Glossary of Mortgage Related Terms

The lingo surrounding mortgages can be confusing and frustrating. But rest assured, real estate and mortgage related concepts can be understood and digested by the average consumer with the support of the tools such as this

Glossary of Terms: This glossary is a reference document that can be accessed as need to clarify some of the frequently misunderstood terminology dealing with mortgage matters.

“A” Credit Rating: The highest consumer credit rating. This stellar classification, requiring a FICO score of 720 or higher, qualifies consumers for the lowest rates offered by lender.

Acceleration clause: Provision contained with a loan that allows the lender to demand repayment in full of a loan when there is a violation of one or more clauses in the loan agreement.

Affordability: The capacity of the prospective borrower to pay for a house. Generally determine by a formula considering income and debt, affordability is the maximum amount the prospective purchaser can be approved for a mortgage.

Amortization Schedule: Document which breaks down each mortgage payment, for the life of the loan. Breakdown shows principal, interest, outstanding loan balance, tax and insurance, should tax and insurance payments be escrowed and paid for by the lender, for each scheduled payment for the duration of the loan.

Annual Percentage Rate (APR): The total cost of the loan. This figure includes the interest rate plus the other fees, such as points, paid to acquire the loan.

Balloon Mortgage: Mortgage that requires borrowers make payments in full by a stated deadline. Typically calculated over a 30-year term, the balloon must be paid in full by a designated deadline, usually within a seven year period.

Cash Out Refinancing: Transaction in which the borrower refinances for an amount greater than the outstanding loan balance, taking the additional amount from the transaction in the form of cash.

Closing: In the case of a real estate sale, a closing is the legal process of transferring ownership and settling the financial exchange between the seller, lender and buyer. In the case of refinancing, closing is the process of settling the financial exchange between the homeowner and the old lender.

Credit Report: Developed by a credit reporting agency, it is a detailed compilation and assessment of an individual's credit history. It is used to evaluate the creditworthiness of the person applying for a mortgage loan.

Down payment: Money that the buyer pays in cash and does not finance when obtaining a mortgage.

Equity: Difference between the fair market value of the home and the balance still owed on mortgages and other liens.

Equity grabbing: Predatory tactic employed by lenders so that the borrowers are more likely to default. As result of this strategy, lender feel entitled to “grab” the equity left behind by the defaulted borrowers.

Escrow: Money or other items of value that are, by mutual agreement, placed with a third party for safe-keeping. The agreed upon understanding is that this money will be delivered upon fulfillment of a specified condition.

First Mortgage: Mortgage that has first priority for payment among any loans recorded against the property.

Interest-only mortgage: Mortgage for which only the interest is paid for a certain period of the loan. The principal remains unchanged during this period.

Lien: Legal provision that allows the lender to lay claim to the borrower’s property if the borrower fails to repay the loan.

Point: Amount equal to one percent of the amount of the mortgage. Points are paid to the lender at closing as a charge for the loan. Lenders typically offers range of rate and points for mortgage-related loans.

Sub-prime borrower: Borrower with a weaker credit history who will, in turn, be required to pay more for credit and are also sometimes subject to questionable lending tactics employed by unethical lenders.

Sub-prime lender: Lender who specializes in loans to sub-prime borrowers. Not all sub-prime lenders engage in questionable tactics.

Underwriter: Person whose job it is to review and evaluate all of the information pertaining to a loan applicant’s mortgage in order to assess whether the loan should be approved.