Mortgage Glossary


Adjustable-Rate Mortgage (ARM): A mortgage in which the interest rate changes periodically, according to changes in a corresponding index.

Appraisal: A written justification of the price paid for a property, primarily based on an analysis of comparable sales of similar homes nearby.

Annual Percentage Rate (APR): The cost of your loan expressed as a yearly rate. For mortgages, it includes interest, points, origination fees, and any mortgage insurance required by the lender.

Amortization: A term used to describe the process of paying off a loan over a predetermined period of time at a specific interest rate. The amortization of a loan includes payment of interest and a portion of the outstanding principal balance during each payment cycle.

Assessment: The placing of a value on property for the purpose of taxation.


Cap: See Rate Cap

Ceiling: The highest rate that can be charged on an adjustable rate loan.

Closing Costs: Costs that the buyer pays at the time of closing. Typical costs may include an appraisal fee, title search, lawyer’s fees, prepaid interest, homeowner’s insurance and points. Closing costs are in addition to your down payment and may vary from one lender to another. A lender makes an attempt to estimate the amount of closing costs and prepaid items on the Good Faith Estimate which must be issued to the borrower within three days of receiving a mortgage application.


Deed: The legal document conveying ownership to a property.


Equity: The value an owner has in property over and above any mortgage indebtedness.

Escrow Account: A trust account held by the lender in the borrower’s name to pay obligations such as property taxes and insurance premiums.


First Mortgage: A mortgage that is in first position among any liens recorded against a property.

Fixed Rate Mortgage: A mortgage with an interest rate that does not change during the life of the loan.

Floor: The lowest rate that can be charged on an adjustable rate loan.


Home Equity: A mortgage loan or line of credit that allows the borrower to draw cash against the equity of the home.

Homeowner’s Insurance: An insurance policy that combines liability insurance and hazard insurance.

Hybrid Mortgage: A mortgage that has a fixed interest rate for the first part of the mortgage (usually 3, 5, or 7 years), and an adjustable interest rate for the remainder of the mortgage.


Lien: A legal claim against a property. Liens must be paid off when a property is sold. A mortgage is considered a lien.

Loan-To-Value (LTV): The percentage relationship between the amount of a loan and the appraised value or sales price of the property (whichever is lower).


Margin: The difference between an interest rate and an index on an adjustable-rate mortgage. The margin remains constant over the life of the loan. It is the index that will move up or down.

Mortgage Insurance (MI or PMI): Insurance a buyer purchases that protects the lender from buyer default. Most lenders require MI if the mortgage exceeds 80% of the appraised value. The premium can be up to a few hundred dollars per month.


Note: A legal document that obligates a borrower to repay a loan at a stated interest rate for a specified period of time.


Origination Fee: On a conventional loan, the loan origination fee refers to the points a borrower pays. One point equals one percent of the loan amount. (See Points.)


Private Mortgage Insurance (PMI or MI): Insurance a buyer purchases that protects the lender from buyer default. Most lenders require MI if the mortgage exceeds 80% of the appraised value. The premium can be up to a few hundred dollars per month.

Points: Finance charges paid to the lender as part of your closing costs. One point is equal to one percent of your total mortgage loan. Paying points will lower your interest rate and may be a good idea if you intend to keep a loan long-term. (See Origination Fee.)

Pre-Approval: A term which is generally taken to mean that a borrower has completed a loan application and provided debt, income, and savings documentation which an underwriter has reviewed and approved. A pre-approval is usually done for a certain loan amount and interest rate, as well as estimates for the amount that will be paid for property taxes, insurance and others costs. A pre-approval applies only to the borrower. Final approval is contingent upon the property to be purchased. (See pre-qualification.)

Prepayment: Payments made to reduce the outstanding loan balance in excess of scheduled payments. Prepayments can shorten the length of your loan and lower the amount of interest you pay.

Prepayment Penalty: A fee that may be charged to the borrower if you pay off the loan before it is due. This penalty is usually limited to the first few years of the loan.

Prepaid Interest: The interest you pay the lender in advance. If you close before the end of the month, the lender will typically require you to pay interest through the end of the month.

Pre-Qualification: The process of determining how much a prospective home buyer might be eligible to borrow before he/she has applied for a loan. This is based only on information provided by the prospective borrower and is only an indication of purchasing power. This is not a guarantee of approval. (See Pre-Approval)

Prime Rate: The interest rate that commercial banks charge their most credit worthy borrowers, such as large corporations.

Principal: The amount borrowed or remaining unpaid. The part of the monthly payment that reduces the remaining balance of a mortgage.


Qualifying Ratios: Calculations that are used in determining whether a borrower can qualify for a loan. There are two ratios. The “top” or “front” ratio is a calculation of the borrower’s monthly housing costs (principal, taxes, insurance, mortgage insurance, homeowner’s association fees) as a percentage of monthly income. The “back” or “bottom” ratio includes housing costs and all other monthly debt, also as a percentage of monthly income.


Rate Cap: The limit on the amount the interest rate can be increased or decreased at each adjustment period in an adjustable-rate loan. The cap may also set the maximum interest rate that can be charged during the life of the loan.

Rate Lock: The commitment issued by a lender to a borrower guaranteeing a specified interest rate for a specified period of time.

Reverse Mortgage: A reverse mortgage is a loan against your home that you do not have to pay back for as long you live in your home. With a reverse mortgage, you can turn the value of your home into cash and not have to make monthly payments. The total loan must be paid back when the last surviving borrower dies, sells the home, or permanently moves away.


Second Mortgage: A mortgage that has a lien position behind or subordinate to the first mortgage.


Title Insurance: Insurance that protects the lender (lender’s policy) or the buyer (owner’s policy) against loss arising from disputes over ownership of a property.

Treasury Index: An index that is used to determine rate changes for certain adjustable-rate mortgage (ARM) products.

Two-Step Mortgage: See Hybrid Mortgage