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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.
• Amortization - 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 those agencies.
• 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 property.
• 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 Administration).
• 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 years.
• 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 transactions.
• 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 as "P&I".
• 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) borrowed.
• PITI - Abbreviation for "Principal Interest Taxes and Insurance". Usually means the total monthly cost of owning the home and is used for qualification purposes.
• 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 seller.
• 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.