Adjustable-rate mortgage (ARM)- a mortgage in which the interest rate (and monthly payments) changes at set intervals, based on a specified index. Generally, a lower rate is offered for an initial period and interest rate fluctuation may be capped during each interval and over the life of the loan.

Amortization- gradual payment of a debt and accrued interest over a fixed time through a series of installments. Over the term, the percentage of each installment applied toward principal gradually increases while the amount going toward interest gradually decreases. Payments are made until the debt and accumulated interest are paid in full.

Annual adjustment cap- the maximum amount a rate can fluctuate (either up or down) over a 12-month period. This amount is spelled out in the initial agreement.

Annual percentage rate (APR)- the annual cost of a loan, expressed as a percentage of the amount borrowed. This amount may vary from the interest rate because it also includes closing costs, discount points, mortgage insurance, and other fees. The APR can be used to compare the overall cost of different mortgage options.

Appraisal- a professional, written analysis of a property's value.

Appraised value- the estimated fair market value of a property, determined by an independent professional and based on knowledge, experience, and local market values.



Balloon mortgage- a type of loan that involves making smaller payments at a fixed-rate for a set number of years, followed, at a specified time, by a final single payment (a 'balloon payment') of the remaining principal.

Bi-weekly mortgage- a loan in which payments are made every two weeks for half of the regular monthly amount. By essentially paying an extra month's mortgage payment each year, the principal is paid off over a shorter term.

Buydown- a method of decreasing monthly payments on a loan by making an initial payment upfront. These may be temporary (payments are lower for a short term) or permanent (payments are lower for the entire term).

Cap- the maximum amount a variable rate may increase or decrease over a certain period. The period could be annual, semi-annual, or the lifetime of the loan.

Cash-out refinance- a type of refinancing in which the new loan amount exceeds the amount needed to payoff the original mortgage and associated costs. The borrower receives cash from the equity in their home.

Closing- a meeting between the buyer, seller, and lender that finalizes the purchase or refinance of a property. It is at this meeting that the property legally changes hands, all documents are signed and notarized, funds are disbursed, and fees are paid. Also known as a settlement.

Closing costs- expenses associated with closing on a property. These may include discount points; insurance premiums; origination fees; attorneys' fees; and preparation, filing, credit report and title search fees; among others.

Collateral- property used to secure a loan. Ownership of the property will be transferred to the lender if the loan is not paid.

Combined loan-to-value ratio (CLTV)- a ratio of the total amount due on all loans associated with a property to the current appraised value of the property.

Conforming loan- a loan that meets the requirements for purchase by FNMA (Fannie Mae) or FHLMC (Freddie Mac). Loan limits change annually, based on average sale prices.

Conventional mortgage- a mortgage that is not guaranteed or insured by the federal government.

Convertible mortgage- an adjustable rate mortgage (ARM) or balloon mortgage that can be converted to a fixed-rate mortgage during a predetermined time frame.

Co-signer- a second party who signs a loan, assuming responsibility for repayment, but who does not hold an interest in the property.

Credit report- a report on an individual's credit history prepared by an independent agency or bureau that is used by a lender to help determine if the individual is a good risk. The report may take into account standing and payment history on credit cards, past mortgages, loans, etc.

Credit reporting agency or credit bureau- a company that develops credit reports on individuals based on information from a credit repository and other sources.



Debt-to-income ratio- a ratio comparing the borrower's monthly combined debts with his/her gross monthly income that is used to determine the borrower's capacity to repay the loan. The combined debts may include mortgage payments, insurance premiums, credit cards, car payment, child support, personal loans, etc.

Deed- a legal document that is used to transfer title of property.

Default- failure to comply with the obligations of a contract. Generally used to refer to failure to make payments on a mortgage but includes failure to meet other terms as well.

Discount points- a payment made to the lender by either the buyer or seller to obtain a lower interest rate. One point is equivalent to one percent of amount of the loan.

Down payment- a portion of the purchase price paid in cash upon closing. This amount is not included in the mortgage and generally ranges from 3-20%.



