Home Loan Glossary

Abatement
The Adjustment or cancellation of an assessed property tax.

Acceleration Clause
A clause included in most mortgages which allows the lender to demand the immediate repayment of the unpaid mortgage loan principal balance if the borrower defaults or transfers title to another individual without informing the lender.

Adjustable rate mortgage (ARM)
A mortgage which carries a fluctuating interest rate based on an interest rate index such as the Prime Rate or LIBOR.  Adjustable rate mortgages may have a fixed rate for a set number of years then adjust thereafter, and typically have a cap on the interest rate increase per year.

Adjusted Basis
The original cost of a property plus any improvement expenses to the property minus any depreciation taken.

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

Adjustment interval
The amount of time between changes in the interest rate and/or monthly payment on an adjustable rate mortgage.  This period is typically one, three or five years.

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

Alt-A Paper (loan)
Alt-A is a category of credit rating for a borrower with good credit but who either doesn’t quite meet the A paper status, can’t verify their full income due to being self-employed and writing much of their income off with business expenses, or may be paid primarily in the form of bonuses or commissions.

Amortization
The calculation of paying off a loan over a specified period of time including principal and interest payments.

Amortization Term
The length of time a loan is to be repaid over.

Annual Cap
The limit on which an adjustable rate mortgage can increase the interest rate.  This cap may be for the life of the loan, a specified adjustment period, or both.

Annual percentage rate (A.P.R.)
A.P.R. is commonly mistaken for the interest rate on a loan, however it is a measurement of the total loan cost including interest and loan fees expressed as a yearly percentage rate.  A.P.R. is determined by a standardized government formula and is a good measure of the real cost of your loan.

Appraisal
An estimate of a property’s value typically based on comparable sales, replacement cost or the property’s ability to produce income.

Assessment
A local tax levied against a property for a specific purpose, such as a sewer or street lights.

Assets
Anything owned by an individual or company which has a net positive value if liquidated.

Balloon Mortgage
A mortgage which is fully amortized over a 30 year period with a fixed interest rate yet matures in typically 5 or 7 years when the unpaid principal balance (also known as the “balloon”) is due in full.

Balloon Payment
The final payment of the unpaid principal balance on a balloon mortgage.

Basis Points
A basis point is 1/100th of a percent, typically referred to as “bps” or “bips”.  75 bps is equivalent to .75% or .0075.

Bi-Weekly Mortgage Payment
A process of paying half of your total mortgage payment every other week rather than once per month which results in retiring the home loan debt ahead of schedule and a substantial amount of interest savings over the life of the loan.

Bridge Loan
A temporary loan issued to finance the purchase of one home while the previous home is still for sale.  Also called a swing loan.

Broker
An individual who acts as an intermediary between the mortgage lender and the borrower.  Home loan brokers typically earn fees and commissions on the total loan value for placing the loan with a lender and assisting in the loan underwriting.

Caps
A safeguard put into place limiting the amount the interest rate, monthly payment, or both can change at the fixed intervals of an adjustable rate mortgage.

Closing Costs
Costs over and above the home price which include things such origination fees, underwriting fees, notary fees, prepaid taxes and more.  Learn about the costs associated with your home loan in our Loan Costs & Fees section.

COFI
For an adjustable rate mortgage the COFI is an interest rate which floats with the prevailing rates in the economy.  Also known as “cost of funds index”

Construction Loan
A temporary loan designed to finance a commercial or residential building project.  Most constructions loans are issued similar to a home equity line of credit and funds are disbursed over a period of time as construction progresses.

Conventional Loan
A home loan which does not meet the requirements for an FHA or VA loan and is not government insured. 

Conversion
A clause in an adjustable rate loan providing the option to switch to a fixed interest rate at a specified time, typically after the first interest rate adjustment period.

Credit Report
A report of a borrower’s credit profile and history produced by three credit reporting bureaus, Equifax, Transunion, and Experian.  Learn more about your credit report in our Credit Score & Report section.

Credit Score
Your credit score is a synopsis of the financial information contained in your credit report. FICO® credit scores (developed by the Fair Isaac Company to create standardized credit scoring) are the most well known and most commonly used by lenders to assess your credit and risk of loan default.  Learn more about your credit report in our Credit Score & Report section.

