Glossary of Mortgage Terms
- Accelerated Depreciation - Depreciation in which deductions
start at their highest annual value in the first year and steadily
diminish in later years.
- Adjustable Rate Mortgage (ARM) - A
mortgage in which the interest rate is adjusted periodically according
to a preselected index. The terms, adjustment schedule, and index to be
used can be negotiated by the borrower and lender. Specific types
include the renegotiable rate mortgage and the variable rate mortgage.
Also referred to as a Canadian rollover mortgage.
- The process by which a loan is repaid over time. Most loan programs
provide for full repayment of the borrowed amount over the term of the
loan. These loans are known as “fully amortizing.” For example, making
the payments for 30 years on a 30 year fixed rate loan will pay off the
loan in 30 years.
- Appraisal - A report made by a qualified
person setting forth an opinion or estimates of value. The term also
refers to the process by which this estimate is obtained.
APR - "Annualized Percentage Rate" as defined by the Federal
Government is the "effective" cost of borrowing money which takes into
account certain costs of borrowing such as prepaid interest, points,
escrow fees, and private mortgage insurance.
Balloon Mortgage - A mortgage with periodic installments of
principal and interest that do not fully amortize the loan. The balance
of the mortgage is due in a lump sum at a specified date in the future,
usually at the end of the term.
Closing Costs - Real estate transactions will have charges for
escrow services, title insurance, appraisals, credit reports, etc. which
are costs of the transaction and paid as part of the closing process.
Conforming Loans - Generally, those loan amounts which conform to
FNMA/FHLMC loan limits, currently $227,150. Also means those loan
programs which ‘conform’ to income, credit, and property guidelines for
Conventional Loan - Residential real estate loans not insured or
guaranteed by the Federal Government.
Down Payment - Amount of money the borrower intends to pay
towards the purchase price of the home and not counting costs involved
in the transaction including title, escrow, appraisal, etc. The down
payment is often expressed in percentage terms, e.g. "20% down payment".
Escrow - In a purchase transaction, this is the third party
company which facilitates the transfer of title from seller to the buyer
and the transfer of purchase funds from the buyer to the seller. In a
refinance transaction, the escrow company facilitates the payoff of the
existing loan(s), and the recording of the new loan against the
Escrow Account - Also known as an "impound account", this is an
account in which the lender holds the borrower’s monthly payments for
property taxes and insurance until such time as those obligations need
to be paid by the lender on the behalf of the borrower.
Government Loan - Loans guaranteed or insured by the Federal
Government such as FHA (Federal Housing Authority) and VA (Veteran’s
Gross Monthly Income - For salaried borrowers, their monthly
earnings prior to any deductions for income taxes or any other employee
deductions. For self-employed borrowers, this would be the monthly
earnings after all business expenses are deducted. Gross monthly income
for self employed borrowers is usually averaged over the prior two
Impounds - Many borrowers choose to include monthly installments
for their property taxes and homeowner’s insurance with their monthly
mortgage payment. The lender holds or impounds these funds until such
time as the property tax payment and the annual insurance premium are
payable. Then the lender pays those obligations on the behalf of the
borrower. Impound accounts for taxes and insurance may also be called
"escrow" accounts. However, this escrow account is different from the
escrow services used to facilitate real estate purchase and refinance
Insurance - Usually hazard (fire, etc.) insurance on the home to
be purchased, the costs of which are calculated on a monthly basis for
qualification purposes. "Insurance" may also include other insurance
policies for flood, earthquake, hurricane, etc.
Interest Rate - The rate used to determine the monthly payment on
the loan. May also be known as "rate" or "‘note rate".
Jumbo Loan - Generally, those loans which are in excess of FNMA/FHLMC
limits, currently at $227,150.
Loan Amount - The actual amount of money borrowed. Also known as
the "contract loan amount".
Lock - Depending on the loan program, the borrower may ask the
lender to guarantee the interest rate quoted for the loan for a specific
period of time, e.g. 30 days.
Monthly Payment - Usually used to describe the monthly principal
and interest payment on the loan without including monthly payments for
taxes, insurance, and private mortgage insurance. May also be expressed
Non-conforming Loans - Those loan amounts in excess of FNMA/FHLMC
loan limits currently $227,150. May also refer to those loan programs
which allow for income, credit and property characteristics which do not
conform to FNMA/FHLMC guidelines.
Note Rate - The contract rate which is used to determine the
actual principal and interest payment on the loan. It is the interest
rate which appears on the loan contract, also known as the "note".
P&I - Abbreviation for "Principal & Interest" which is the
payment on the loan. Each loan payment for a fully amortizing loan is
part interest and part repayment of the money (i.e., principal)
PITI - Abbreviation for "Principal Interest Taxes and Insurance".
Usually means the total monthly cost of owning the home and is used for
PMI - Abbreviation for "Private Mortgage Insurance" which insures
the lender against any loss arising from the borrower’s default
(non-payment) on the loan. PMI is usually required when the borrower’s
down payment or equity is less than 20%. PMI is the private sector
equivalent of FHA insurance on government loans.
Principal - The amount of money borrowed. Also that portion of
the monthly payment which repays the money borrowed.
Purchase Price - The selling price agreed upon by buyer and
Taxes - Property taxes payable on the home to be purchased.
Lenders will take the annual amount of property taxes to be paid on the
home and divide by 12 to determine the property tax obligation on a
monthly basis for qualifying purposes.
Total Monthly Debt - The total of all debt to be paid monthly by
the borrower. Includes the monthly payment on the proposed real estate
loan and other monthly housing costs as well as payments on all other
borrower revolving and installment debts.
Variables - To calculate a loan payment, one must know (1) the
amount of money which is to be borrowed, (2) the length of time over
which the money will be repaid (term), and (3) interest rate being
charged on the loan amount. From these "variables", one can
mathematically calculate a loan payment. Changes in any or all of the
variables will change the payment. Since the relationship between these
variables is mathematical, one can solve for any one of the variables as
long as the other three variables are known. For example, if one knew
the payment amount, the interest rate, and the loan amount, then one
could solve for the term of the loan.