Learn About Some Commonly-Used Mortgage Terms
When it comes to real estate, specially financing, there are a wide variety of terms that can be confusing for those who are not in the mortgage industry. Breaking down the technical jargon into everyday terms is key to better understanding commonly-used terms that you will likely come across when buying or selling a home. Here is a short list with basic definitions to help you along the way.
Adjustable-Rate Mortgage (ARM): An adjustable-rate mortgage is a rate that will vary over the duration of the loan based on a variety of indexes that are related to current market conditions.
Appraisal: An appraisal is a report that a professional appraiser provides with the estimated property value based on the current market conditions and the sale prices of other, similar properties on the market.
Amortization: The term “amortization” refers to reduction of capital (by paying off the debt) over a specific period of time.
Balloon Payment: A balloon payment is a lump sum that has to be paid off at the end of the balloon mortgage (typically five to seven years of a fixed-rate mortgage).
Bridge Loan: A bridge loan is a loan that can be obtained for a short period of time and is typically used when someone is buying another home before their current property has sold on the market.
Collateral: Collateral is when a property is used as security. For home mortgages, if the home loans are not paid the property is used as “collateral” and is acquired by the lender through the foreclosure process.
Conventional Loan: A conventional loan is a mortgage that is obtained through the private sector and therefore is not guaranteed by the U.S. government.
Credit Score: A credit score is a number that is determined by equations that examine the credit history of an applicant and is used for loan qualification purposes.
Debt-to-Income-Ratio: A person’s debt-to-income ratio is the comparison of the applicant’s monthly debt to their monthly income and is used by the lender to help determine the approved loan amount.
Deed: A deed is a document that denotes ownership of the property and is transferred from the seller to the buyer.
Deed-in-Lieu: A deed-in-lieu of foreclosure is when the deed to the property is handed over to the lender to fulfill the debt, bypassing the foreclosure process.
Earnest Money: The buyer makes an earnest money deposit to show that they are seriously considering purchasing the property. The deposit is applied to closing costs.
Equity: Equity is the difference in the value of the property (in the current real estate market) and the balance of the loan.
Escrow: In real estate, third-party escrow accounts are used to hold money until the conditions of the transactions are met.
Fair Market Value: The fair market value is the estimated sale price of the home based on the current market conditions and the sale price of other, similar homes on the market.
Fixed-Rate-Mortgage: A fixed-rate-mortgage is a loan in which the interest rate is the same throughout the duration of the loan.
Forbearance: A forbearance temporarily postpones payments for a short period of time. The borrower must request forbearance and the lender has to approve.
Good Faith Estimate: The good faith estimate is the expected charges the borrower will have to pay at closing.
Grace Period: The grace period on a home loan is the time allotted for a payment after the due date before penalties are applied.
Gross Monthly Income: The gross monthly income is the borrower’s income not taking into account taxes or other expenses and is used for loan qualification purposes.
Home Equity Line of Credit (HELOC): The home equity line of credit is when a homeowner takes out a second loan against the equity in the property.
HUD: HUD stands for the United States Department of Housing and Urban Development.
HUD- Statement: The HUD-1 statement is frequently referred to as the “settlement sheet” and provides details on the closing costs.
Interest-Only Mortgage: Interest-only mortgage refers to when the mortgage payments for a period of time consist of only payments toward the interest and are not applied to the principal balance.
Judicial Foreclosure: The judicial foreclosure process is used in several states and requires the case to be approved by a foreclosure judge before it can proceed. (Click here to learn more).
Jumbo Loan: A jumbo loan is a mortgage loan that exceeds a certain value (which changes periodically). These loans tend to have a higher interest rate and cannot be funded by Fannie Mae and Freddie Mac.
Lien: A lien is placed on a property when the home is used as collateral. When the property is sold, liens must be paid off.
Loan-to-Value Ratio: The loan-to-value ratio is the percentage of the property value that is being financed.
Loan Modification: A loan modification is the process of changing the terms of a mortgage.
Maturity: The maturity of a mortgage is the due date of the loan.
Mortgage Insurance Premium (MIP): The mortgage insurance premium is a payment for homeowners insurance that is typically included in the mortgage payment.
Mortgage Broker: The mortgage broker is the company that acts as the loan originator on behalf of a lending company. They are intermediaries between providers and consumers.
No Cash-Out Refinance: In a no cash-out refinance, the purpose of the process is to pay on the balance of an existing loan as well as costs associated with obtaining a new mortgage.
Origination Fee: The origination fee covers costs associated with the processing of the loan and is paid to the lender. Typically the fee is a percentage of the amount being financed.
Owner's Title Policy: The owner’s title policy is extended protection that covers the buyer's initial investment in the property in case there is a title dispute in the future.
PITI: PITI stands for principal, interest, taxes, and insurance. These are the four things that make up your typical monthly mortgage payment.
Pre-Approval: Pre-approval means that the homebuyer has applied for the loan and the mortgage company plans to guarantee the loan based on income, savings, and debt information provided. A pre-approval letter does not require the lender to guarantee the loan.
Principal: For a home loan, the principal is the outstanding debt on the loan that does not take into account interest.
Quitclaim Deed: A quitclaim deed refers to the transfer of a deed when there is not a guarantee that the title of the property is free of liens.
Refinancing: Refinancing is when you obtain another home loan and pay off the first one. Typically this process is used for lower monthly mortgage payments and lower interest rates.
Reverse Mortgage: A reverse mortgage is when a homeowner who is over 62 years-old can start obtaining monthly payments from the equity in their home.
Servicer: The organization that collects the monthly mortgage payments from borrowers.
Survey: A survey shows the precise property boundaries of the property.
Sweat Equity: Sweat equity refers to when homeowners provide improvements to the property that increase the home’s value.
Title: The title is the legal documentation that provides proof of ownership.
Title Search: A title search involves checking the title to ensure that there are not any liens on the property.
Underwriting: In underwriting, the loan application and supporting documents are analyzed to determine the lender’s risk.
Variable Rate: A variable rate is the same as an adjustable mortgage rate in which the interest rate can change throughout the duration of the loan based on market conditions.
VA Loan: A VA loan is a government-backed mortgage by the US Veterans Administration.
Yield Curve: The term “yield curve” refers to a graph of both long-term and short-term rates.
Zero-Down Mortgage: A zero-down mortgage allows the borrower to finance 100% of the purchase price, removing the need for a down payment.
At the end of the day, learning more about mortgage terms can go a long way in helping you navigate the home buying process. If there are other terms that you encounter, never hesitate to ask your real estate agent or mortgage lender.