Mortgage and Refinancing Terms and Definitions

Amortization - The process of paying off a mortgage in regular increments.

Amortization Schedule - A monthly repayment schedule outlining how a loan will be paid off in fixed payments combining principal and interest.

Annual Percentage Rate (APR) - A calculation that expresses the total cost of a mortgage loan as a yearly rate (according to a federally mandated procedure). The APR calculation takes into account monthly interest payments, mortgage insurance, points, and certain fees paid at origination. It generally results in a rate slightly higher than the stated interest rate on the loan.

Appraised Value - An opinion of value reached by an appraiser based upon recent sales information for similar properties, the condition of the property and the neighborhood’s impact on future property value.

Appraisal - An opinion of value reached by an appraiser based upon recent sales information for similar properties, the condition of the property and the neighborhood’s impact on future property value. The cost of the appraisal is part of closing costs.

Assumability - A loan feature that allows the loan to be transferred from the seller to the purchaser of a home with the same terms and conditions, subject to lender approval.

Balance Sheet - A document showing the financial situation--assets, liabilities, and net worth--of a company at a specific point in time.

Balloon Mortgage - A short-term, fixed-rate loan with low payments for a set number of years and a large balloon payment of the remainder of the principal due at the end of the term.

Assignment - The transfer of property rights by one person, the assignor, to another, the assignee.

Bi-weekly Mortgage - A payment plan under which the borrower pays one half of a monthly payment every two weeks. This often results in a faster pay-off of a mortgage.

Caps (payment) - Consumer safeguards which limit the amount monthly payments on an adjustable rate mortgage may change. Since they do not limit the amount of interest the lender is earning, payment caps may cause negative amortization.

Cash Available - Your housing affordability depends on the amount of money you have for the down payment, closing costs and a cash reserve. The more you can come up with, the less you will have to borrow.

Cash Out - A refinance for more than the balance of the current mortgage. The excess money taken out reduces the borrower’s equity.

Cash required to close - Money needed by borrower to cover down payment, closing costs, Cash reserves, and prepaids.

Cash Reserve - Funds that the borrower will have remaining after all expenses (down payment, closing costs & prepaid expensis) of the transaction have been paid.

Closing (settlement) - The conclusion of a transaction. In real estate, closing includes the delivery of a deed, the signing of notes and security instruments, and the disbursement of funds necessary to the sale or loan transaction.

Closing Agent - Neutral third party appointed to act as a custodian for documents and funds during the transfer of property from seller to buyer. Depending on local law and custom, this could be an attorney, escrow agent or title company.

Closing Costs - Fees incurred in a real estate or mortgage transaction paid by borrower and/or seller at the closing of the transaction.

Contingency - A condition which must be satisfied before a contract is legally binding--before a sale can close.

Credit Rating - An expression of the borrower's creditworthiness based upon present financial condition and past credit history.

Credit Report -A detailed account of the credit, employment and residence history of an individual used by a prospective lender to help determine creditworthiness. Credit reports also list any judgments, tax liens, bankruptcies or similar matters of public record entered against the individual. A fee is usually charged.

Current PITI - An abbreviation for a monthly payment that includes principal, interest, taxes and insurance. In mortgage lending it is common for the monthly mortgage payment to include not only the principal and interest payment on the loan, but an escrow amount for real estate taxes and hazard insurance as well.

Deed - Legal document by which title to a property is transferred from one owner to another. The deed contains a description of the property and is signed, witnessed, and delivered to the buyer at closing.

Deed of Trust - Document creating a lien on a property as security for the payment of a debt. In some states, a mortgage is used instead.

Default - Failure to meet legal obligations in a contract, including failure to make payments on a loan. A mortgage is generally considered to be in default when a payment is 30 days past due

Deferred Interest - Amount added to the balance of a loan when monthly payments are insufficient to cover the interest incurred. This results in negative amortization.

Delinquency - Failure to make required payments on time.

Document Preparation or Review- This fee covers the expenses associated with the process of preparing the legal documents that you will be signing at the time of closing, such as the mortgage, note, and truth-in-lending statement.