Equal Credit Opportunity Act (ECOA)- a federal law, also known as Regulation B, that prohibits a lender from discriminating in making credit available based on race, color, religion, national origin, age, sex, marital status, or receiving past assistance from public funds.

Equity- The difference between the current fair market value of a property and the amount still owed on the property (remaining mortgage plus any other liens).

Escrow- placing funds and documents with a third party (often with an escrow agent or in an escrow account) until they are needed to pay for certain predetermined aspects of the loan (insurance, taxes, closing costs) or until a certain condition has been met.

Escrow account- the account where escrow funds are held. Borrowers make monthly payments into the account to pay for taxes, insurance, and other expenses. Fair Credit Reporting Act (FCRA)- a federal law that regulates the collection, distribution, and disclosure of consumer credit information and establishes criteria for correcting errors in credit reports.



Fair market value- the amount a home would sell for in the current, local real estate market. Often thought of as the highest amount a willing buyer would pay and the lowest amount a willing seller would accept.

Fannie Mae (FNMA)- another name for Federal National Mortgage Association, a privately owned corporation created by Congress to support the secondary mortgage market through purchasing and securing mortgages.

Federal Housing Administration (FHA)- a federal agency (a division of U.S. Department of Housing and Urban Development (HUD)) that sets standards for underwriting and provides mortgage insurance to lenders to encourage homeownership.

Finance charge- the sum of all fees and interest paid by the borrower over the life of the loan. Fees may include discount points, origination fees, mortgage insurance, some closing costs, and others.

Fixed-rate mortgage- a type of mortgage in which the interest rate does not fluctuate over the term of the loan. Payment amounts and interest rates are determined at the loan's inception.

Foreclosure- a legal procedure in which a mortgaged property is sold after a borrower defaults on a loan. Proceeds from the sale are applied to the outstanding balance on the loan.

Freddie Mac (FHLMC)- another name for the Federal Home Loan Mortgage Corporation, a privately owned, government-sponsored corporation that is a major investor in the secondary mortgage market.



Gift funds/ gift letter- funds given by family and friends toward the purchase of a property without expectation of repayment/ a letter stating the amount of such funds and that they do not have to be repaid.

Good faith estimate (GFE)- a list detailing all of the costs associated with a loan that must be provided to the borrower within three business days of application, as required by the Real Estate Settlement Procedures Act (RESPA).

Gross annual income- total annual income, prior to taxes and deductions, from all sources including, but not limited to, salary.



Homeowners' insurance- insurance that covers a property when damaged due to natural disasters, theft, and fire and generally also includes personal liability and personal property clauses.

Index- an independent published number or rate that is used as the basis for calculating interest rates on adjustable rate mortgages. Some commonly used indexes are Treasury security yields, Libor index, prime rate, or average interest rate.

Initial interest rate- the interest rate in place at the origination of an adjustable rate mortgage (ARM), prior to the first rate adjustment. Often called a 'teaser' rate.

Interest- the amount of money paid to a lender for borrowing money.

Interest rate- a percentage of the total amount of a loan that is charged for borrowing money over a specific period (usually a year)

Jumbo loan- a loan in an amount that exceeds the requirements for purchase by FNMA (Fannie Mae) and FHLMC (Freddie Mac). The loan limit is set annually based on average sale prices. Also known as a non-conforming loan.



Lender- a business or financial institution that makes loans

Lien- a legal claim against a property, usually for payment of a debt.

Lifetime cap- the maximum amount an adjustable rate can increase over the course of a loan.

Loan application- a form submitted by individuals interested in borrowing money from a lender that is used to determine whether a lender will approve a borrower for a mortgage loan.

Loan term- the length of time a borrower is given to pay back a loan, generally 15 or 30 years.

Loan-to-value ratio (LTV)- the ratio, expressed as a percentage, of the remaining unpaid principal on a loan and the appraised value of a property.

