Is your bank or broker confusing you with big words? Do you want to sound a whole lot savvier when handling your mortgage transaction?
This mortgage glossary is a good place to hone up on your mortgage vocabulary to make sense of what can be a very confusing process.
The more you know about seemingly complicated mortgage terms, the more fear you’ll instill in your bank or broker. Outsmart them early on and they’ll think twice before trying to overcharge you.
Check out the ever-expanding “mortgage dictionary” below. Be sure to click on the hyper-linked terms to get a more detailed definition where applicable:
1031 Exchange – a tax-deferred exchange of real estate employed to offset or even avoid capital gains tax.
15-Year Fixed Mortgage – a fixed-rate home loan that has half the typical term of 30 years.
203k Loan – an FHA loan that allows you to finance home improvements and permanent financing in a single mortgage loan.
5/1 ARM – An ARM that doesn’t have its first adjustment until year six, and then adjusts once annually thereafter.
Adjustable-Rate Mortgage (ARM) – a mortgage with a variable interest rate, which adjusts monthly, biannually, or annually. Option-arms and hybrid mortgages are also considered adjustable-rate mortgages.
Alt-A Mortgage – a home loan that isn’t prime or subprime, but somewhere in the middle.
Amortization – the way a loan is paid off over time in installments, detailing how much goes toward interest, and how much is paid toward principal.
Annual Percentage Rate (APR) – the actual interest rate you pay on your mortgage, which factors in fees, points, and other costs associated with the loan.
Annual Percentage Yield (APY) – the annual interest rate taking into account the frequency and cost of compounding interest.
Assumption – the act of assuming responsibility for the payment of a mortgage lien.
Balloon Mortgage – a short-term mortgage with small monthly installments and a large lump sum due at the end of the loan term. An example would be a 30 due in 15, which amortizes like a 30 year fixed, but is due 15 years earlier.
Biweekly Mortgage – a mortgage where 26 half payments, or 13 full payments, are made annually.
Bridge Loan – a short term loan taken out against one property to finance the purchase of a new property.
Buy-Down – the act of securing a lower than par interest rate by paying the bank a lender a premium.
Caps – initial, periodic, and lifetime payment caps which limit how much and how frequently an interest rate can change on an adjustable-rate mortgage.
Cash-In Refinance – a refinance transaction where borrowers bring money to the closing table to lower their mortgage balance.
Certificate of Reasonable Value (CRV) – an appraisal issued by the Veterans Administration to determine the value of a property. The loan amount may not exceed the CRV on a VA loan.
Closing – the final step in the loan process when loan documents are signed at an escrow or title company.
Closing Costs – the amount of money that must be paid to close your loan, including lender fees and third-party charges, along with taxes and transfer fees.
Combo Loan – a first and second mortgage used concurrently to finance a property.
Conforming Loan – a loan that meets Fannie Mae and Freddie Mac guidelines, which also falls under a certain loan amount.
Construction Loan – a short-term loan given to a builder during intervals of the building process which is due upon completion of the project.
Conventional Mortgage – any mortgage loan that is not insured or guaranteed by the federal government.
Credit Report – a tool used by the bank or lender to review your credit profile and your ability to carry and repay debt.
Credit Score – a three-digit number that is used by lenders to assess your creditworthiness. There are minimum scores for most home loan programs.
Debt-to-Income Ratio – the ratio of monthly liabilities and housing expenses divided by the monthly gross income of the borrower.
Deed-in-Lieu of Foreclosure – a method of avoiding foreclosure by deeding your property to the lender.
Deed of Trust – a security instrument between the borrower and the lender, recorded in public records as a lien on the subject property. It differs from a mortgage in that the bank can foreclose on the property without judicial proceedings.
Deferred Interest – the amount of interest added to the principal loan balance when a borrower pays less than the interest-only note rate (see: option arm).
Delinquency – the failure to make a monthly mortgage payment on time, which can eventually lead to a notice of default, and later a foreclosure.
Discount Rate – the interest rate the Federal Reserve offers to member banks and thrifts.
Down Payment – an upfront payment made by the home buyer toward the property purchase price, usually ranging from five to 20 percent. The remainder of the sales prices makes up the mortgage loan amount.
Earnest Money – a deposit paid to the seller by the buyer as a pledge to complete a real estate transaction. If the seller accepts the offer, the deposit is held in escrow and applied to closing costs when the deal is closed.