Debt to Income Ratio
The percentage of your monthly expenses which go towards paying off debt obligations divided by your monthly income.  This ratio is used by lenders to determine the feasibility of your loan repayment.  A high debt to income ratio is considered a poor risk to the lender as you already have a large portion of your monthly expenses going to debt payments.  The lower the debt to income ratio the better you are as a credit risk to the lender.

Deed of Trust (Trust Deed)
A legal document used in securing the collateral for a loan.  Once the loan is repaid, the deed of trust is transferred through a process called reconveyance to the borrower who satisfied the debt obligation.  If the loan is not repaid, the owner of the deed of trust may foreclose (take back) the collateral.

Default
Failure by the borrower to satisfy the payment obligations of a loan.

Deferred Interest (Negative Amortization)
When a loan payment option has a lower interest rate than what is standard causing the unpaid interest to be added to the loan principal balance.  This is also referred to as “Neg Am” or “Negative Amortization.  Making the negative amortization payment only results in your principal balance increasing over the life of the loan.

Delinquency
Failure by the borrower to make a loan’s payment on time.  A late payment is said to be a “delinquent” payment, and the borrower said to be a “delinquent” borrower.

Down Payment
The amount a borrower pays in advance to reduce the loan amount.  For example, a 20% down payment on a $500,000 home results in a $400,000 mortgage loan. Higher down payments typically result in a lower interest rate as it represents reduced risk to the lender.

Earnest Money
Money paid to the seller by the borrower in conjunction with a home purchase as a deposit to bind the sale.  It’s a show of good faith by the borrower that they’re intent on completing the transaction.  Earnest money is typically non-refundable if the buyer decides not to purchase the home.

Encumber
To place a lien or mortgage on a piece of real property.

Entitlement
The guaranteed access to certain rights.  In this case entitlement refers to meeting the requirements of, and being eligible for a VA loan program.

Equal Credit Opportunity Act (ECOA)
A law put into place in 1974 barring lender discrimination based on race, sex, color, religion, origin, marital status or age.

Equity (Owner’s Interest)
The outstanding principal debt balance subtracted from the total value of a property is the equity, or “owner’s interest”.

Escrow Account
An account in which the lender places the withheld portion of a loan payment designated for property taxes and insurance premiums.

Escrow Disbursement
The process of a lender forwarding payment from your escrow account to the appropriate taxing authority and insurance company, thereby satisfying your property tax and insurance requirements.

Fannie Mae (Federal National Mortgage Association or FNMA)
A government sponsored publicly traded entity designed to bring stability and liquidity in the mortgage markets.  Fannie Mae does not make home loans, but rather they insure home loans made by approved lenders to qualified borrowers.  This reduces the risk to the lender of borrower default, and results in a corresponding lower interest rate to the borrower.

Federal Home Loan Bank (FHLB)
Provides low cost capital to lenders for home loans.

Federal Home Loan Mortgage Corporation (Freddie Mac)
See “Freddie Mac”

Federal Housing Administration (FHA)
The Federal Housing Administration (FHA) is a government agency created in 1934 to insure mortgage loans and bring stability to the mortgage markets.  The FHA does not make loans directly, but rather insures home loans which qualify made by FHA lenders thereby reducing the risk of default to the lender.

Federal National Mortgage Association
See “Fannie Mae”

Federal Open Market Committee (FOMC)
A 12 member committee responsible primarily for monetary policy through directing the growth of money and credit.  The FOMC sets the Federal Funds Rate – or the rate charged for overnight loans from one commercial banking institution to another.

FHA Loan
A Federal Housing Administration insured home loan issued by qualified lenders to qualified borrowers in conjunction with the purchase of a home.  See our FHA and VA loan section.

First Mortgage
The primary lien on a property. 

Fixed Rate Mortgage
A home loan where the interest rate remains fixed for the life of the loan.

Foreclosure
A legal proceeding in which the lender seeks to foreclose the borrower’s equitable right of redemption.  The borrower in default thereby loses rights to the mortgaged property (repossessed) and the home is typically put up for sale by the lender and the proceeds used to pay the defaulted borrower’s outstanding principal debt obligation.

Freddie Mac
Similar to Fannie Mae, Freddie Mac (the Federal Home Loan Mortgage Corporation) is a publicly traded government sponsored entity created to bring stability and liquidity to the mortgage markets.  Freddie Mac buys pools of confirming mortgage loans, packages them then sells them to investors as pooled securities.