Lock-in- a practice in which a lender agreeing to hold a specific interest rate for a borrower for a designated length of time



Margin- the amount added to the index to determine the interest rate. Used in adjustable rate mortgages.

Maturity date- the scheduled date when a loan must be paid in full.

Mortgage- a legal document that gives the lender title to a property to secure funds loaned for the purchase of the property.

Mortgage insurance- insurance that protects the lender if a borrower defaults on a loan. Generally required if the down payment is less than 20%.

Mortgagee- the lender

Mortgagor- the borrower



Negative amortization- an gradual increase in the amount of principal on a loan. This generally occurs when the amount of interest due exceeds the monthly payment. The unpaid interest is then added onto the principal amount.

Non-conforming loan- a loan in an amount that exceeds the requirements for purchase by FNMA (Fannie Mae) and FHLMC (Freddie Mac). The loan limit is set annually based on average sale prices. Also known as a jumbo loan.

Note- a legal document that promises payment of a sum of money and sets forth conditions for the repayment of the loan.

Origination fee- a fee, often expressed as a percentage or points, paid for the processing of a loan.



PITI- principal, interest, taxes, and insurance. The components of a monthly mortgage payment.

PMI- private mortgage insurance. Insurance that protects the lender if a borrower defaults on a loan. Generally required if the down payment is less than 20%.

Payment cap- the maximum amount of a payment may change from one adjustment period to another. If the amount of interest exceeds this amount, negative amortization may occur.

Points- a payment made to the lender by either the buyer or seller to obtain a lower interest rate. One point is equivalent to one percent of amount of the loan.

Preapproval- a process in which a lender thoroughly evaluates financial information provided by a potential borrower and determines the amount of money they would lend. Pre-approval can be used to show sellers that the buyer is capable of making a purchase.

Prepayment penalty- a fee charged when a loan is paid in full before the maturity date, as stipulated in the note.

Prequalification- a process in which a lender offers a non-binding idea of how much money they would offer a borrower based on a review of their basic financial situation.

Prime rate- the best rate banks charge for short-term and home equity line of credit loans.

Principal- the amount of money owed on a loan, excluding interest.

Property tax- an assessment on a piece of real estate paid to a local governmental entity (city, county, etc). Generally a fixed percentage of the value of the property.



Rate cap- the maximum amount a variable rate may increase or decrease over a certain period. The period could be annual, semi-annual, or the lifetime of the loan.

Real Estate Settlement Procedures Act (RESPA)- a federal consumer protection law that requires lenders to disclose costs, relationships, and practices.

Refinancing- the process of paying off an existing loan with the proceeds from a new loan using the same property as collateral. Often done to secure a lower interest rate or to take cash out of equity.

Rescission- the cancellation of a contract. Generally, borrowers have three days after refinancing to cancel the loan.

Settlement- a meeting between the buyer, seller, and lender that finalizes the purchase or refinance of a property. It is at this meeting that the property legally changes hands, all documents are signed and notarized, funds are disbursed, and fees are paid. Often called a closing.



Tax rate- the percentage of a person's income paid to the government.

Tax savings- the amount of money an individual is able to withhold from their taxes, based on itemized deductions related to homeownership.

Term- the length of time a borrower is given to pay back a loan, generally 15 or 30 years.

Title- a legal document that provides proof of an individual's right to ownership of a property.

Title insurance- insurance that protects the lender from liens, defects, and inconsistencies in the title. Title insurance is also available for the homeowner.

Title search- a thorough examination of public records related to a property to verify ownership of the property and ensure that there are no liens or claims on it.

Total housing expense- the sum of all housing related costs including mortgage, insurance (homeowners and mortgage), interest, taxes, and other assessments and fees.

Truth-in-Lending Act- a federal law that requires lenders to provide written notice of all fees and conditions associated with a loan. The document can be used to compare loans from different financial institutions.

Underwriting- the process of analyzing a borrower's creditworthiness and the property to determine the risk to the lender and the amount and rate of the loan.

VA- the Department of Veterans Affairs, a federal agency that guarantees loans made to qualified veterans.