Mortgage Glossary

Adjustable rate mortgage (ARM): The interest rate on this mortgage loan fluctuates according to market conditions at the time of the lender's periodic adjustments made during the loan's term and are determined by a pre-selected index and margin. ARMs typically have limits on the frequency of rate adjustments, as well as caps on interest rate changes and on increases over the life of the loan.

Bad credit mortgage loan: This type of loan, which is geared towards individuals with a poor credit score, usually requires collateral (usually 25% at minimum) and a large down payment. Bad credit mortgage loans enable borrowers to raise their FICO score through timely mortgage payments and eventually qualify for a conforming or subprime loan.

Closing: At this meeting, the seller transfers ownership of the property to the purchaser and is paid, and the borrower pays the escrow amount and signs documents finalizing the sale.

Collateral: This is the security that a borrower pledges for repayment of a mortgage loan or other obligation. In the case of a mortgage, the property operates as the collateral for the loan. Upon default by the borrower, the lender may seize and sell the collateral to pay off the loan.

Commercial mortgage: With this type of loan, land and buildings, or non-residential property, may be financed in exchange for collateral securing payment of interest and principal. The commercial mortgage lender maintains a legal claim over the collateral until the borrower pays off the loan.

Conforming home loan: This home mortgage is typically sold at a discount on the secondary market to the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae), two entities that resell them to investors. Home loans sold to Fannie Mae or Freddie Mac must meet strict eligibility requirements and remain within established loan limits, which vary from year to year. A conforming loan is a loan that does not exceed Fannie Mae's or Freddie Mac's limits and that satisfies its qualifying criteria.

Credit history: The three leading consumer reporting agencies compile the information contained in this official record, which tracks a consumer's past and present debt history and enables home lenders to ascertain a prospective borrower's ability to repay credit. Credit history includes public records such as bankruptcies and monetary judgments, identification data, outstanding balances, and repaid debts.

Credit report: This official record provides detailed data on a loan applicant's credit and payment history, which in turn is relied upon by lenders to assess the former's credit worthiness. The four main categories in a credit report are 1) recent inquiries, 2) public record information (i.e. tax liens, court judgments, bankruptcy), 3) credit information (i.e. loan amount, credit limit), and 4) identifying information. Credit reports are prepared by the three leading credit bureaus in the United States, namely Experian, Equifax, and Trans Union.

Debt consolidation: This debt management strategy involves paying off multiple, high-interest consumer loans (i.e. credit cards) with a single loan or home equity line of credit offering lower monthly payments and a longer repayment period. For mortgage purposes, homeowners may apply consolidate by obtaining a second mortgage or refinancing their first mortgage. The low-rate loan used for consolidation is generally secured on property.

80-20 mortgage: Also referred to as 80/20 financing, 100 percent financing, or a zero-down mortgage, this type of loan allows individuals to purchase a home with practically no down payment. It is ideal for credit-worthy individuals with limited funds. By obtaining a piggyback loan or second mortgage, borrowers may avoid paying private mortgage insurance (PMI). The first mortgage covers 80% of the property's cost, and the second mortgage is provided for 20 percent. Together, the two mortgages enable borrowers to buy a home with no money down.

Federal Home Loan Mortgage Corporation (Freddie Mac): This congressionally-chartered federal agency purchases first or second residential conventional home mortgages at a discounted rate from lenders and resells them on the secondary market.

Federal Housing Administration (FHA) loan: This residential mortgage, which is backed by the Department of Housing and Urban Development (HUD) and the Federal Housing Administration in the event of borrower default, is available to all eligible home buyers. FHA loans are designed for families in the low-to-middle income bracket, and their loan amount ceilings differ according to the type of home and region.

Federal National Mortgage Association (Fannie Mae): This government-sponsored, private corporation buys conventional residential home mortgages from creditors at a discount and constitutes the most important source of financing for mortgage lenders. Fannie Mae, whose stocks are traded on the New York Stock Exchange, also purchases and sells VA and FHA mortgages.

Fixed-rate mortgage: This long-term loan, which enables borrowers to purchase real property, boasts a steady interest rate and monthly payments throughout the life of the loan, which is typically 15 or 30 years. If the fixed-rate mortgage is paid off during the term, early repayment fees might be applicable.

Foreclosure: This is a legal proceeding whereby a creditor acquires possession of the property serving as collateral for the mortgage loan upon the borrower's default. The security interest (i.e. home) is sold, and its proceeds are applied towards satisfaction of the debt.