Equal Credit Opportunity Act – a federal law that prevents lenders from discriminating applicants based on race, religion, national origin, sex, age, marital status or involvement in public assistance programs
Escrow – a third party intermediary who holds and allocates funds, including taxes and insurance in a mortgage transaction.
Federal Funds Rate – the interest rate banks charge one another for overnight use of excess reserves.
Federal Home Loan Mortgage Corporation – one of the largest financiers of conventional mortgages on the secondary market. Widely known as Freddie Mac.
Federal National Mortgage Corporation – a publicly owned, government-sponsored corporation that packages mortgages and resells them on the secondary market. Also known as Fannie Mae.
FHA Loan – a program originated during The Great Depression that allows lower income borrowers to qualify for mortgages as long as they fit certain criteria set forth by the Federal Housing Administration who insures them.
First-Time Home Buyer – typically defined as someone who has not owned another property at any time during the three years prior to the date of the purchase.
Fixed-Rate Mortgage – a mortgage with a constant interest rate that will not adjust at any point during the life of the loan.
Foreclosure – the legal process by which a bank or lender sells a property after a borrower fails to meet the repayment terms of the loan.
Good Faith Estimate – a disclosure which details your loan summary and an estimate of the charges you’ll incur upon settlement, now known as the Loan Estimate (LE).
Graduated Payment Mortgage – a negative amortization mortgage with flexible payment options that gradually increase over time until leveling off. Intended for young couples who are unable to make the full mortgage payment, but whose income will increase over time.
Hard Money Loan – a mortgage of last resort for borrowers who can’t obtain financing in the standard market due to poor credit.
HARP Loan – a refinance loan offered to those with negative equity.
Hazard Insurance – insurance which protects a property owner from damages caused by fire or severe weather.
Home Appraisal – a comprehensive report that determines the value of your property based on a number of valuation factors.
Home Equity – the value of a property less any and all existing liens. If a borrower owns a property worth $500,000 and has liens of $400,000, equity is $100,000.
Home Equity Line of Credit – a line of credit that uses the value of a property as collateral.
Impound Account – an account established by the issuing bank/lender or loan servicer to collect monthly and automatically pay a borrower’s property taxes and insurance costs when payments are due.
Interest-Only Mortgage – a home loan that lets you pay just the interest portion of the mortgage payment each month.
Investment Property – a property that you do not occupy, but rather rent out to a tenant.
Islamic Mortgage – a mortgage that avoids the payment or receipt of interest, which is prohibited under Islamic law.
Jumbo Loan – a loan amount above the conforming loan limits, which is set each year by Fannie Mae and Freddie Mac. These loans typically carry higher interest rates than conforming loans because they can’t be sold to Fannie or Freddie.
Lender Credit – a credit paid by the lender to the borrower for taking an above-market interest rate.
Lender-Paid Mortgage Insurance – the lender pays for your mortgage insurance in exchange for a higher interest rate on your mortgage.
Lender Overlay – a guideline (or set of guidelines) in addition to those required by Fannie Mae, Freddie Mac, or the FHA/VA.
Lien – a claim against a property by the issuing bank or lender to secure repayment of a debt, typically in the form or a mortgage.
Loan Officer – a representative of a bank or broker who originates mortgages on their behalf.
Loan Origination – the initiation of the home loan process whereby a borrower submits their information to a bank or lender in order to obtain mortgage financing.
Loan Processor – the individual who handles all the paperwork associated with closing your loan.
Loan-to-Value – the percentage of the appraised property value that is borrowed from a bank or lender. A down payment of 20% would create a loan-to-value of 80%.
Margin – a given amount specified by the bank or lender which when added to the accompanying mortgage index sets the interest rate for an adjustable-rate mortgage.
Mortgage – a temporary loan used to finance the purchase of real property, also known as a home loan.
Mortgage Broker – an independent loan originator who works on behalf of consumers to obtain mortgage financing. Brokers don’t represent a single bank, but rather work with numerous lenders.
Mortgage Discount Points – a form of prepaid interest whereby the borrower lowers the interest rate of the mortgage at closing.
Mortgage Due Date – the date your mortgage payment is due each month during the loan’s duration.
Mortgagee – the issuing bank or mortgage lender.
Mortgage Insurance – required insurance on a mortgage if the down payment is less than twenty percent and a single loan is used to finance the property.
Mortgage Late – a term used in the mortgage industry to identify a late payment that is 30 days or more past due.
