The Ultimate Guide to Mortgage Loan Speak

Finally a Mortgage Glossary that you can Understand!

The terms that mortgage lenders use can be daunting and confusing. The purchase of your home should be a blessing, not a word jumble that makes you feel like a 5th grader. My easy-to-comprehend mortgage glossary will help you brush up on your mortgage speak so you know accrued interest from a wrap-around mortgage.

A-credit customer – is basically a customer with a stellar credit rating. Customers with credit scores over 720, will get the best interest rates and mortgage options from mortgage lenders.

Accrued interest – This interest adds to the balance of your mortgage loan because it’s Earned, but not paid.

Adjustable rate mortgage – also referred to as an ARM or a variable rate mortgage, in which the interest rate is fixed for a specified amount of time, then changes later, based on the bank rate.

Affordability – basically the maximum price you can afford to pay for your home.

Agreement of sale – is signed by both the purchaser of the home and the seller of the home. The agreement states all terms and conditions agreed upon before the property is sold – such as any repairs that need to be made – before the home is sold.

Amortization – is the re-payment schedule of the mortgage – minus the interest. This means that the balance of the loan declines when scheduled mortgage payments are made.

Amortization schedule – is the mortgage payment schedule that indicates the interest rate, the term of the loan, the loan balance, tax and insurance payments that need to be made on the mortgage loan.

Amount financed – is the mortgage amount owed – minus the closing costs.

Application - A standard mortgage loan application, also called a 1003. A 1003 includes personal information about the borrower, the home in purchase, and the mortgage amount applied for.

Application fee – Not all lenders charge one, but some charge an application fee that encompasses fees for property appraisal and the credit report.

Appraisal – a documented estimate of the property’s value.

Appraiser – a professional individual who estimates the value of a home and property. Most sellers will get their home appraised before putting it on the market to get an idea of it’s worth.

Appraisal fee – is charged to the seller of the property.

Annual Percentage Rate – also referred to as APR, which includes the interest rate, points, and flat dollar charges. The APR is calculated based on the full term of the mortgage loan.

Approval – refers to the approval of the borrower's loan application.

Adjustable rate mortgage – also referred to as an AMR is the same as a variable rate mortgage, in which the mortgage rate starts at a fixed rate for a specified amount of time, and then varies according to the bank rate until the end of the loan’s term.

Assumption – occurs when the purchaser of a home agrees to repayment any outstanding loans on the property.

Assumable mortgage – when a buyer takes over the mortgage contract of the seller.

Back-end commission – a fee that the lender pays the mortgage broker, as a commission for finding them borrower clientele.

Bad-faith estimate – See our article How Much House Can I Afford? A bad faith estimate refers to manipulated closing costs so that the mortgage amount is attractive to the potential borrower.

Balance – is the outstanding amount remaining on a mortgage loan.

Balloon mortgage – See our article on Understanding Your Mortgage Options. A balloon mortgage is similar to a fixed rate mortgage in that the borrower pays their mortgage payments at a lower monthly fixed rate. However after 5, 7 or 10 years (as stipulated in the borrower’s agreement) the borrower will be responsible for paying back the full balance of the entire loan, then re-applies for a mortgage at a new rate and terms.

Bi-monthly mortgage – is a split mortgage payment, where the borrower makes two mortgage payments on the first and 15th of the month.

Bi-weekly mortgage – when mortgage payments are made every two weeks in order to pay off a mortgage more quickly with less interest.

Buy-down - the borrower agrees to pay points to get a lower interest rate on their mortgage.

Buy-up – the borrower agrees to pay a higher interest rate to get a rebate from the lender upfront.

Cash-Out – when a borrower takes "cash-out" of the transaction on the sale of the home, instead of taking out a home equity loan.

Closing – the transference of home ownership from the seller to the purchaser.

Closing date – the date upon which the closing occurs.

CMG plan – allows the borrower to write checks out of their mortgage to pay back a loan early.

Co-borrowers – when more than a single person is responsible for the repayment of a mortgage loan. Co-owners are often spouses, but sometimes common-law, friends or family members.

Construction financing – a mortgage meant specifically for borrowers having homes built rather then purchasing an existing property.

Conversion option – gives the borrower the option to transform a variable rate mortgage to a fixed rate mortgage when the interest rate is attractive.

Cost of savings index – or a COSI determines the interest rates on a variable or adjustable rate mortgage (ARM).

Credit report – a detailed credit history on all of an individual’s credit activities. Lenders will request a copy of your credit history to determine your credit-worthiness and how much of a mortgage and rates you should get.

Credit score – is the 3 digit score that determines your credit worthiness. Your credit score is based on your credit history.

Cumulative interest – is a calculation of all interest payments paid during the term of the loan.

Debt consolidation – is when all debt is transferred under one debt or consolidated loan, with one payment, terms and interest rate.

Default – is when the borrower fails to meet the terms of their loan agreement.

Down payment – a percentage of the property value, or mortgage loan amount, that the borrower “puts down” on the purchase price of the home.

Dual index mortgage – means the interest rate is adjusted based on the average interest rate index.

