Lending & Loan Terms

Adjustable Rate Mortgage (ARM)
A type of loan for which the interest rate can change, usually in relation to an index interest rate. With an ARM, the interest rate and monthly payment may start out lower than a fixed-rate mortgage, but both the interest rate and monthly payment can increase substantially.
Paying off a loan with regular payments over time, so that the amount you owe decreases with each payment.
Annual Income
A factor in a mortgage loan application that typically refers to your total earned, pre-tax income over a year. Whether a lender will rely upon a specific income source or amount when considering you for a loan will often depend upon whether you can reasonably expect the income to continue.
Annual Percentage Rate (APR)
A broader measure of the cost of borrowing money than the interest rate. The APR reflects the interest rate, any points, mortgage broker fees, and other charges that you pay to get the loan. For that reason, your APR is usually higher than your interest rate.
A written document that shows an opinion of how much a property is worth. The appraisal gives you useful information about the property, such as what makes it valuable and how it may compare to other properties in the neighborhood.
Cash-out Refinance
A type of refinance that replaces your old mortgage with a new one that has different terms. You will likely take out a loan larger than what you have left to pay on the home, so that you can receive the surplus in cash.
Closing Disclosure
A required five-page form that provides final details about the mortgage loan you have selected. It includes the loan terms, your projected monthly payments, and how much you will pay in fees and other costs to get your mortgage.
Conventional Mortgage Loan
Any mortgage loan that is not insured or guaranteed by a government agency, such as the Federal Housing Administration, Department of Veterans Affairs, or Department of Agriculture.
Co-Signer (Co-Borrower)
Someone who agrees to take full responsibility to pay back a mortgage loan with you. This person is obligated to pay any missed payments and even the full amount of the loan if you do not pay. Having a co-signer on your mortgage loan gives your lender additional assurance that the loan will be repaid, but your co-signer’s credit record and finances are at risk if you don’t repay the loan.
Credit History
A record of your credit accounts and your history of paying on time as shown in your credit report. Consumer reporting companies collect and update information about your credit record and provide it to other businesses, which use it to make decisions about you.
Debt-to-Income Ratio
The sum of your monthly debt payments divided by your gross monthly income. This number is one way lenders measure your ability to manage the monthly payments to repay the money you plan to borrow.
Down Payment
The amount you pay toward the home upfront. You put a percentage of the home’s value down and borrow the rest through your mortgage loan. Generally, the larger the down payment you make, the lower the interest rate you will receive and the more likely you are to be approved for a loan.
Earnest Money
A deposit a buyer pays to show good faith on a signed contract agreement to buy a home. The deposit is held by a seller or third party like a real estate agent or title company. If the home sale is finalized, the earnest money may be applied to closing costs or the down payment. If the contract is terminated for a permissible reason, the earnest money is returned to the buyer. If the buyer does not perform in good faith, the earnest money may be forfeited and paid out to the seller.
The amount your property is currently worth minus the amount of any existing mortgage on your property.
Escrow Account
An account set up by your mortgage lender to pay certain property-related expenses, like property taxes and homeowner’s insurance. If your mortgage doesn’t have an escrow account, you pay the property-related expenses directly.
FHA Loan
A loan from a private lender that is regulated and insured by the Federal Housing Administration. FHA loans allow for lower credit scores and down payments, compared to conventional loans. Maximum loan amounts vary by county.
Fixed-Rate Mortgage
A type of home loan for which the interest rate is set when you take out the loan. The interest rate will not change during the term of the loan.
When your servicer temporarily allows you to pay your mortgage at a lower rate or to stop paying your mortgage. Depending on the kind of loan you have, there may be different forbearance options. Remember that you will have to make up these missed or reduced payments when your forbearance period is over.
When the lender or servicer takes back property after the homeowner fails to make mortgage payments. Generally, borrowers must be notified if the lender or servicer begins foreclosure proceedings. Federal rules may apply to when the foreclosure may start.
Home Equity Line of Credit (HELOC)
A line of credit that allows you to borrow against your home equity. Unlike a home equity loan, HELOCs usually have adjustable interest rates. You can borrow money for a specified time from when you open your account, known as the “draw period”. During the draw period, you can borrow money, and you must make minimum payments. When the draw period ends, you will no longer be able to borrow money from your line of credit.
Home Equity Loan
A loan that allows you to borrow money using the equity in your home as collateral. You receive the money from a home equity loan as a lump sum. A home equity loan usually has a fixed interest rate.
Homeowner’s Insurance
Insurance that pays for losses and damages to your property if something unexpected happens, like a fire or burglary. When you have a mortgage, your lender generally wants to make sure your property is protected by insurance.
Home Improvement Loan
A loan you take out to remodel or otherwise improve your home. If you have equity in your home, you may be able to use it as security for a home improvement loan.
Interest Rate
The cost you will pay each year to borrow the money from a mortgage loan, expressed as a percentage rate. The interest rate does not reflect fees or any other charges you may have to pay for the loan.
Interest Rate Cap
The maximum interest rate increase that can occur annually for an adjustable rate mortgage, even if the rate would have increased more under market interest rates.
Loan Deferment
An agreement which allows a borrower to avoid foreclosure by postponing his or her overdue mortgage payments. The deferred amount comes due when the borrower refinances the loan or sells the home, or the mortgage ends in another way.
