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Mortgage Terminology
Amortization
The gradual reduction in the principal of a loan through regularly scheduled installment payments. The amortization schedule shows the portions of each payment that are applied to principal and interest, as well as the loan balance remaining after each payment.
ARM - Adjustable Rate Mortgage
The interest rate on an ARM adjusts periodically based on an index that changes with market conditions. The interest rate is the sum of the index plus a margin. Some ARMs offer a rate hold for an initial period of time. Most ARMs have periodic interest rate caps, as well as lifetime interest rate caps. Adjustment periods vary.
APR - Annual Percentage Rate
The annual percentage rate reflects the actual cost of a loan and includes the loan interest rate, private mortgage insurance, points, and some fees.
Appraised Value
A professional assessment of a property's market value.
Assessed Value
The value placed on a property by local officials for taxation purposes. It may or may not equal the appraised value.
Balloon Payment
The final payment of a mortgage, which is larger than the regular payment and usually extinguishes the debt. A balloon mortgage often has a shorter term (5-12 years), but the payment is based on a 30-year term, which reduces the payment amount. At the end of the 5 to 12 year term, the entire outstanding balance is due in a balloon payment.
CLTV - Combined Loan to Value
This is the ratio of all mortgage loans on a property combined (usually a first and second trust deed) to the property's appraised value.
Condominium
A form of property ownership in which the owner holds the title to an individual dwelling, plus interest in common areas of a multi-unit project.
Equity
Equity is the degree of ownership in the property. It is the difference between the fair market value of a property and the total amount owed on the property. Tax laws allow the interest on home equity loans to be deductible for most purposes. (It is wise to consult with your tax advisor regarding your specific situation).
Escrow
The holding of documents and money (such as a deposit) by a neutral third party prior to closing the sale of the property. It may also be an account held by the lender into which a homeowner pays money for taxes and insurance.
Fixed Rate Mortgage
A mortgage in which the interest rate does not change during the entire life of the loan.
Flood Certification
The determination as to whether a property is located in a flood zone. If it is, the lender will require federal flood insurance.
Index
A published rate or benchmark measure of current interest rate levels used to calculate periodic changes in rates charged on adjustable rate mortgages.
LTV - Loan to Value
The ratio of the mortgage loan amount to the property's appraised value.
Multi-Family
A building with more than four residential rental units.
PMI- Private Mortgage Insurance
Insurance provided by a non-government insurer to protect a lender against loss if a borrower defaults. Lenders may require PMI if the down payment is less than 20 percent of the purchase price.
Point
A point is a fee equal to 1% of the principal amount of your mortgage, which is paid to the lender. Example: with a $100,000 mortgage, one point is equal to $1,000. This usually paid at closing. Points may be paid by the borrower or the home seller, or may be split between them.
Prequalification
The process of determining the maximum loan amount for which a borrower can qualify.
Rate Cap
An interest rate cap limits how much the rate on an Adjustable Rate Mortgage can increase. There may be a cap per rate adjustment period (such as 1% per year), as well as a life time cap, which limit the total increase in the interest rate over the life of the loan.
Rate Lock
A written agreement in which the lender guarantees the borrower a specified interest rate, provided the loan closes within a set period of time.
Second Mortgage
An additional mortgage loan behind the first mortgage on a property. The rights of the second mortgage lender are subordinate to the rights of the first mortgage lender.
Title Insurance
Title Insurance protects the lender (lender's policy) or the buyer (buyer's policy) against loss arising from disputes over property ownership.
Title Search
A detailed examination of the title records on the property to ensure the seller is the legal owner and there are no liens or other outstanding claims against the property.
Townhouse
A home attached to one or more other houses, but which sits directly on a parcel of land which you also own. If you don't own the land, it is a condominium.
