Mortgage Terminology

Acceleration clause is a provision in a mortgage that allows the lender to demand payment of the entire principal balance if a monthly payment is missed or some other default occurs. 

Additional principal payment is a way to reduce the remaining balance on the loan by paying more than the scheduled principal amount due. 

An adjustable-rate mortgage is a loan with an interest rate that changes according to an index. Payments may increase or decrease according to shifts in that index. Generally, you can expect to make lower initial payments with an ARM. If interest rates increase over time, your monthly payments may increase, too. 

Adjustment cap is a set limit on how much the interest rate or the monthly payment can increase, either at each adjustment or during the life of the mortgage. Payment caps don’t limit the amount of interest the lender is earning and may cause negative amortization. 

Adjustment date is the date that the interest rate changes on an adjustable-rate mortgage (ARM). 

Adjustment period is the period elapsing between adjustment dates for an adjustable-rate mortgage (ARM). 

Affordability analysis is an analysis of a buyer’s ability to afford the purchase of a home. It includes a review of 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 is the gradual repayment of a mortgage loan, both principal and interest, by installments. 

Annual percent rate is the cost of credit articulated as a yearly rate. APR is not an interest rate. It’s a way to measure the total cost of credit. It considers interest, origination fees, loan discounts, transaction charges, and any premiums for credit-guarantee insurance. APR is designed to give you a tool for comparing the costs of similar loans. 

Application fee is the cost for applying for a loan or line of credit. This fee may include the cost of pulling a credit report. 

A home appraisal is a written analysis prepared by a qualified appraiser estimating the value of a property. 

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

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

Assignment is the transfer of a mortgage from one person to another. 

Assumability means an assumable mortgage can be transferred from the seller to the new buyer. Generally, it requires a credit review of the new borrower and lenders may charge a fee for the assumption. If a mortgage contains a due-on-sale clause, it may not be assumed by a new buyer. 

Assumption fee is paid to a lender (usually by the purchaser of real property) when an assumption takes place. 

Certificate of Eligibility is a document issued by the federal government certifying a Veteran’s eligibility for a Department of Veterans Affairs (VA) mortgage.

Certificate of Reasonable Value is a document issued by the Department of Veterans Affairs (VA) that establishes the maximum value and loan amount for a VA mortgage.

Change frequency is the frequency (in months) of payment and/or interest rate changes in an adjustable-rate mortgage (ARM). 

Closing refers to the transfer of ownership from the seller to the buyer. It includes the completion of all necessary paperwork and the payment of closing costs. In a mortgage situation, it also refers to the disbursement of funds from the lender to the seller. In refinancing, closing refers to the final payment of the existing loan with the refinanced loan. Also called “settlement.” 

Closing costs 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. There are mortgage loans that offer “no closing cost” options. 

Collateral is the property being offered to a borrower from a lender, used to secure a loan. If a borrower ever defaults on their loan, the lender can reclaim the property. This offers security to the lender, thus typically resulting in lower loan interest rates than unsecured loans. 

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

Consumer reporting agency is an organization that handles the preparation of reports used by lenders to determine a potential borrower’s credit history. The agency gets data for these reports from a credit repository and from other sources. 

Conversion clause is a provision in an ARM allowing the loan to be converted to a fixed rate at some point during the term. Usually, conversion is allowed at the end of the first adjustment period. The conversion feature may cost extra. 

Co-signer is a person who does not have any ownership of the property but will take financial responsibility to pay back unpaid debts if the borrower defaults on their loan. 

Credit is the ability of a customer to obtain funds, goods, or services before payment based on the trust that payment(s) will be made in the future. 

Credit report is a report detailing an individual’s credit history that is prepared by a credit bureau and used by a lender to determine a loan applicant’s creditworthiness. 

A credit risk score measures a consumer’s credit risk relative to the rest of the U.S. population, based on the individual’s credit usage history. The credit score most widely used by lenders is the FICO® score, developed by Fair, Isaac and Company. 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. In general, credit scores are critical in the mortgage loan underwriting process.

Effective gross income is 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 is 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. Also called home equity.

Escrow is 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 that are to be disbursed upon the closing of a sale of real estate. 

Escrow disbursements are the use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, and other property expenses as they become due. 

Escrow payment is the part of a mortgagor’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.

Ginnie Mae (GNMA) is a wholly-owned government corporation that offers government-insured loans like FHA, VA, PIH, and RD. Ginnie Mae is not a Government Sponsored Enterprise (GSE). To understand the difference, please visit GinnieMae.gov.

Good faith estimate (GFE) is the list of the settlement charges that you must pay at the closing. The lender must provide this to you within three business days of receiving the mortgage application.

Growing-equity mortgage (GEM) is a fixed-rate mortgage that provides scheduled payment increases over an established period of time. The increased amount of the monthly payment is applied directly toward reducing the remaining balance of the mortgage. 

