower which guarantees the lender that they will be paid back the entire amount of the loan if the borrower defaults

Negative amortization: the process of adding to the principal balance of a loan when the payments do not fully cover the required interest

Points: a "point" is equal to 1% of the loan amount

Prelim: short for "preliminary title report;" a written document about a property which details the liens, easements, ownership and any other recorded items against the property

Prepayment penalty: a charge imposed by a mortgage lender on a borrower who wants to pay off part or all of a mortgage loan in advance of schedule

Principal: the face amount of a mortgage loan

Title: legal evidence of ownership of a property

Title insurance: insurance obtained by the buyer of a house to ensure clear title to the property