Adjustment Interval 
For an adjustable rate mortgage, the time between changes in the interest rate charged. The most common adjustment intervals are one, three or five years. 

 Amortization 
Literally to "kill off" (root: mort) the outstanding balance of a loan by making equal payments on a regular schedule (usually monthly). The payments are structured so that the borrower pays both interest and principal with each equal payment. 

Back to Top

 Annual Percentage Rate (APR) 
The interest rate which reflects the cost of a mortgage as a yearly rate. This rate is usually higher than the stated loan rate for the mortgage, because it takes into account points and other charges. 

Back to Top

 Application Fee 
The fee charged by the lender to the borrower for applying for a loan. Payment of this fee does not guarantee that a loan will be approved. Some lenders may apply the cost of the application fee to certain closing costs. 

Back to Top

 Appraisal 
The determination of property value based on recent sales information of similar properties. 

Back to Top

 Assumable Loan 
These loans may be passed on from a seller of a home to the buyer. The buyer "assumes" all outstanding payments. 

Back to Top

 Balloon Mortgage 
Behaves like a fixed-rate mortgage for a set number of years (usually five or seven) and then must be paid off in full in a single "balloon" payment. Balloon loans are popular with those expecting to sell or refinance their property within a definite period of time. 

Back to Top

 Broker 
An individual in the business of assisting in arranging funding or negotiating contracts for a client but who does not loan the money himself. Brokers usually charge a fee or receive a commission for their services. 

Back to Top

 Caps 
A set percentage amount by which an adjustable rate mortgage may adjust each adjustment period. For adjustable loans, caps are usually quoted as two numbers as in 2/6. The first number indicates how much a loan may adjust at each adjustment period while the second number indicates how much a loan may adjust over its lifetime. 

Back to Top

Loans like the 3/1 and 5/1 adjustable which have an initial fixed period are quoted with 3 numbers as in 3/2/6 which would mean that the first adjustment may be as much as 3%, subsequent adjustments are capped at 2% each, and the lifetime cap is 6%. 

Back to Top

 Closing Costs 
Fees paid by the borrower when property is purchased or refinanced. These typically include a loan origination fee, discount points, appraisal fee, title search, title insurance, survey, taxes, deed recording fee, and credit report charges. 

Back to Top

 Commitment 
A written letter of agreement detailing the terms and conditions by which the lender will lend and the borrower will borrow funds to finance a home. 

Back to Top

 Conforming Loan 
A mortgage loan for $265,000 or lower. 

Back to Top

 Construction Loan 
A short term loan for funding the cost of construction. The lender advances funds to the builder as the work progresses. 

Back to Top

 Conventional Loan 
A mortgage neither insured by the FHA nor guaranteed by the VA. 

Back to Top

 Conversion 
The right of a borrower to convert an adjustable or balloon loan into a fixed loan. 

Back to Top

 Credit Rating 
Borrowers are rated by lenders according to the borrower's credit-worthiness or risk profile. Credit ratings are expressed as letter grades such as A-, B, or C+. These ratings are based on various factors such as a borrowers payment history, foreclosures, bankruptcies and charge-offs. There is no exact science to rating a borrowers credit, and different lenders may assign different grades to the same borrower. 

Back to Top

 Credit Report 
A report to a prospective lender on the credit standing of a prospective borrower. Used to help determine creditworthiness. Information regarding late payments, defaults, or bankruptcies will appear here. 

Back to Top

 Deed 
A legal document which affects the transfer of ownership of real estate from the seller to the buyer. 

Back to Top

 Default 
The failure to make payments on a loan. 

Back to Top

 Down Payment 
Money paid by a buyer from his own funds, as opposed to that portion of the purchase price which is financed. 

Back to Top

 Equity 
The difference between the current market value of a property and the principal balance of all outstanding loans. 

Back to Top

 Finance Charge 
The total dollar amount your loan will cost you. It includes all interest payments for the life of the loan, any interest paid at closing, your origination fee and any other charges paid to the lender and/or broker. Appraisal, credit report and title search fees are not included in the finance charge calculation. 

Back to Top

 Fixed-Rate Mortgage 
A mortgage where the interest rate does not change for the life of the loan. 

Back to Top

 Float 
Between the time of application and closing, a borrower may choose to bet on interest rates decreasing by electing to float. Floating is essentially choosing not to lock the interest rate. Since it is the borrowers responsibility to lock his or her rate before (or at) closing, choosing to float is considered risky and may result in a higher interest rate. Request information from your lender regarding lock procedures. 

Back to Top

 Foreclosure 
A legal procedure in which real estate is sold by the lender to pay a defaulting borrower's debt . 

Back to Top

 Good Faith Estimate 
An estimate of charges which a borrower is likely to incur in connection with a loan closing. 

Back to Top

 Gross Monthly Income 
The total amount the borrower earns per month, not counting any taxes or expenses. Often used in calculations to determine whether a borrower qualifies for a particular loan. 

Back to Top

 Hazard Insurance 
A form of insurance in which the insurance company protects the insured from certain losses, such as fire, vandalism, storms and certain other natural causes. 

