GLOSSARY OF TERMS

Adjustable-Rate Mortgage (ARM)
A mortgage with an interest rate that changes during the life of the loan according to movements in an index rate. Sometimes called AMLs (adjustable mortgage loans) or VRMs (variable-rate mortgages).

Affordability Analysis
An analysis of a buyer’s ability to afford the purchase of a home. Reviews income, liabilities, and available funds, and considers the type of mortgage you plan to use, the area where you want to purchase a home, and the closing costs that are likely.

Amortization
The gradual repayment of a mortgage loan, both principal and interest, by installments.

Amortization Term
The length of time required to amortize the mortgage loan expressed as a number of months. For example, 360 months is the amortization term for a 30-year fixed-rate mortgage.

Annual Percentage Rate (APR)
The cost of credit, expressed as a yearly rate including interest, mortgage insurance, and loan origination fees. This allows the buyer to compare loans, however APR should not be confused with the actual note rate.

Appraisal
A written analysis prepared by a qualified appraiser and estimating the value of a property.

Appraised Value
An opinion of a property’s fair market value, based on an appraiser’s knowledge, experience, and analysis of the property.

Asset
Anything owned of monetary value including real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, etc.).

Balance Sheet
A financial statement that shows assets, liabilities, and net worth as of a specific date.

Balloon Mortgage
A mortgage with level monthly payments that amortizes over a stated term but also requires that a lump sum payment be paid at the end of an earlier specified term.

Balloon Payment
The final lump sum paid at the maturity date of a balloon mortgage.

Before-tax Income
Income before taxes are deducted.

Broker
An individual or company that brings borrowers and lenders together for the purpose of loan origination.

Closing
A meeting held to finalize the sale of a property. The buyer signs the mortgage documents and pays closing costs. Also called “settlement.”

Closing Costs
These are expenses—over and above the price of the property—that are incurred by buyers and sellers when transferring ownership of a property. Closing costs normally include an origination fee, property taxes, charges for title insurance and escrow costs, appraisal fees, etc. Closing costs will vary according to the area and the lenders used.

Compound Interest
Interest paid on the original principal balance and on the accrued and unpaid interest.

Deposit
This is a sum of money given to bind the sale of real estate, or a sum of money given to ensure payment or an advance of funds in the processing of a loan.

Down Payment
Part of the purchase price of a property that is paid in cash and not financed with a mortgage.

Effective Gross Income
A borrower’s normal annual income, including overtime, that is regular or guaranteed. Salary is usually the principal source, but other income may qualify if it is significant and stable.

Equity
The amount of financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on the mortgage.

Escrow
An item of value, money, or documents deposited with a third party to be delivered upon the fulfillment of a condition. For example, the deposit of funds or documents into an escrow account to be disbursed upon the closing of a sale of real estate.

Escrow Payment
The part of a mortgager’s monthly payment that is held by the servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due.

FHA Mortgage
A mortgage that is insured by the Federal Housing Administration (FHA). Also known as a government mortgage.

FICO Score
FICO® scores are the most widely used credit score in U.S. mortgage loan underwriting. This 3-digit number, ranging from 300 to 850, is calculated by a mathematical equation that evaluates many types of information that are on your credit report. Higher FICO® scores represent lower credit risks, which typically equate to better loan terms.

Fixed-Rate Mortgage (FRM)
A mortgage interest that are fixed throughout the entire term of the loan.

Housing Expense Ratio
The percentage of gross monthly income budgeted to pay housing expenses.

Interest
The fee charged for borrowing money.

Loan
A sum of borrowed money (principal) that is generally repaid with interest.

Owner Financing
A property purchase transaction in which the party selling the property provides all or part of the financing.

Points
A point is equal to one percent of the principal amount of your mortgage. For example, if you get a mortgage for $165,000 one point means $1,650 to the lender. Points usually are collected at closing and may be paid by the borrower or the home seller, or may be split between them.

Prepayment Penalty
A fee that may be charged to a borrower who pays off a loan before it is due.

Pre-Approval
The process of determining how much money you will be eligible to borrow before you apply for a loan.

Prime Rate
The interest rate that banks charge to their preferred customers. Changes in the prime rate influence changes in other rates, including mortgage interest rates.

Principal
The amount borrowed or remaining unpaid. The part of the monthly payment that reduces the remaining balance of a mortgage.

Principal Balance
The outstanding balance of principal on a mortgage not including interest or any other charges.

Principal, Interest, Taxes, and Insurance (PITI)
The four components of a monthly mortgage payment. Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the monthly cost of property taxes and homeowners insurance, whether these amounts are paid into an escrow account each month or not.

Private Mortgage Insurance (PMI)
Mortgage insurance provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults. Most lenders generally require mortgage insurance for a loan with a loan-to-value (LTV) percentage in excess of 80 percent.

Real Estate Agent
A person licensed to negotiate and transact the sale of real estate on behalf of the property owner.

Real Estate Settlement Procedures Act (RESPA)
A consumer protection law that requires lenders to give borrowers advance notice of closing costs.

Realtor®
A real estate broker or an associate who is an active member in a local real estate board that is affiliated with the National Association of Realtors.

Refinance
Paying off one loan with the proceeds from a new loan using the same property as security.