Mortage Glossary

Adjustable Mortgage Loan (AML): Any mortgage that does not have a fixed interest rate and fixed payments for the term of the loan, or does not amortize to zero at the end of the set term, when all required payments are made on time. (AMLs include ARMs, Buydowns, GEMs, GPARMs, and other mortgage types.)
Adjustable Rate Mortgage (ARM): A mortgage in which the interest rate is adjusted periodically according to the movement in a preselected index. Technically, ARMs do not include mortgages where the payments change for other reasons, such as buydowns, although the term is often used in this broader sense.
Amortization Schedule: A timetable for payment of a mortgage showing the amount of each payment applied to interest and principal and the remaining balance.
Amortize: Reduce a debt by regular payments of both principal and interest. (“Fully Amortizing” means payments scheduled to pay off the debt completely during a set term.)
Annual Percentage Rate (APR): The total yearly cost of a mortgage stated as a percentage of the loan amount; includes the base interest rate, primary mortgage insurance, and loan origination fee (points).
Appraisal: A professional opinion of the market value of a property.
Appreciation: An increase in the value of a house due to changes in market conditions or other causes.
Assessed Value: The valuation placed upon property by a public tax assessor for purposes of taxation.
AUS: Automated Underwriting System.
Balloon Mortgage: Generally a fixed rate mortgage with a 30 year amortization, but with a maturity date often set at 5 or 7 years.
Borrower: One who receives funds with the expressed or implied intention of repaying the loan in full.
Buydown: Money advanced by an individual (builder, seller, etc.) to reduce monthly payments for a home mortgage either during the entire term or for an initial period of years.
Cap: A provision of an ARM limiting how much the interest rate or mortgage payments may increase.
Cash Out: A loan transaction in which the borrower receives funds at the time of closing.
Claim: An amount requested of an insurer, by a policyholder or a claimant, for an insured loss.
Closing: A scheduled appointment where and when a sale is finalized, the buyer signs the mortgage and closing costs are paid. Also called “settlement.”
Closing Costs: Expenses (over and above the price of the property) incurred by buyers and sellers in transferring ownership of a property. Also called “settlement costs.”
Co-Borrower: An additional borrower on a loan. A co-borrower’s obligations on a loan are the same as all other borrowers.
Committment Letter: A formal offer by a lender stating the terms under which it agrees to loan money to a home buyer.
Comparables (Comps): An abbreviation for comparable properties used for comparative purposes in the appraisal process; facilities of reasonably the same size and location with similar amenities; properties which have been recently sold, which have characteristics similar to property under consideration, thereby indicating the approximate fair market value of the subject property.
Conventional Mortgage: Any mortgage that is not insured or guaranteed by the federal government.
Convertible ARM: An adjustable-rate mortgage that can be converted to a fixed-rate mortgage under specific conditions.
Coverage: The amount of protection, usually expressed in a percentage of the total claim amount, an insured receives under a certificate.
Credit Report: A report of an individual’s credit history prepared by a credit bureau and used by a lender in determining a loan applicant’s creditworthiness.
Cure: A loan that is removed from a delinquency status with no loss to the insurer.
Deed: A document by which the ownership of real property is transferred from one party to another.
Deed In Lieu: A deed given by a mortgagor to a mortgagee to satisfy a debt and avoid foreclosure.
Default: Failure to make mortgage payments on a timely basis or to comply with other conditions of a mortgage.
Deferred Interest: See Negative Amortization.
Deficiency Judgement: A court order to pay the balance owed on a loan if the proceeds from the sale of the security are insufficient to pay off the loan. Deficiency judgments are not allowed in all states.
Delinquency: A loan in which a payment is overdue but not yet in default.
Depreciation: A decline in the value of property; the opposite of “appreciation.”
Discount Points: See Points
DO: Desktop Originator - FNMA.
Down Payment: The part of the purchase price which the buyer pays in cash and does not finance with a mortgage.
DU: Desktop Underwriter - FNMA.
Equity: The difference between the market value of a property and the homeowner’s outstanding mortgage balance.
Equity Loan: A loan based on the borrower’s equity in his or her home.
Escrow: The holding of documents and money by a neutral third party prior to closing; also, an account held by the lender into which a homeowner pays money for taxes and insurance.
Fannie Mae: See Federal National Mortgage Association (FNMA).