Index is the measure of interest rate changes a lender uses to decide the amount an interest rate on an ARM will change over time. The index is generally a published number or percentage, such as the average interest rate or yield on Treasury bills. Some index rates tend to be higher than others and some more volatile. 

Initial interest rate refers to the original interest rate of the mortgage at the time of closing that runs through an agreed upon number of months known as the initial rate period. This rate changes for an adjustable-rate mortgage (ARM).

Installment is the regular periodic payment that a borrower agrees to make to a lender. 

Insured mortgage is a mortgage that is protected by the Federal Housing Administration (FHA) or by private mortgage insurance (MI). 

Interest is the fee charged for borrowing money. 

Interest rate is the rate a lender charges you each period for the loan. See fixed-rate mortgage and adjustable-rate mortgage. 

Interest accrual rate is the percentage rate at which interest accrues on the mortgage. In most cases, it is also the rate used to calculate the monthly payments. 

Interest rate ceiling for an adjustable-rate mortgage (ARM) is the maximum interest rate, as specified in the mortgage note. 

Interest rate floor for an adjustable-rate mortgage (ARM) is the minimum interest rate, as specified in the mortgage note. 

Interest-only mortgage is a mortgage that gives the borrower the option of paying only the interest portion of a payment without paying on the principal balance. 

Margin is the difference in percentage points between the index rate and the adjustable-rate mortgage interest rate (ARM) at each adjustment. 

Maturity is the date on which the principal balance of a loan becomes due and payable. 

Minimum payment is the lowest payment you need to pay to stay in good standing. On an interest-only loan, it only includes the interest, but most of the time, it includes both principal and interest. 

Monthly fixed installment is the portion of the total monthly payment that is applied toward principal and interest. When a mortgage negatively amortizes, the monthly fixed installment does not include any amount for principal reduction and doesn’t cover all of the interest. The loan balance therefore increases instead of decreasing. 

Mortgage is a legal document that pledges a property to the lender as security for payment of a debt. Also refers to the loan used to purchase property that is paid back over time. Many different types of mortgages are available depending on a borrower’s needs and financial status. 

Mortgage banker is a company that originates mortgages exclusively for resale in the secondary mortgage market. 

Mortgage broker is an individual or company that brings borrowers and lenders together for the purpose of loan origination. 

Mortgage insurance is a contract that insures the lender against loss caused by a mortgagor’s default on a government mortgage or conventional mortgage. Mortgage insurance can be issued by a private company or by a government agency.

Mortgage insurance premium (MIP) is the amount paid by a mortgagor for mortgage insurance. 

A mortgage lien is a legal claim to your property, which serves as collateral for your mortgage, if you default on your loan. 

Mortgage life insurance is a type of term life insurance. In the event that the borrower dies while the policy is in force, the debt is automatically paid by insurance proceeds. 

Mortgagor is the borrower in a mortgage agreement. 

Origination fee is a fee paid to a lender for processing a loan application.

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

Qualifying ratios are calculations used to determine if a borrower can qualify for a mortgage. They consist of two separate calculations: a housing expense as a percent of income ratio and total debt obligations as a percent of income ratio. 

Secondary mortgage market is where existing mortgages are bought and sold.

SOFR stands for Secured Overnight Financing Rate, and it’s a benchmark interest rate used to measure the cost of borrowing cash overnight that’s collateralized by U.S. Treasury securities. Financial institutions use SOFR to set interest rates for other businesses and borrowers. 

Seller carry-back is an agreement in which the owner of a property provides financing, often in combination with an assumable mortgage. See owner financing. 

Servicer is an organization that collects principal and interest payments from borrowers and manages borrowers’ escrow accounts. The servicer often services mortgages that have been purchased by an investor in the secondary mortgage market. 

Settlement costs are costs that you are obligated to pay at the time of closing. These are more commonly called closing costs. 

Standard payment calculation is the method used to determine the monthly payment required to repay the remaining balance of a mortgage in substantially equal installments over the remaining term of the mortgage at the current interest rate. 

Step-rate mortgage is a mortgage that allows for the interest rate to increase according to a specified schedule (i.e., seven years), resulting in increased payments as well. At the end of the specified period, the rate and payments will remain constant for the remainder of the loan. 

Underwriting is the process of evaluating a loan application to determine the risk involved for the lender. Underwriting involves an analysis of the borrower’s creditworthiness and the quality of the property itself. 

USDA loan is a loan guaranteed by the U.S. Department of Agriculture that can be used to buy or repair a home in designated rural areas. 

Zero point/zero fee loan is a loan where you pay no points or fees upfront. You pay a higher interest rate, and the lender pays the closing costs. In the 1990s, this was a popular loan for first-time buyers and refinancing, but it was not advantageous for people wanting to stay in their dwelling for a long period of time.