Gap Financing
Similar to a bridge loan, a Gap loan is designed to provide funding for a construction project between each stage of development and/or until permanent financing can be put into place.

Government National Mortgage Association (GNMA or Ginnie Mae)
A US government owned entity which provides guarantees on mortgage backed securities and provides funding for and VA home loans.  Ginnie Mae mortgage backed securities are the only ones backed by the US government.

Graduated Payment Mortgage (GPM)
A home loan with lower initial monthly payments creating negative amortization (an increasing principal debt balance) which increase over time (typically 5 to 15 years) to a fixed monthly payment.  Used most commonly to get upwardly mobile borrowers into a home loan in which they’ll be able to afford better in the future, but not necessarily in the present.

Gross Income
An individual’s total income before taxes and other deductions.

GSE
An acronym for “government sponsored enterprise”.  GSE’s include institutions such as Fannie Mae or Freddie Mac.

Guaranty
A promise by one party to fulfill the financial obligations of another party if they cannot meet the obligations themselves.

Hazard Insurance
Insurance on a property designed to protect from a potential financial loss suffered due to fire, theft or weather.

Home Loan
A residential mortgage secured by the collateral of a one to four unit family property or condominium.

Homestead Declaration
A homestead declaration is filed with your county clerk or recorder’s office and is designed to protect the equity in your home (up to certain limitations) from creditors.

Impound Account
See “Escrow Account”

Index
A published interest rate based off other indexes or set rates such as the average yield on treasury bills or the average interest rates banks are charging for loans.

Initial Interest Rate
The first interest rate applied to a mortgage loan, also sometimes called a “teaser rate”.  For an adjustable rate mortgage this rate only lasts for a fixed period of time after which it will adjust to the current rates plus or minus a spread, and continue to adjust at specified intervals.

Interest Rate
The fee paid by the borrower for using another individual or entities money.  The percentage of the home loan charged by the lender in conjunction with the loan.

Interest Rate Ceiling
The maximum interest rate for an adjustable rate mortgage as stated in the loan documents.

Interest Rate Floor
The minimum interest rate for an adjustable rate mortgage as stated in the loan documents.

Jumbo Loan
A jumbo loan is a home loan for an amount larger than the conforming limits for Fannie Mae and Freddie Mac.  Jumbo loans represent higher risk of default for the lender and more capital at stake to lose in the event of foreclosure.  For these reasons, jumbo loans typically have a higher interest rate than conforming loans.  Jumbo loans also require a higher down payment to help negate or offset the risk associated with loan default.

Junior Mortgage
A mortgage that is subordinate to the primary mortgage and primary lienholder.

Kick Out Clause
A condition within a lease which allows the tenant to cancel the agreement if the landlord fails to meet the terms and conditions of the lease.

Lease Option
An arrangement in which the lender provides a borrower (who ultimately intends to purchase the home) the ability to lease the home with an option to buy the home at a specified price.  Each month’s rent payment includes both rent and a certain amount as a deposit towards the home loan purchase.

Liabilities
An individual’s long and short term debt obligations.

Lien
A claim on a piece of property.  The lien holder is the person who holds the lien.  The lien can be satisfied and the lien removed provided the obligations are met.

Lifetime Cap
For an adjustable rate mortgage (ARM) the lifetime cap is the maximum amount the interest rate and/or monthly payment can increase or decrease to.

Loan
Money borrowed by an individual from a lender with the promise of repayment of both principal and interest.  A home loan is secured by using real property as collateral.

Loan To Value (LTV)
The percentage of principal debt divided by the value of a property.  A borrower with a high LTV or loan to value has very little equity in the property, whereas a borrower with a very low loan to value has a greater amount of equity in the property.

Lock
The lender’s promise that a stated interest rate will be offered for a certain period of days (typically 15 or 30 days).  The home loan interest rate lock precedes the home loan closing.

Margin
The added interest a lender charges above the stated index rate in an adjustable rate mortgage.

Market Value
The monetary worth of an item on the open market determined by what a buyer is willing to pay for it and the seller is willing to sell it for.

Mortgage
A legal document binding a borrower to certain financial obligations in accordance with the terms and conditions of the mortgage agreement, and pledging the property as collateral for the loan.