Mortgage Lender – an institution that originates mortgage loans either to keep for interest income or sell on the secondary market.
Mortgage Payment – the cost of your loan, paid monthly.
Mortgage Points – stands for a percentage point of the loan amount, typically makes up the origination fee, which can be a fraction of a point to multiple points.
Mortgage Principal – the balance of the lien(s) on a property, not including interest. What you owe on your mortgage.
Mortgage Rate – the rate of interest associated with your mortgage.
Mortgage Term – the length of your mortgage. Most are 30 years, though 15 years is also very common.
Mortgage Underwriter – the individual who decisions your mortgage by either approving, suspending, or declining it.
Mortgagor – the borrower or homeowner.
Negative Amortization – when a mortgage payment received is below the interest-only payment, the difference will be added onto the principal balance of the loan.
Ninja Loan – no income, no job, no asset loan. A “Ninja loan” is industry slang for a no doc loan, which doesn’t require income, asset, or job verification. NoIncomeNoJobAssets. It’s not specifically for Ninjas, unless they’ve got something to hide.
No Closing Cost Refinance – a refinance transaction in which the bank or broker pays all settlement costs.
Note – a written promise to repay the mortgage plus interest, which includes the name of the borrower, issuing lender, and the terms and provisions.
Option Arm – a home loan that gives borrowers four payment options, including a negative amortization payment option.
Origination Fee – a percentage of the loan amount charged by the bank or broker for completing the loan process.
Par Rate – the interest rate a borrower will qualify for assuming there is no rate manipulation.
Payment Shock – a sudden, large increase in the monthly mortgage payment as a result of an adjustable-rate mortgage or through a refinance with new financing terms.
Piggyback Mortgage – a second mortgage that closes simultaneously with the first mortgage to reduce the total necessary down payment.
PITI – the monthly housing expense, expressed as principal, interest, taxes, and insurance (see: mortgage payment).
Pre-Approval/Pre-Qualification – processes to determine what you can afford to ensure you can obtain mortgage financing when purchasing a property.
Prepayment Penalty – if a loan is refinanced or repaid prior to a certain date as agreed upon in the loan documents, a fee will be charged by the bank or lender.
Primary Residence – a house or condo you plan to occupy the majority of the year.
Prime Rate – the interest rate offered by commercial banks to its best corporate customers.
Purchase Money Mortgage – a mortgage used to purchase a piece of property.
Qualified Mortgage – a home loan that meets new underwriting guidelines established by the CFPB. Also known as a QM loan.
Quitclaim Deed – a document by which a person either disclaims interest in a property or transfers interest to another person, typically a spouse.
Reserve Requirements – the amount of verifiable assets you need to qualify for a given mortgage.
Resetting the Clock – when you refinance and extend the original loan term of your mortgage.
Reverse Mortgage – a mortgage reserved for homeowners aged 62 or older who wish to tap their home equity without paying monthly mortgage payments.
Right of Rescission – a law which allows a homeowner to rescind a contract to refinance their primary residence within three days of signing loan documents .
Second Mortgage – a mortgage taken out behind a first mortgage, either concurrently or after the fact.
Seller Carryback – when a seller acts as the bank or lender and carries a second mortgage on the subject property.
Short Sale – a foreclosure alternative where a property is sold for less than the balance on the associated mortgage.
Short Refinance – a refinance transaction where the lender agrees to lower the rate and/or change the term despite the mortgage balance exceeding the property value.
Stated Income Mortgage – a mortgage in which the borrower does not have to document their income.
Streamline Refinance – an expedited refinance that requires limited underwriting, and may even forego the need for an appraisal.
Subprime Mortgage – a home loan reserved for those who have marginal credit or difficulty qualifying for a traditional loan.
Teaser Rate – the initial, discounted interest rate offered on adjustable-rate mortgages.
Title Insurance – protection against lawsuits and claims tied to the chain of title on the subject property.
Underwater Mortgage – a mortgage whose balance exceeds the value of the property. Also known as an “upside down” mortgage.
USDA loan – a mortgage insured by the USDA that allows borrowers to purchase homes in rural areas with nothing down.
VA Mortgage – a mortgage offered to veterans and their families that is guaranteed by the Veterans Administration.
Yield Spread Premium – the commission mortgage brokers used to receive from banks and mortgage lenders by originating loans.
Zero Down Mortgage – a home loan that doesn’t require a down payment.
Zestimate – the estimated market value of a piece of property based on Zillow’s algorithm.