Basic Terminology

This section offers a brief overview of key terms and concepts in the mortgage industry, designed to assist professionals in grasping the essentials of residential mortgages.

Amortization

Amortization of a loan is the process of gradually paying off a debt with regular payments. An amortization schedule can show regular monthly payments to help you keep on course to pay off a loan. In accounting, amortization lowers the “book” value of a loan or asset over time, similar to depreciation.

Appraisal

An appraisal is a professional opinion of the value of a house. Appraisals will include recent sales information for similar properties in the area, as well as the home’s current condition and location. Most times, lenders require an appraisal for the buying, selling, or refinancing of any property.

Appreciation

The increase in value of an asset. For example, a house usually appreciates, or gains value, as long as it is being cared for. The opposite of “depreciation.”

APR (Annual Percentage Rate)

Separate from the interest rate, the APR represents the interest plus fees and any other applicable one-time costs associated with your loan, including mortgage insurance, discount points, origination fees, and certain closing costs. The APR essentially represents the total cost of the mortgage loan, expressed as a percentage of your loan amount.

ARM (Adjustable-Rate Mortgage)

Adjustable-Rate Mortgages (ARMs), also known as “variable-rate mortgages,” start with a very low interest rate that can change along with a benchmark index rate (such as the international LIBOR rate). There are caps in place that restrict your rate from moving too high or too low for either the life of the loan, per rate change, or the initial rate change.

Assets

Anything regarded as having economic value. This term is also used when a person, thing, or quality can produce positive economic value.

Closing Costs

Closing costs are expenses other than the purchase price paid at the closing of a real estate transaction. Standard costs are set by the loan amount, purchase price, and any points or negotiated fees. Both the buyer and seller can have closing costs.

Co-Applicant / Co-Borrower

Along with the primary borrower, a co-applicant or co-borrower both refer to someone whose income and credit history will be factored in to qualify the borrower’s ability to repay the loan. All parties involved are required to pay the loan and will be on the title.

Collateral

A home or property promised by a borrower to safeguard the lender in case the borrower defaults on the loan. If this happens, the property may be seized by the lender and subsequently sold.

Conventional Loan

A type of mortgage that is not offered or secured by the government. Instead, the loan is backed by private lenders, and its insurance is usually paid by the borrower.

Credit Score

Credit score measures creditworthiness and is primarily based on an individual’s credit report. Scores range from 300 to 850, with scores over 680 generally considered good.

Debt to Income Ratio (DTI)

DTI measures an applicant’s monthly debt payments over gross monthly income. Lenders use this percentage to determine how much an applicant is eligible to borrow.

Deed

A legal document that transfers the ownership or title of a property.

Depreciation

The decrease in value of an asset. For example, if a house is not taken care of and maintained, it will depreciate in value.

Down Payment

The initial cash payment toward the purchase price. The more you can put into a down payment, the less you need to borrow, and the less likely you are to require mortgage insurance.

Equity

Home equity is the value of the home that you truly own (versus the amount owed to the lender). Factors like down payments, principal repayment, home improvements, and market conditions can affect home equity.

Escrow

An account that holds money for homeowner's insurance and property taxes, part of your monthly mortgage payment may be put into this account.

FHA Loan

An FHA mortgage loan is insured by the Federal Housing Administration (FHA) and issued by an FHA-approved lender. FHA loans are known for having lower down payment and credit score requirements.

Fixed-Rate Loan

A loan where the interest rate remains the same for the entire term of the loan, providing predictable monthly payments.

Home Inspection

A thorough examination of a property's condition, usually conducted by a qualified inspector before the sale is finalized.

Interest

The cost of borrowing money, typically expressed as a percentage of the principal loan amount.

Loan Types

Various types of loans including FHA, VA, and Conventional are described, highlighting differences in requirements and benefits.

Loan to Value (LTV)

A ratio that compares the amount of your loan to the value of the home. A lower LTV ratio is generally seen as less risky to lenders.

Market Value

The price at which property would sell under current market conditions.

Mortgage

A loan specifically for purchasing real estate.

Mortgage Broker vs Mortgage Banker

Describes the differences between brokers who arrange loans and bankers who fund and manage loans.

Mortgage Insurance

Insurance that protects the lender from a borrower's default on the mortgage.

Point(s)

Fees paid upfront to lower the interest rate on a loan, expressed as a percentage of the loan amount.

Pre-qualification

An initial evaluation of an applicant’s creditworthiness based on information provided by the applicant.

Pre-approval

Preliminarily approval for a specific loan amount based on the lender’s thorough review and verification of the applicant’s financial and credit information, including credit reports, bank statements, and assets.

Principal

The amount borrowed that must be repaid to the lender, not including interest.

Rate Lock

An agreement between the lender and borrower to lock in the interest rate on a loan for a certain period.

Realtor vs Real Estate Agent

Explains the difference between Realtors, who are members of the National Association of Realtors, and real estate agents.

Refinance

Describes the process of replacing an existing loan with a new one under different terms.

Term

The specified time you have to repay your loan. Usually terms are listed for 15, 20, or 30 years.

Title

The legal right to own or sell a property.

Underwriting

The process by which lenders assess the risk of lending to a borrower.

Veterans Affairs (VA) Loan

Loans provided to veterans with benefits such as no down payment options.