Down Payment - In a home purchase, the difference between the purchase price and the mortgage amount.

Down Payment Percent - The down payment percentage is calculated by dividing the amount you plan on putting down on the purchase of a home by the selling price.

Earnest Money - Deposit made by a buyer toward the down payment as evidence of good faith when the purchase agreement is signed.

Equal Credit Opportunity Act (ECOA) - Federal law requiring creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status or receipt of income from public assistance programs.

Escrow/Attorney/Title - A neutral third party who carries out the instructions of both the buyer and seller to handle all the paperwork of settlement or "closing." You will either use an escrow company, an attorney or a title company depending on which state you reside in.

Fixed-Rate Mortgage - A mortgage whose interest rate does not change for the life of the loan. Payments are also fixed.

Flood Check - If the house is close to a source of water, a survey is conducted to determine whether a property is in a flood zone. A fee is charged.

Floor - The minimum interest rate payable on an adjustable-rate mortgage.

Gross Monthly Income - Total monthly income before taxes or expenses are deducted. Used in the loan origination process to calculate borrower’s ability to make payments on a loan.

Hazard Insurance - A policy that protects the insured against loss due to fire or certain natural disasters in exchange for a premium paid to the insurer. Also known as Home Owner’s Insurance or fire insurance.

Impound (or Reserves) - Portion of a borrower's monthly payments held by the lender to pay for taxes, insurance, and other items as they become due.

Lending Guidelines - Every loan program has different guidelines. Guidelines are used to meet Federal, State and Local laws and enforce minimum requirements by the lender. Guidelines ensure that prospective borrowers won't purchase a home that they won't be able to afford.

Loan Amount - The actual amount borrowed from the lending institution including any financed fees, debt consolidation, etc.

Loan Balance The current outstanding balance (the amount you owe) on your present mortgage loan.

Lock or Lock In - A lender's guarantee of an interest rate and related points for a set period of time, usually between loan application and loan closing. This protects borrower against rate increases during that time.

Monthly Income - Based on your earnings and debt, lenders calculate your approximate borrowing limit. Many lenders believe that the total of mortgage payments, property taxes, hazard insurance, etc. should not exceed 28-30% of your monthly gross income.

Notary - An official authorized by law to attest and certify certain documents by his or her hand and official seal.

Original Term - The term of a home loan is the number of years the home loan is amortized for. Home loans are generally amortized over 15, 20 or 30 years.

Payment (P&I) - Your monthly mortgage payment, including principal and interest, but excluding tax and insurance payments.

Points (or Discount Points) - Money paid to a lender at closing in exchange for a lower interest rate. Each point is equal to 1% of the loan amount.

Prepaid Expenses - Taxes, insurance and assessments paid in advance of due dates.

Processing - The preparation and documentation of a mortgage loan application for underwriting.

Property Value - LTV or Loan to Value Ratio refers to the relationship between the unpaid principal balance of the mortgage and the property's appraised value (or sales price if it is lower).

Rate - The annual rate of interest on a loan.

Recording - The act of entering documents concerning title to a property into the public records.

Survey - A measurement of land, prepared by a registered land surveyor, showing the location of the land with reference to known points, its dimensions, and the location and dimensions of any improvements.

Tax Savings - This is the amount of money you save in income taxes. You save this money because in most cases the interest you pay on your home loan is tax deductible! (Ask your tax advisor).

Term - The number of years the home loan is amortized for. Home loans are generally amortized over 15, 20 or 30 years.

Termite Report - A report that results from an inspection by a professional to determine if the property has termites. A fee is charged.

Title Insurance - The process of determining the history of the ownership of a property in order to determine if the seller has legal ownership in the property they are selling. A fee is Charged.

Underwriting - The analysis of risk, the determination of the appropriate loan amount, and the setting of loan terms and conditions, based on the borrower's creditworthiness and the value of the real property that will secure the loan.

Walk-through - A final inspection of a home to check for problems that may need to be corrected before closing.

Wire Transfer Fee - Loan proceeds are typically transferred via electronic wire. This is the transaction fee that is charged by the bank to execute the wire.