Fully-indexed rate (FIR): This is the present value of an ARM's rate index in addition to a margin which differs from one transaction to the next, but remains the same throughout the life of the loan. The FIR provides a reliable estimate of the rate at the first adjustment. When shopping for an ARM, consumers should select the one with the lower FIR.

Home equity: This represents a homeowner's financial interest in real property. Home equity is calculated by subtracting the outstanding balance of the mortgage or loan and claims against the property from its fair market value. In other words, home equity represents the difference between the property's value and the amount that a homeowner owes on his or her mortgage.

Home equity line of credit (HELOC): Also referred to as a second mortgage, this is a form of open-ended, revolving loan that utilizes the borrower's home as security or collateral and allows him or her to draw funds on the line. Borrowers are only required to pay the interest each month on the sum that they have drawn on their HELOC. Lenders generally limit the amount borrowed to 75 to 85% of the property's appraised value.

Home equity loan: This variable or fixed-rate, revolving loan enables individuals to borrow against their home equity for a wide range of purposes ranging from college education and debt consolidation to major expenditures and home improvements. A homeowner's residence is used as collateral in exchange for a line of credit against which cash can be drawn.

Home improvement loan: This type of loan, in which the borrower's property is used as collateral, is extended to homeowners for purposes of financing home improvements. Home improvement loans may finance improvements for solar installation, energy conservation, modernization, and rehabilitation.

Home inspection: This constitutes a thorough, pre-closing inspection of a home's physical state, including its construction, electrical and plumbing systems, appliances, and structure by an inspector. The purpose of a home inspection is to ascertain the property's condition and safety and to put home purchasers on notice of necessary repairs. Home inspections should be completed by the closing date in order to ensure that repairs are effectuated prior to the sale of the home.

Home insurance: This form of property insurance, protects homeowners against 1) damage to the home and its contents, 2) loss of use, and 3) personal liability. Home insurance protects policyholders from perils such as smoke damage, lightning, theft, and vandalism.

Interest: This represents the cost of borrowing money. Consumers pay a fixed percentage of the funds borrowed as payment to the creditor for use of the principal.

Interest-only mortgage: With this type of loan, borrowers' monthly payments consist of interest accrued on the mortgage. Interest-only mortgages usually translate into lower monthly payments. At the end of the interest-only period, the borrower repays the remaining balance or principal over the remaining years left on the mortgage.

Interest-rate index: This measures interest rates, such as the Treasury Bill rate, LIBOR, and the prime rate. Interest-rate indexes are utilized by creditors to set the interest rates on the mortgages they sell or to obtain a comparison of investment returns.

Jumbo mortgage: Also referred to as a non-conforming mortgage, this type of loan exceeds the conforming loan limits established by Freddie Mac and Fannie Mae. A jumbo mortgage is typically a loan of more than $252,700.

Loan-to-value (LTV) ratio: This represents the ratio of the mortgage loan amount to the appraised value or purchase price, whichever is lower, of the property serving as security or collateral for the loan. LTV is expressed in percentage form and indicates the amount of equity that a borrower can expect to have in a home.

Mortgage Bankers Association (MBA): This national organization militates in favor of ethical and fair lending practices and represents the real estate finance industry. It ensures a solid real estate market, expands access to affordable housing, and works to increase home ownership and financial literacy.

Mortgage broker: This professional acts as an intermediary between lenders and borrowers, providing the latter with a wide selection of loan products from multiple lenders and at competitive mortgage rates. Mortgage brokers provide counseling on the loans available, accept applications, as well as process and underwrite loans.

Mortgage calculator: An online tool that helps home purchasers calculate the monthly interest and principal on a mortgage by entering the interest rate and home loan amount. Mortgage calculators also enable users to view the financial impact of modifications in the following variables- monthly payment amount, total number of payments, and the principal balance on their loan.

Mortgage lenders: These are institutions (i.e. credit unions and banks) and companies (i.e. life insurance companies, trust companies) that lend funds to individuals for the purchase of real estate. Mortgage lenders also perform a financial and credit review and manage the loan application process and property through closing.

Mortgage rate: This refers to the interest rate or cost that consumers pay to obtain a mortgage loan and is expressed as a percentage.