Loan Estimate
A three-page form that you receive after applying for a mortgage. The form provides you with important information, including the estimated interest rate, monthly payment, and total closing costs. The Loan Estimate shows you what loan terms the lender expects to offer if you decide to move forward with the loan.
Loan Modification
A change in your loan terms that can reduce your monthly payment to an amount you can afford. Modifications may involve extending the number of years you have to repay the loan, reducing your interest rate, and/or forbearing or reducing your principal balance.
Loan-to-Value Ratio
A measure comparing the amount of your mortgage with the appraised value of the property. Mortgage lenders may use the LTV in deciding whether to lend to you and to determine if they will require private mortgage insurance.
Maturity Date
With regard to a mortgage or other loan, the maturity date is the date by which the entire loan should be paid off or any remaining amount might come immediately due.
An agreement between you and a lender that allows you to borrow money to purchase or refinance a home, and that gives the lender the right to take your property if you fail to repay the money you’ve borrowed.
Mortgage Insurance
Insurance that protects the lender if you fall behind on your payments. Mortgage insurance is typically required if your down payment is less than 20 percent of the property value. Mortgage insurance also is typically required on FHA and USDA loans.
Mortgage Interest Rates
Interest rates specifically associated with loans to buy a home.
Mortgage Term
The period of time over which you have to repay a loan. For most types of homes, mortgage terms are typically 15, 20, or 30 years.
Option ARM
Payment options for an adjustable rate mortgage. Typically includes paying interest only, payment a minimum amount, or paying both principal and interest.
Origination Fee
What the lender charges the borrower for making the mortgage loan. The origination fee may include processing the application, underwriting and funding the loan, and other administrative services.
Owner’s Title Insurance
Insurance that provides protection to the homeowner if someone sues and says they have a claim against the home before the homeowner purchased it.
How much you will actually have to pay to satisfy the terms of your mortgage loan and completely pay off your debt. Your current balance might not reflect how much you actually have to pay to completely satisfy the loan, as the payoff includes the payment of any interest you owe and any other fees you may have incurred.
The ability to reduce the interest you pay on a mortgage slightly by paying an upfront fee.
A contingent approval for a certain amount of money as long as a full credit check and other factors, including home valuation and underwriting, checks out.
A process by which a lender does a soft credit check to prequalify you as a good candidate for various offers.
The amount of a mortgage loan that you have to pay back. Your monthly payment includes a portion of that principal. When a payment on the principal is made, the borrower owes less, and will pay less interest based upon a lower loan size.
Pricipal Balance
How much you owe on the home or loan not including any interest. Typically, this is close to the total amount you owe or what your payoff on the home would be at any given time.
Principal Payment
A payment completely toward the principal on the loan or the amount of your payment that is put toward the principal amount. Usually, the mortgage payments you make are split between interest, principal and escrow.
Private Mortgage Insurance
Also known as PMI. This is a requirement that you carry homeowners insurance and that it’s paid for through your mortgage, which increases the monthly amount you pay. PMI is usually required unless you make a 20% or higher down payment or have 22% or more equity in your home.
Usually refers to the APR or interest rate on a mortgage loan. Ex. “Can I get a good rate on my mortgage?”
Rate Lock
A temporary freeze on the interest rate being offered. A mortgage lender may approve you at a certain APR, for example, and lock that offer in for 30 days while you shop for or work to close on a home.
Rate/Term Refinance
A type of refinance that replaces your initial mortgage with a new one that comes with better terms. Your refinanced mortgage brings a new interest rate and a different required monthly payment, and probably a new term length. A rate/term refinance allows you to pay off your mortgage sooner and to pay less in interest.
Borrowing via a new loan to pay off the existing mortgage. This is typically done to reduce the monthly payment or get a better interest rate to save money.
Right of Rescission
The right of a consumer to cancel certain types of loans. If you are buying a home with a mortgage, you do not have a right to cancel the loan once the closing documents are signed. If you are refinancing a mortgage, you generally have until midnight of the third business day after the transaction to cancel the mortgage contract.
Short Sale
A sale of your home for less than what you owe on your mortgage. A short sale is an alternative to foreclosure, but because it is a sale, you will have to leave your home.
Start Rate
The beginning or opening rate you pay at the start of an adjustable rate mortgage.
The legal document showing who has current ownership of a property. The bank or lender has it until you pay off the mortgage, and then, it transfers to you.
Title Company
A third party that ensures the seller of a home has a legal right to sell it and transfer the title to someone else.
Title Fraud
Misrepresenting legal ownership of a title with the intent of defrauding someone of money.
Title Insurance
Insurance that protects the owner of a home from title fraud, whether they own the home outright or are still paying a mortgage.
Title Search
The act of searching for any other owners or liens against a title to ensure it is in the free and clear before a home purchase is finalized.
The process of evaluating how much risk a borrower represents so a lender can make an informed approval and offer. Underwriting decides whether someone will be approved for a loan and what rate may be appropriate.
A loan that is part of one of the U.S. Department of Agriculture’s mortgage programs. The USDA offers mortgage programs with no down payment and generally favorable interest rates to rural homebuyers who meet income eligibility requirements.
VA Loan
A loan that is part of the Department of Veterans Affairs’ mortgage program. This loan program helps servicemembers, veterans, and eligible surviving spouses buy homes. The VA does not make the loans, but sets the rules for who may qualify and the mortgage terms.