A Glossary Of Important Mortgage Terms Every Investor Should Know

Mortgage and mortgage loans have become a medium of exchange among lenders and borrowers. However, many are still unaware of many mortgage-related terms and terminologies used in these mortgage transactions. 

We have listed a complete alphabetical glossary of all important terms and terminologies used frequently in mortgage transactions. 

The glossary aims at familiarizing all mortgage terms and terminologies to all potential investors.

A 

Acceptance

Acceptance or acceptance condition is when a seller and a buyer accept the terms and conditions of an offer. 

Abstract Of Title

The Abstract of Title is a document recording all past transactions catering to a particular land or property. The abstract of the title gives the owner a right to claim or dispose of their lands. 

Adjustable-Rate Mortgage (ARM) 

The ARM mortgage system is a system where the interest rates and the payment system may change during the lifespan of a particular loan. Mostly, interest rates may be low in the beginning and change within some time frame. 

Amortization  

Amortization is a situation where the debt amount gradually decreases. The principal debt amount follows a downward graph during amortization. 

Annual Percentage Rate (APR) 

The APR is the rate of interest at which lenders charge borrowers for the amount taken on a loan. The lender charges APR on a percentage basis. 

Appreciation

Appreciation happens when the value of a particular asset increases with time. 

B 

Balance Sheets

A balance sheet is a financial record of all the assets and liabilities in a tabular form for any investor or company. 

Base Rate

The base rate is the foundation or benchmark rate on which many financial operations take place. 

Bond 

A bond is a medium of income, including interest, and the issuer issues a maturity date from time to time. 

Break-Even Point 

The break-even point is at which the total expenses match exactly with the total income. 

Bridge Loan

A bridge loan is a short-period, termed loan, before entering any long-term financing loan. Borrowers can avail of short-term loans under a bridge loan setup. 

C 

Cap

Cap is the maximum limit up to which a particular rate of interest can increase. 

Cash To Close 

Cash to close is the sum of money a borrower needs to have in hand before a particular loan ends. 

Ceiling Rate 

The ceiling rate is the maximum interest rate allowed in one particular transaction. 

Certificate Of Reasonable Value (CRV) 

The Department of Veterans Affairs issues the Certificate Of Reasonable Value or CRV, where the maximum amount of loan and its value are assessed. 

Chain Of Title

The chain of title showcases all the property documents chronologically, from oldest to the most recent ones.

D 

Debt Consolidation

Debt consolidation is when a single loan is used to pay off multiple debts for a borrower. 

Delinquency

Delinquency is a situation where a borrower repays no amount on the decided period. 

Down Payment  

The down payment is the initial amount paid by a borrower and is the difference between the property value and the mortgage loan incurred. 

Draw Period

The draw period is within which a borrower can withdraw amounts (draw) based on the credit. 

E 

Equity

Equity is the difference between the current property value and the outstanding mortgage owed by the borrower. 

Equal Credit Opportunity Act (ECOA) 

The ECOA act is government law. It states that the lender should not discriminate against borrowers based on race, caste, color, religion. The lenders make credit available to everyone impartially. 

Extra Payment

Extra payment is the additional amount a borrower pays, which is more than the monthly installment. This amount helps to reduce the interest amount in the long run. 

F 

Fair Market Value

The fair market value is the selling price of a property usually assessed after all appraisal values. 

Floating Rate

A floating rate is determined according to the changes in the market. It either rises or falls according to market trends. 

Flood Insurance

Flood insurance is an insurance policy to protect property by insuring against damages caused by a flood. 

Funding Date

A funding date marks the commencement of a loan. A lender does the funding of the loan on the funding date. 

G 

Government Loan

Federal and governable bodies such as the RHS, FHA sanctions a government loan. 

H 

Hazard Insurance

Hazard insurance is an insurance policy to protect a property from hazards caused by fire, hurricanes, or theft. 

Housing Expense Ratio

The housing expense ratio is the percentage of your gross monthly income devoted to housing expenses. 

I 

Income

Money received, especially as a regular flow, for work or through investments.

Income Property  

Income property is the amount of income generated from any property. 

Inflation Rate

The rate at which the general rise in the price levels, goods, and services in an economy occurs. 

Interest Rate Cap  

The interest rate cap is the maximum limit up to which an interest can be charged. 

Insured Mortgage  

An insured mortgage is a type of mortgage safeguarded by an insurance company in favor of the lender if any frauds occur. 

J

Jumbo Loan  

A jumbo loan is also known as a non-conforming loan with high credit quality. It exceeds the limits preset by the Federal Housing Finance Agency (FHFA) 

L 

Liabilities  

Liabilities are the long-term or short-term debts which a borrower owes to lenders and needs to be paid off. 

Liability Insurance  

Liability insurance is a type of insurance that protects borrowers from the risk of liability in case of any fire, theft, etc. 

Line Of Credit  

A line of credit is the maximum loan a borrower can access as needed and repay within a specified period. 