Mortgage refinancing: In this process, homeowners utilize the proceeds from a new mortgage backed by the same collateral to pay off an existing mortgage. Before refinancing, borrowers should weigh the refinancing fees against the savings in interest. Mortgage refinancing enables consumers to obtain a lower interest rate and reduce their monthly mortgage bills. It also offers them a shorter mortgage term and allows them to change from a fixed-rate to an adjustable-rate mortgage.

National Association of Mortgage Brokers (NAMB): This national organization represents the interests of both home purchasers and mortgage brokers in the United States. Its members agree to abide by a code of best lending practices and ethics that emphasizes honesty, confidentiality, and professionalism.

Non-conforming loans: These are conventional home mortgages that do not conform to Freddie Mac or Fannie Mae guidelines, which set forth the income and credit requirements, down payment, maximum loan amount, and eligible properties. Non-conforming loans are also referred to as jumbo loans.

Office of Federal Housing Enterprise Oversight (OFHEO): This independent federal agency, which is part of the Department of Housing and Urban Development, is charged with ensuring the financial security and health as well as the capital sufficiency of Freddie Mac and Fannie Mae, the two leading players in the secondary home loan market.

Payment adjustment cap: This is a limitation on the percentage or amount that payments may increase at each adjustment.

Periodic cap: This is a ceiling on the maximum level that a rate of interest on an adjustable mortgage (ARM) can increase in a specific period of time, typically 6-12 months.

Piggyback mortgage: This type of loan consists of a first mortgage covering 80% of the cost and a second mortgage financing the outstanding balance, or 10-20% of the loan amount. Piggyback mortgages enable consumers to avoid payment of private mortgage insurance (PMI) and to pay a reduced rate of interest on the first mortgage.

Points: Alternatively dubbed discount points, these are one-time charges, expressed as a percentage of the loan amount, that borrowers pay creditors for issuing the funds. One point is equivalent to one percent of the mortgage amount. Points often reduce the interest rate on mortgages, thus enabling borrowers to benefit from lower monthly payments.

Pre-approved mortgage loan: With this type of loan, a creditor examines a prospective borrower's income and credit report and determines whether he or she is eligible for a loan. The lender determines the maximum loan amount, the amount needed for closing costs and a down payment, the type of loan programs and home that the borrower qualifies for, and the interest rate it is willing to extend.

Predatory lending: This term refers to a host of deceptive, abusive practices on the part of lenders who attempt to persuade prospective borrowers to accept one-sided and unfair loan terms. Some of the most common predatory lending tactics include the following: 1) exorbitant interest rates and excessive fees, 2) loan flipping, 3) abusive pre-payment penalties, and 4) kickbacks to brokers.

Principal: This represents the initial amount of a loan or the face amount of a mortgage on which interest is computed as a percentage and which remains unpaid. The principal excludes interest, costs, and fees. A borrower's monthly mortgage bill is directed to both the principal and the interest.

Private mortgage insurance (PMI): This type of loan insurance, which provides protection to lenders faced with borrower default, is required where the down payment comprises less than 20% of the home's sales price. Borrowers make the PMI premium payments, which are included in the monthly payment bills.

Refinance rate: This refers to the new interest rate that applies when a mortgage is refinanced and a new home loan with a lower interest rate replaces the existing loan. The refinance rate, which is calculated by utilizing the loan-to-value ratio, enables borrowers to reduce their monthly payment. The loan term and the amount of the loan determine the new interest rate.

Reverse mortgage: This home equity loan enables borrowers to receive tax-free payments from the lender for life in exchange for pledging his or her property as collateral. Reverse mortgages provides elderly individuals with funds from their home equity on the condition that they treat their property as their principal residence. The reverse mortgage is only repaid when the home is sold or the property owner moves or dies.

Second home mortgage: This is a mortgage against a home that already has a mortgage, and its rights are secondary to those of the first mortgagee. Upon default by the borrower, the property is sold, and the proceeds are disbursed to the second mortgagee only after the first mortgagee is paid off.

Secured home improvement loan: This type of loan protects creditors by ensuring payment of the funds borrowed with the same property targeted for improvement. Individuals with enough equity in their homes can easily qualify for a secured home improvement loan, irrespective of their credit standing.

Subprime mortgage: This loan product is designed for individuals with poor credit resulting from late or missed payments, among other credit-tarnishing items. Subprime borrowers usually pay a higher interest rate due to the risks (i.e. default) they pose to lenders.