Glossary of Mortgage Terms

Adjustable Rate Mortgage (ARM)

A home loan in which the interest rate and the mortgage payments can increase or decrease periodically, based on the movement of an index.

Abstract Of Title

Public records relating to the transaction history of a piece of land. In the purchase process, an abstract of title is reviewed by an attorney or, more likely, a title insurance company to determine that it is clear of defects. If defects, such as a lien, are found, they must be cleared before a buyer can purchase the property.

Acceleration Clause

A clause in a mortgage contract that requires the balance of a loan to become due immediately under certain conditions, such as not making regular mortgage payments.

Agreement of Sale

Also know as purchase contract, purchase agreement, or sales agreement. It's a contract in which the seller agrees to sell and the buyer agrees to buy, under certain terms and conditions spelled out in the document and signed by both parties. (Note: A document not signed by both parties is not a binding contract.)

Amortization

Periodic reduction of the principal balance on a loan through regular payments, usually monthly.

Annual Percentage Rate

The true interest rate on a home loan. The total cost or finance charge for a loan per year, expressed as a percentage. Includes up front costs, to obtain the loan, such as an application fee. These fees will result in a slightly higher number than the stated mortgage note rate.

Application Fee

A fee paid by the borrower on generating a loan application. The fee usually includes the cost of a full credit report on the applicant and a property appraisal. A typical fee might be about $350.

Appraisal

The procedure where a professional appraiser visits a property, prepares a lengthy report, with photographs, estimates.

The report concludes with an opinion about the value of the property. Most lenders in a real estate transaction require the Appraisal procedure. For example, an appraiser determines the value of a property by reviewing, among other things, the type of dwelling; it's condition, and searching out sales transaction records for similar properties in the neighborhood.

Assumption of Mortgage

An obligation undertaken by the purchaser to be personally responsible for the payment of an existing mortgage. The purchaser is then substituted for the original mortgagor on the property. The mortgagee, or mortgage holder (lender) then releases the original mortgagor from further liability.

Attorney Review Fee

This fee is often charged to the borrower as part of closing costs on a loan. It should be negotiable. One thing to look for is if the lender even has an attorney on staff conduct such a review.

Balloon Mortgage

A mortgage where periodic payment of principal and interest does not fully amortize the loan. The remaining balance of the loan is due in a lump sum at a specified date. Most balloon programs allow for refinancing the balance of the loan if certain conditions have been met, such as regular payments, etc.

Binder

Binder or Offer to Purchase – A preliminary agreement to purchase a property, secured by the payment of "earnest money" from the buyer to the seller. A binder secures the right to purchase a property under the stated terms for a limited time.

Binder

A title insurance or hazard insurance commitment to insure the title or the property, subject to conditions and exclusions stated in the document.

Building Line or Setback

Distances measured from a property line, beyond which construction cannot extend.

Cap

A limit on how much the interest rate or monthly payment can change, during an adjustment, or over the life of a loan. For example, a 2/6 cap might refer to a cap of 2% annually with a 6% cap for the life of the loan. The change can be up or down.

Cash Out

This term is usually found in refinancing procedures, where the applicant borrowers a larger sum in order to receive cash back from the transaction.

Closing Costs

A variety of expenses connected with the sale and purchase of real estate property. These are spelled out for the buyer in a document called the Good Faith Estimate.

Closing Day

This is the day in which all parties to the real estate sale meet to finalize the transaction. Your mortgage lender should provide a list of items needed for closing.

Cloud (on title)

An outstanding or unsettled claim which adversely affects the marketability of a property title.

Co-Borrower

A second borrower who signs on the on the mortgage loan, such as a spouse. Income, debts, assets, and the credit histories of both borrowers are combined for purposes of qualifying for the loan.

Commission

A commission is money paid to a real estate agent or broker by the seller.

Comparables

A term used in the appraisal process. Properties sold recently that are similar to a property being evaluated in an appraisal are called comparables.

Condominium

Individual ownership of units (portions) in a multi-unit structure or development with individual interest in common areas.

Conforming Loan

A conventional mortgage that conforms to the loan amounts and mortgage guidelines used by the Federal National Mortgage Association (FNMA, or "Fannie Mae") and/or the guidelines of The Federal Home Loan Mortgage Corporation (FHLMC, or "Freddie Mac"). A conforming loan is a mortgage under the limit. Conventional mortgages or conforming loans are classified as non-conforming or jumbo loans when the amount of the loan exceeds the limit. Fannie Mae and Freddie Mac guidelines establish the maximum loan amount, borrower credit and income requirements, down payment, and suitable properties. Fannie Mae and Freddie Mac announce new loan limits each year.

Conventional Mortgage

Conventional mortgage falls within Fannie Mae guidelines, and cover loans up to dollar limit at the current time. (These guidelines are sometimes adjusted up or down.)

Cooperative

A system of stock ownership in a corporation which in turn owns the structure.

Deed

A written document conveying real property.

Default

The failure to make timely payments under the terms of a loan agreement.

Encumbrance

A claim against a property by another party which usually impacts the transferability of the property. (Also may be referred to as a Lien.)

Equity

The difference between the fair market value of a property and the owner's current indebtedness on that property. (See also Loan to Value.)

Escrow

Funds held by a third party on behalf of others subject to their written or oral instructions.

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