M 

Margin

A margin is a gap a lender creates depending upon the interest rate adjustments and is carried on until the loan ends for a borrower. 

Market Value

The market value is the maximum amount or value of a particular asset that a buyer can legally quote in the market. 

Maturity Date 

A maturity date is a fixed date within which the borrower must repay all the liable interests or principal amounts to the lender. 

Mortgage

A mortgage is usually a loan sanctioned against an immovable asset, like a house or a commercial property. The lender keeps the asset as collateral until the borrower repays the total loan amount.

N 

Negative Amortization

Negative amortization is a situation where the monthly installments with interest do not match the actual amount received. The unpaid amounts keep on adding and increase the loan amount even more. 

Note Rate

The note rate is the interest rate specified on the mortgage note. 

Notice Of Default

A notice of default is a formal legal written document that notifies a borrower that some default has taken place, which is why a legal proceeding may also follow. 

O

Origination

The origination is the specified date on which the loan proceeds are distributed. 

Origination Fee

The amount of fees given to a lender for processing a loan is known as an origination fee. 

Owner-Occupied

Owner-occupied property is under the ownership of a lender as their primary residence. 

P 

Payment Cap

A payment cap is a preset boundary according to which the monthly payment bracket may increase in a period. However, most times, a payment cap may cause negative amortization situations as well for a borrower. 

Payoff

The payoff is the amount of money remaining to complete the payment of a loan. 

PITI 

PITI stands for principal, interest, tax, and insurance.

Pre-Approval

A pre-approval is a pre-qualification contract of a loan or mortgage of the lender with the borrower. 

Pre-Payment  

Pre-payment is the amount of money paid in before the monthly installment date, to reduce the amount of principal due. 

Pre-Paid Expenses 

Prepaid expenses account for those expenses whose payment is done in advance, such as insurance, taxes, etc. 

Prime Rate  

The prime rate is a special rate reserved for prime customers in a bank. A bank charges a prime rate for such customers before giving out any amount of money. 

Principal Balance 

The principal balance is devoid of any interest and is the main capital amount that needs to be paid back in a loan agreement. 

Promissory Note

A promissory note is a written document that promises the repayment of a specific amount within a specific period.

Q 

Qualifying Ratio

The qualifying ratio is a systemized process where calculations are made whether a borrower is eligible enough to qualify for a mortgage agreement. It can be calculated either on the housing expense factor the total debt outstanding of a borrower. 

R 

Rate Lock

A rate lock is a situation where a lender fixes a certain rate of interest that a borrower adheres to for a fixed time frame. 

Rate Reduce Option

Under a fixed mortgage agreement, a borrower is given the option to lower the rate of interest over a specific period. 

Real Estate Settlement Procedure (RESPA) 

The RESPA is a law for consumer protection that prevents any default practices from taking place. It ensures pre-closure of real rates, not levying of extra fees, and setting policies and rules for a mortgage agreement. 

Refinance 

Refinance is where a present loan is chosen to pay off with the proceedings coming from a new loan. Refinancing on the same property is used to lower interest rates and other financial costs. 

Rural Housing Service (RHS) 

The department of agriculture operates the rural housing services that provide loans and finance to farmers who cannot get it elsewhere. Any farmer thinking to buy a property may benefit from the RHS system. 

S 

Second-Home

A second home entitles a second person to own a property with the principal owner. 

Secured Loans  

Secured loans are given out to borrowers against security such as cars, houses, etc. Any personal property of the borrower serves as a security for the loan. 

Settlement  

Settlement is a situation where a particular property’s sale or purchase is deemed to be complete concerning all terms and conditions. A borrower agrees to pay the due amount left, and a lender accepts the decided amount. 

Settlement Agent

A settlement agent is who helps in the settlement process between a borrower and a lender and thus closes the mortgage by settlement. 

SOFR 

SOFR stands as Secured Overnight Financing Rate, which calculates the cost borrowed overnight. 

Subordinate financing

Subordinate financing is a second priority mortgage that has a lesser priority than the first mortgage agreement. 

T 

Term

Terms are the time frame within which the borrower needs to pay off a loan amount. 

Third-Party Fees

A third-party fee is an amount charged by a third-party agent other than a borrower or lender for their services. 

Title

The title refers to the ownership of a particular property. 

Title Company

Title companies are the ones who scrutinize the title and ownership details and issue an allowance for a mortgage. 

Title Insurance  

Title insurance is a legal contract that safeguards any illicit activities favoring the borrower or the lender. 

U 

Unapplied Funds

When the payments made for a loan are either partly or completely reflected in the suspense account, it is termed as unapplied funds. 

Upfront Costs

Upfront costs are charged when applying for a loan. For example, a loan application fee is called an upfront cost. 

V 

Variable-Rate

As the name suggests, a variable rate fluctuates and is not stagnant. It increases or decreases concerning the prime rates. 

W 

Wire Transfer

Wire transfer is a method of transferring money from one account to another within a country or internationally. 

Y 

Year-End statement

A year-end statement reflects all the interest either paid up or left due in a specific financial year. 

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