Back to Top

 Housing Ratio 
The ratio of the monthly housing payment to total gross monthly income. Also called Payment-to-Income Ratio or Front-End Ratio. 

Back to Top

 Index 
A published interest rate not controlled by the lender to which the interest rate on an Adjustable Rate Mortgage (ARM) is tied. The index and the interest rate linked to it may increase or decrease. The typical index values available are as follows: 

Back to Top

 Jumbo Loan 
A loan above $417,000 for 2007 on a single family residence. These limits are set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate - see our california jumbo loan site.

Back to Top

 Life of Loan Cap 
The maximum interest rate that can be charged during the life of the loan. Also called Lifetime Cap. This value is often expressed as an increment above the initial loan rate. For example, an adjustable rate loan with an initial rate of 7.25% and a 6% lifetime cap will never adjust above a rate of 13.25% (7.25+6.0). 

Back to Top

 Loan-To-Value Ratio 
The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage. A LTV ratio of 90 means that a borrower is borrowing 90% of the value of the property and paying 10% as a down payment. For purchases, the value of the property is assumed to be the purchase price, for refinances the value is determined by an assessment. 

Back to Top

 Lock noun 
The period, expressed in days, during which a lender will guarantee a rate. Some lenders will lock rates at the time of application while others will allow the borrower to lock the rate after the application is taken. Request information from your lender regarding lock procedures. 

Back to Top

 Lock verb 
The act of committing to a mortgage rate. This action, taken by a borrower some time between the application and the closing dates, is sometimes accompanied by a payment by the borrower to the lender. Opposite of float 

Back to Top

 Margin 
The amount a lender adds to the quoted index rate for an adjustable rate loan to determine the new interest rate. 

Back to Top

 Monthly Housing Expense 
Total principal, interest, taxes, and insurance paid by the borrower on a monthly basis. Used with gross income to determine affordability. 

Back to Top

 Mortgagee 
The lender. 

Back to Top

 Mortgagor 
The borrower. 

Back to Top

 Net Effective Income 
Gross income less federal income tax. 

Back to Top

 Origination Fee 
The fee imposed by a lender to cover certain processing expenses in connection with making a loan. Usually a percentage of the amount loaned. All origination fees are reflected as Points at the MortgageBase website. 

 Points 
Prepaid interest paid by the borrower to the lender at closing. A point is equal to 1 percent of the loan amount (e.g. 1.5 points on a $100,000 mortgage would cost the borrower $1,500). Generally, by paying more points at closing, the borrower reduces the interest rate of his loan and thus future monthly payments. 

Back to Top

 Prepaids 
Expenses such as taxes, insurance and assessments which are paid in advance of their due date and which must be paid by the buyer on a prorated basis at closing. 

Back to Top

 Prepayment 
The ability to pay off the remaining balance of a loan. 

Back to Top

 Prepayment Penalty 
Lenders who impose prepayment penalties will charge borrowers a fee if they wish to repay part or all of their loan in advance of the regular schedule. 

Back to Top

 Principal 
The amount of debt, not counting interest, left on a loan. 

Back to Top

 Private Mortgage Insurance (PMI) 
Paid by a borrower to protect the lender in case of default. PMI is typically charged to the borrower when the Loan-to-Value Ratio is greater than 80%. 

Back to Top

 Qualifying Ratio 
The ratio of the borrowers fixed monthly expenses to his gross monthly income. Ratios are expressed as two numbers like 28/36 where 28 would be the Front-End Ratio and 36 would be the Back-End Ratio. 

Back to Top

The Front-End Ratio is the percentage of a borrowers gross monthly income (before income taxes) that would cover the cost of PITI (Mortgage Principal Payment + Mortgage Interest Payment + Property Taxes + Homeowners Insurance). In the case of a 28% Front-End Ratio a borrower could qualify if the proposed monthly PITI payments were 28% or less than the borrower's gross monthly income. 

Back to Top

The Back-End Ratio is the percentage of a borrowers gross monthly income that would cover the cost of PITI plus any other monthly debt payments like car or personal loans and credit card debt. 

Back to Top

Please note that qualifying ratios are only a rough guideline in determining a potential borrower's credit-worthiness. Many factors such as excellent or poor credit history, amount of down payment, and size of loan will influence the decision to approve or disapprove a particular loan. 

Back to Top

 Settlement Costs 
See Closing Costs. 

Back to Top

 Tax Lien 
A claim against real estate for the amount of its unpaid taxes. 

Back to Top

 Title 
A document that gives evidence of an individual's ownership of property. 

Back to Top

 Title Insurance 
Insurance against loss resulting from defects of title to a specifically described parcel of real estate. 

Back to Top

 Title Search 
An examination of city, town, or county records to determine the legal ownership of real estate. 

Back to Top

 Total Debt Ratio 
Monthly debt and housing payments divided by gross monthly income. Also known as Back-End Ratio. 

Back to Top

 Variable Rate Mortgage 

Back to Top