Mortgage Bank
A non-depository institution which originates, services, packages and sells pools of mortgage loans.

Mortgage Broker
An individual who works with multiple mortgage lenders and borrowers to find the most appropriate home loan fit between them.

Mortgagee
The mortgage lender.

Mortgage Insurance
See “private mortgage insurance”.

Mortgage Insurance Premium
The dollar amount paid to a private mortgage insurance company in conjunction with insuring your mortgage.

Mortgage Life Insurance
A form of decreasing term life insurance designed and structured to pay off a borrower’s mortgage loan in the event of their death.

Mortgage Portfolio
All loans held by a mortgage bank or investor.

Mortgagor
The borrower.

Negative Amortization (Neg Am)
When the structure of a home loan allows for a smaller monthly payment which doesn’t cover a fully amortized principal and interest payment.  This results in extra principal debt being added to the home loan balance.

Net Income
In business, income after subtracting costs and expenses associated with the generation of the income.  Also referred to as the bottom line or net profit.

Note
An agreement between a borrower and a lender obligating the borrower to pay principal and interest on a home loan at specified intervals until the principal debt is satisfied.

Origination Fee
A payment to the mortgage lender or loan broker associated with securing a new home loan.  The fee typically ranges from .5% to 2% of the total loan amount.

Owner Financing
A transaction between a home owner and home buyer where the home owner finances the home loan themselves and the buyer makes interest and principal payments according to the terms and conditions of the loan agreement between the two parties.

Periodic Payment Cap
The limit on payment increases or decreases during the adjustment intervals for an adjustable rate mortgage.

Periodic Rate Cap
The limit on interest rate increases or decreases during the adjustment intervals for an adjustable rate mortgage.

Permanent Loan
A home loan greater than 10 years in duration with fully amortized interest and principal payments.

PITI
An acronym for the total monthly payment on a home loan including principal, interest, taxes and insurance.

Points
A fee paid in conjunction with a home loan typically expressed as a percentage of the total loan amount.  This fee is most commonly used to reduce or “buy down” the home loan interest rate.

Power of Attorney
A legal document allowing one person to act on behalf of another.

Private Mortgage Insurance
Private mortgage insurance, or more commonly called “PMI”, is typically charged on a home loan when the property loan to value is above 80% (a borrower with less than 20% of the home loan amount to put as a down payment).  This private mortgage insurance (PMI) payment provides reduced risk of borrower default to the lender as the loan is insured through these premiums paid.

Pre-Approval
The process in which a borrower completes a loan application and secures funding for a home loan before making an offer to purchase a house. The home purchased must still meet the underwriting guidelines and criteria set forth by the lender.  As such, the pre-approval process applies strictly to the borrower’s ability to borrow a certain amount.

Pre-Qualification
When a loan advisor provides a written opinion of the borrower’s ability to qualify for a specific loan.

Pre-Paid Expenses
Payments made to an escrow account which include taxes, insurance, private mortgage insurance and any special assessments.

Prepayment
A provision in the loan document allowing the borrower to make payments in advance of their due date.

Prepayment Penalty
An added cost associated with prepayment of all or part of the principal loan balance in advance of the due date.

Primary Mortgage Market
The market in which lenders make direct loans to borrowers as opposed to the direct lender selling the loan to an investor.

Principal
The amount of debt owed on a loan or the portion of the monthly loan payment which goes directly to reduce the principal debt balance.

Principal, Interest, Taxes & Insurance (PITI)
The four components of a mortgage payment.

Private Mortgage Insurance (PMI)
For borrowers with less than the typically required 20% down payment, these insurance payments are designed to protect the lender from borrower default.  If the borrower does default on the home loan, the insurance company will step in and make the lender whole.

Rate Cap
See Caps.

Rate Lock
A firm commitment by the lender to the borrower to provide financing for a specified amount over a specified time at a specified rate of interest.

Realtor
A real estate broker or agent holding a membership with the National Association of Realtors.

Real Estate Agent
A real estate professional authorized by home buyers and sellers to assist in the purchase or sale of a home.

Real Estate Settlement & Procedures Act (RESPA)
A consumer protection law requiring lenders to advise borrowers of closing costs in advance.

Recission
The cancellation of a contract.