Equity – or rather home equity, is the value of the home. This value is deducted from the outstanding mortgage.

Escrow – a condition in the mortgage agreement, which indicates that a certain amount of money be put aside for taxes and hazard insurance to the regular monthly mortgage payment. This money is put in escrow should such situations occur.

FICO Score – is named for the company that created it – the Fair Isaac Corporation. The FICO calculation is the universal calculation used to determine credit scores.

Fixed rate mortgage – or an FRM, is a mortgage where the interest rate is fixed, so the monthly mortgage payments are always the same. FRM is a good idea if the bank rates are low, but if they’re not you can end up paying more for your home. FRM also supply stability to the borrower, because the mortgage payments never change.

Foreclosure – when a lender takes legal possession of a property, should the borrower default on their borrower’s agreement.

Front-end fee – the opposite of back-end, front-end fees are those paid to the mortgage lender by the borrower.

Good faith estimate – every lender is required to provide a full list of closing costs to the borrower 3 days after they apply for a mortgage. This list will fully prepare a borrower of the extra costs due, outside of the purchase price of the home.

Grace period – is the period in which the borrower can be late with a mortgage payment and not have to pay penalty fees.

Hazard insurance – protects a property against fire and other natural occurring disasters.

Homeowners insurance – is the same as hazard insurance, it protects the borrower and property fire and hazards. Homeowner’s insurance is required by the lender before a mortgage is approved.

Initial interest rate – on an ARM is the 5, 7 or 10 year period of fixed interest.

Interest-only mortgage – is a mortgage that has the borrower pays all of the interest up-front.

Interest rate – the interest charged on an annual basis on a mortgage loan.

Investor – any borrower who purchases investment property – and chooses not to live in said property.

Late payment – is any mortgage payment received after the grace period. Penalties will apply.

Lease-to-own – where instead of purchasing a home, the buyer instead leases the home. All lease payments go towards the price of the home, and at the end of the lease the tenant can buy out the home in full.

Lien – If a borrower defaults the lender can take legal possession of the property.

Loan officer – play middle man between you (the borrower) and the lender.

Mandatory disclosure – laws that protect the borrower and ensure the lender fully discloses all information during the mortgage process.

Maturity – or loan maturity refers to the period up until the last mortgage payment is due.

Mortgage – the loan agreement and the lien on the sale of a house to secure the lender on loan repayment. The mortgage states that if the borrower defaults on the loan agreement, the lender has legal right to take possession of the home.

Mortgage broker – offers advice and provides loans from various lenders. The broker acts as middle man, he or she receives the mortgage application and processes the loan, but doesn’t loan their companies money (like a banker). For more information please see our article Mortgage Brokers vs. Bankers.

Mortgage insurance – protects the lender against default by the borrower.

Mortgage insurance premium - monthly and annual premiums that the borrower pays towards mortgage insurance (see above).

Mortgage lender – the company who supplies the financing for a borrower’s mortgage.

Mortgage payment – is the monthly payment of the mortgage balance and interest on your loan.

Negative amortization – also deferred interest, refers to when the mortgage balance is less than the interest due.

No-Cost mortgage – settlement costs paid by the lender seller, as opposed to the property buyer.

Nominal interest rate – a fixed interest rate that’s doesn’t change due to inflation.

Option fee – the up-front fee paid for the option to lease to own later.

Origination fee – a lender’s fee charged as part of the closing costs.

Partial prepayment – larger mortgage payments made to pay off the loan faster and with less interest.

Permanent buy-down – same as a buy-down, is in exchange for a lower interest rate on your mortgage.

Points – are paid by the borrower in exchange for a lower interest rate on a loan. Most lenders will offer point/reduced interest rate packages.

Pre-approval – a ballpark mortgage amount given to a borrower before they actually get approved for a mortgage. Most real estate agents won’t work with a buyer unless they have been pre-approved.

Price-gouging – refers to a deceptive and illegal practice by lenders who charge excessive interest rates and lenders fees.

Principal – is the loan balance minus interest and extras.

Qualification – is written documentation that proves a borrower can repay a loan.

Rate caps – are placed on the interest rates of adjustable rate mortgages (ARMs), so that they don’t exceed a maximum amount.

Rate protection – protects the borrower of an ARM against rising interest rates during the period of loan application and approval.

Referral fees – are payments made to brokers for referring clients.

Refinance – paying off a mortgage with a new mortgage.

Second mortgage – a loan used to pay off a property that already had a mortgage.

Self-employed borrower – will often have trouble getting a mortgage. Their mortgage application is based on their tax returns from self-income.

Settlement costs – are paid when the mortgage closes.

Stated assets – is a document that states all of the borrower’s assets – such as any investments, savings accounts, properties, automobiles, or anything of value that the borrower currently owns.

Sub-prime borrower – are borrowers with poor credit.

Sub-prime lender – are lenders who service borrowers with poor credit.

Term – the length of the loan.

Underwriting – the process by which a lender or lending officer determines if a borrower should be approved for a loan.

Wrap-around mortgage – is when a buyer takes over the mortgage on an existing home.