Mortgage Terminology

Annual Cap: A term that applies to ARMs. Once an ARM is in its adjustment period, the rate is capped at a percentage on a yearly basis.

APR (Annual Percentage Rate): Annual percentage rate (APR) is the cost of the loan plus note rate and fees, expressed as a yearly rate.

Appraisal: The fair market value of your property.

Adjustable Rate Mortgage (ARM): Generally, an ARM is fixed for a specified number of years, then enters into an adjustment period.

Balloon Mortgage: A loan product that is generally fixed for 5 or 7 years, after which you are required to pay your loan balance in full.

Commitment: A written statement from a lender that specifies the amount it is willing to loan you, at what rate and for how long.

Deed of Trust: The instrument that secures your property for the lender as collateral for your debt.

Earnest Money Deposit: An earnest money deposit is used in a purchase when the potential buyer puts down a portion of his or her total down payment to show good faith that they truly intend to purchase the property. This is an important facet of the purchase process, so please speak about this in depth with your Realtor®.

FICO (Fair Isaac and Company): Your credit score as calculated into a formula. The terms ‘credit score’ and ‘FICO’ are used interchangeably.

Fixed Rate Mortgage: A loan product in which after the rate is locked, it is fixed for the entire life of the loan.

Float: “Floating” a rate means that you are not locked in or guaranteed a particular rate. You may choose to float if you feel that interest rates will decrease, or if a property address has not yet been determined (in a purchase pre-approval).

Good Faith Estimate: Required by law to be sent out to borrowers within 3 days of applying for a loan. In good faith, the lender or broker must disclose to the best of their ability the cost of the loan.

Homeowners Insurance: This insurance is required by the lender, although there are various policies from the most standard to the most extensive. The amount of insurance a lender requires will cover the property itself, not necessarily the possessions within.

Impound Account: In lieu of paying property taxes and homeowners insurance on your own twice a year, you may choose to have the lender pay for them instead by adding the cost to your monthly mortgage payment.

Index: Associated with ARM products. Once your ARM enters its adjustment phase, your rate is determined by the Index + Margin. There are multiple index options, and each one has distinct market characteristics and fluctuates differently.

Lifetime Cap: Associated with ARM products. Your start rate plus a certain percentage amount (usually 5%) determines your lifetime cap, which means that the rate you pay at will never exceed that cap.

Loan-to-Value Ratio (LTV): Your LTV ratio is the amount of the loan you receive divided by the appraised value of your home. A lower LTV means less risk to the lender.

Lock: When you lock in a rate, that rate is your guarantee, as long as your loan closes within the pre-determined time frame, usually 30 days.

Margin: Associated with ARM loan products. Essentially, it is the lender’s cost of doing business and does not fluctuate. Margins generally range from 2.25% to 4%, depending on which ARM product you choose.

Negative Amortization Loan: Allows you to defer interest and pay less than what you owe. Since your payment may not cover all the interest due, you may end up owing more than your original loan balance.

Points: Points are loan origination fees and each point totals 1 percent of the loan amount. They will increase your upfront closing costs, but will reduce the interest rate.

Pre-approval: A written pre-approval means that you have submitted all necessary documentation to receive a loan and that a lender will back up your offer to purchase a home.

Preliminary Title Report: A title company completes a search to determine if there are any other claims to ownership for the specified property.

Private Mortgage Insurance (PMI): Required on all loans greater than 80% of the property’s value.

Promissory Note: States that you promise to pay the lender the amount owed.

Property Taxes: Determined by your assessed value. You pay taxes to the county for community services such as schools, public works, and local government.

Qualifying Ratio: Also known as a debt-to-income ratio. Every lender utilizes a qualifying ratio guideline for approval of a loan. Your homeowner costs (Principal, Insurance, Taxes, and Insurance) and your monthly liabilities are added up and then divided by your monthly income to determine qualification for a loan.

Title Insurance: Required in every purchase and refinance. You are insured that the title company will pay for any loss caused by defects of title on your real estate.