Reconveyance
The transfer of a property title from the current owner to the previous owner.

Recording Fees
Money paid in association with a home sale and the transfer of property title to a new owner.

Refinance
Replacing an existing loan with a new loan on a property or home already owned.

Repossession
The process of a lender taking back property used as collateral in securing a loan made.

Resolution Trust Corporation (RTC)
A government entity created in 1989 to facilitate the disposal of failed assets on the balance sheets of thrifts and ensure customer deposits that were FDIC insured were accessible.

Right of First Refusal
A covenant in an agreement allowing a predefined party to accept or reject an offer before any other parties.

Right of Foreclosure
The right of a lender to take over collateral property when a borrower fails to meet the obligations contained in the loan agreement.

Right of Redemption
A right available in some states allowing a defaulted borrower to reclaim within a specified period of time the mortgaged property by making payment in full to the lender of all outstanding debt in association with the loan agreement.

Right of Rescission
A covenant within a loan agreement allowing the borrower three business days to cancel the agreement for a full refund of any monies paid in accordance with the loan specifications.

Right of Survivorship
When a property is owned jointly with another individual the surviving individual (in the event of death of one party) retains full ownership of the property.

Sale Leaseback
An agreement whereby an owner deeds a property to a party who then in turns creates a long term leasing agreement with the original owner on the property.

Seasoned Mortgage
A mortgage which has been in effect for at least one year and all interest and principal payments have been made on time.

Second Mortgage
A mortgage that is junior or subordinate to the primary loan on a piece of property.

Secondary Market
After primary loans are packaged they are often sold on what’s called the secondary market.  The secondary market exists for investors to buy packages of pooled loans providing the primary lender the capital with which to make new loans.

Secured Loan
A loan in which a borrower pledges collateral property which they agree to forfeit to the lender if they don’t meet the terms of the loan agreement.

Settlement Costs
Money paid by the borrower in association with the closing of a home loan.  Such costs typically include discount points, title fees, attorney’s fees, origination fees, and other prepaid escrow items such as taxes and insurance.

Simple Interest
Interest paid only on the principal balance and not on other interest accrued.

Title
Evidence of ownership in a property

Title Insurance
A policy issued by a title insurance company which insures the home buyer from any errors made in the title search on the property.

Title Search
The process whereby a title company reviews municipal records to determine who has legal claim to a property.

Truth in Lending (Regulation Z)
A federal law which requires full disclosure to a borrower of all fees associated with a mortgage loan including the annual percentage rate (APR).

Two-Step Mortgage Loan
A loan which carries a fixed interest rate for a set number of years (typically 5 or 7 years) then has the ability to adjust to current interest rates set by prevailing market conditions at that time for the remainder of the loan period.

Underwriting
The process of examining a borrowers financial profile (income, assets and liabilities) to determine what home loan interest rate and terms they qualify for.

VA Loan (Veteran’s Administration)
A home loan guaranteed by the Department of Veterans Affairs restricted to individuals qualified by military service (or other entitlements) which most often carries a minimal or no down payment and a lower interest rate than what is currently available to other borrowers.

Variable Rate Mortgage
See Adjustable Rate Mortgage

Warehouse Loan (Warehousing)
A form of interim financing whereby a lender borrows short term funds secured by longer term mortgage loan obligations.  Once the longer term obligations are packaged together they can be sold to an investor and the proceeds reinvested and/or used to reduce the warehouse loan.

Yield
The return on investment typically expressed as a percentage of the price originally invested.

Zoning
A process which defines and regulates a property’s usage parameters.  Most commonly zones are commercial, residential, or industrial zoned.

3/1, 5/1, 7/1 and 10/1 ARMs
A mortgage which provides a fixed interest rate for a period of years (represented by the first number), and may adjust thereafter at set intervals (represented by the second number), but typically only once per year.  A 5/1 ARM has a fixed interest rate for 5 years then may adjust every year thereafter. 

401(k) or 403(b) Loan
401(k) and 403(b) plans are qualified retirement plans where an individual contributes to an account on a pre-tax basis.  Such plans may allow for a loan against their balance.  Such retirement plan loans must be repaid back into the account with interest.

5/25 and 7/23 Mortgages
Fully amortized fixed rate mortgages which allow a one-time interest rate adjustment based on an index after five or seven years.