Mortgage Types and Terms

Acceleration: The exercise of a clause which gives the mortgagee the right to declare the entire loan due prior to maturity under certain specified conditions, usually default.

Adjustable Rate Mortgage (ARM): A mortgage in which the interest rate is adjusted periodically according to the movement in a pre-selected index.

Amenity: A feature that enhances property value.

Amortization Schedule: A timetable for payment of a mortgage showing the amount of each payment applied to interest and principal and the remaining balance.

Amortize: Reduce a debt by regular payments of both principal and interest.

AMP: Automatic mortgage payment.

Annual Cap: The highest or lowest amount the interest rate of an ARM loan can increase or decrease in any one year.

Annual percentage Rate (APR): The total yearly cost of a mortgage stated as a percentage of the loan amount; includes the base interest rate, primary mortgage insurance, and loan origination fee (points).

Appraisal: A professional opinion of the market value of a property.

Appreciation: An increase in the value of a house due to changes in market conditions or other causes.

Assessed Valuation:   The value that a taxing authority places upon property for the purposes of taxation.

Balloon Mortgage:  A mortgage with periodic installments of principal and interest that do not fully amortize the loan. The balance of the mortgage is due in a lump sum at a specified date, usually at the end of the term.

Bridge Loan: An interim loan given to finance the difference between the construction loan and the maximum permanent loan as committed or when unable to sell current home before purchasing a new home.

Buydown Mortgage: A mortgage with a below-market interest rate made by a lender in return for an interest rate subsidy in the form of additional discount points paid by the builder, seller or buyer.

Cap (or Rate Cap): The maximum allowable interest rate or payment increase on adjustable-rate mortgages.

Closing: In real estate, the delivery of a deed, financial adjustment, the signing of notes, and the disbursement of funds necessary to consummate a sale or loan transaction.

Closing Costs: Fees paid to affect the closing of a mortgage, such as an origination fee, discount points, title insurance fees, survey fees, and attorney’s fees.

Conventional Loan: A mortgage financing which is not insured or guaranteed by a government agency such as HUD/FHA, VA or the Farmers Home Administration.

Conversion Option: The option to switch the ARM mortgage to a fixed-rate mortgage.

Convertible ARM: An adjustable-rate mortgage that can be converted to a fixed-rate mortgage under specified conditions.

Deed: A written document signed, delivered, and usually recorded, which conveys title of the property from the seller to the borrower.

Disclosures: Information required by law relevant to specific transactions given to borrowers, sellers, and agents.

Discount Point: Amount payable to the lending institution by the borrower or seller to increase the lender’s effective yield. One point is equal to one percent of the loan.

Down Payment: The difference between sales price and loan amount.

Earnest Money: A sum of money given to bind a sale of real estate, or assure payment or an advance of funds in the processing of a loan; a deposit.

Easement: A right to the limited use or enjoyment of land held by another.  Also, an interest in land to enable sewer or other utility lines to be laid, or to allow access to a property.

Escrow Account: An account to which a borrower makes monthly installment payments for property taxes, insurance, and special assessments, and from which the lender disburses the sum as payments become due.

FHA Loan: A loan insured by the Federal Housing Administration (FHA), open to all qualified home purchasers. While there are limits to the size of FHA loans, they are generous enough to handle moderately priced homes almost anywhere in the country.

Fixed-Rate Mortgage (FRM): A mortgage in which the buyer contracts for a specified interest rate over a specified period of time. The principal and interest payment does not vary.

Funding Fee:  The insurance premium that is collected up front on a VA loan to insure the lender against loss. This premium may be paid in cash or financed over the life of the loan. The amount of the premium is based on the loan-to-value ratio. There is no refund on any portion of this premium.

Good-Faith Estimates: A requirement that lenders provide borrowers with an estimate of settlement service charges the borrower is likely to incur. A Good-Faith Estimate must be provided by the lender within three business days of receiving a signed loan application.

Graduated Payment Mortgage (GPM): A mortgage with a structured repayment schedule to enable borrowers to meet monthly payments. The monthly payments rise at a set rate over a set period of time and then become constant for the remaining term of the loan. Negative amortization occurs during the first few years since the initial payments do not cover the interest due on the loan.

Homeowners Association Dues: The fees charged to homeowners in either a condominium or a planned unit development for upkeep of common areas.

Insured Loan: A loan insured by FHA or a private mortgage insurance (PMI) company.

Lifetime Cap: A provision of an ARM that limits the total increase in interest rates over the life of the loan.

Lock In: Interest rates and discount points are guaranteed for a period of time; loan must be closed prior to expiration of lock-in period.

Origination Fee: The fee mortgage lenders charge to borrowers for preparing loan documents, making credit checks, etc.; usually computed as a percentage of the face value of the loan. This fee is usually paid by the buyer unless other arrangements are made.

Payment Buydown: Payment buydowns occur when a third party, typically a builder, pays part of the initial P&I payments for a year or two, so that the borrower has smaller payments and can qualify for the loan.

PITI: Principal, Interest, Taxes, and Insurance are components of a mortgage payment.

Point: An amount equal to one percent of the principal amount of a mortgage.

Pre-qualification: Loan application package processed and submitted for credit approval when no subject property has been chosen by the borrower.

Prepaid Interest: Mortgage interest that is paid in advance of when it is due, to obtain tax advantages.

Principal: Amount of loan excluding interest or other charges.

Private Mortgage Insurance (PMI): Insurance written by a private company, protecting the mortgage lender against financial loss occasioned by a borrower defaulting on the mortgage.

Title Insurance Policy: A contract by which the insurer agrees to pay the insured a specific amount for any loss caused by defects of title to real estate, wherein the insured has an interest as purchaser, mortgage, or otherwise.

Title: A legal document establishing the right of ownership.

VA Loan: A mortgage offered to eligible veterans and guaranteed by the Veterans Administration.