Federal Deposit Insurance Corporation (FDIC): The Federal Deposit Insurance Corporation (FDIC) provides insurance of accounts for institutions whose deposits were formerly covered by the Federal Savings & Loan Insurance Corporation (FSLIC). See FIRREA.
Federal Home Loan Bank Board (FHLBB): A regulatory and supervisory agency for federally chartered savings institutions which oversees the operations of the FSLIC and FHLMC. This agency was abolished by the Financial Institutions Reform, Recovery and Enforcement Act of 1989. (See FIRREA.)
Federal Home Loan Mortgage Corporation, Freddie Mac (FHLMC): A private corporation authorized by Congress, which became an independent, stockholder-owned government corporation with the passage of FIRREA. FHLMC promotes the flow of funds into the housing markets by purchasing conventional mortgages in the secondary market and selling securities backed by those mortgages in the capital market.
Federal Housing Administration (FHA): A division of the Department of Housing and Urban Development. The FHA’s main activity is the insuring of residential mortgage loans made by private lenders. It sets standards for construction and underwriting. FHA neither lends money, nor plans, nor constructs housing.
Federal Housing Finance Board (FHFB): The Federal Housing Finance Board (FHFB) oversees the credit functions of the twelve regional Federal Home Loan Banks. See FIRREA.
Federal National Mortgage Association, Fannie Mae (FNMA): A government sponsored corporation, owned solely by private investors, created to provide support to the secondary market for FHA and VA mortgages and conventional mortgages.
Federal Savings & Loan Insurance Corporation (FSLIC): See FIRREA.
Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA): An act signed into law in August, 1989, by President George H. W. Bush that restructured the thrift regulatory and insurance system. The Federal Home Loan Bank Board (FHLBB) was abolished and its various functions reassigned to existing and new government agencies. The Federal Housing Finance Board (FHFB) was formed to replace Federal Home Loan Bank system. It oversees the credit functions of the twelve regional Federal Home Loan Banks. The Office of Thrift Supervision (OTC) was formed to charter federal thrifts, serve as the primary federal examiner and regulator of federal and state-charted savings associations (formally insured by the FSLIC), and administer laws governing savings and loan holding companies. The Federal Deposit Insurance Corporation (FDIC) provides insurance of accounts for institutions whose deposits were formerly covered by the Federal Savings & Loan Insurance Corporation (FSLIC). The FSLIC was abolished. The Resolution Trust Corporation (RTC) was formed to resolve thrift failures over the next three years and dispose of their assets and liabilities.
First Mortgage: The mortgage that has first claim in the event of default.
Fixed Rate Mortgage (FRM): A mortgage in which the interest rate does not change during the entire term of the loan.
Foreclosure: The process by which a mortgaged property may be sold when a mortgage is in default.
Freddie Mac: See Federal Home Loan Mortgage Corporation (FHLMC).
Full Recasting: Setting the P&I payments to the level that will fully amortize the loan’s outstanding balance over the remaining term using the fully indexed accrual rate at the recasting point.
Fully Indexed Accrual Rate: The interest (accrual) rate resulting from the index at closing (or at another point in the loan) plus the lender’s full spread, rounded as prescribed in the loan documents (often to the nearest 1/8th or 1%).
GPARM: A graduated payment adjustable rate mortgage.
Graduated Payment Mortgage (GPM): A mortgage where the payments are scheduled to increase, usually annually, for a set number of years and then level off. GPM can be used with either a fixed or adjustable interest rate, and usually has a 30-year term.
Growing Equity Mortgage (GEM): A fixed rate, graduated payment mortgage with small initial payments that increase each year so that the loan pays off in a shortened term, usually 15 years.
Hazard Insurance: Insurance to protect the homeowner and the lender against physical damage to a property from fire, wind, vandalism or other hazards.
HELOC: Home Equity Line of Credit.
Home Owner's Insurance: An insurance policy that combines liability coverage and hazard insurance.
Home Owner's Warranty: A type of insurance that covers repairs to specified parts of a house for a specific period of time.
Index (Also called “Rate Index”): A regularly published rate, independent of the lending institution, that measures the prevailing cost of funds, and is used periodically with the margin to set AML accrual rates. Common indices are the 1-Year Treasury Security and FHLBB’s Cost of Funds.
Initial Borrower Interest Rate (IBIR): The rate on which the borrower’s first payment is calculated. If the loan is discounted or bought down, it may be lower than the Fully Indexed Accrual Rate.
Initial Borrower Payment Rate (IBPR): The annual interest rate used to calculate the borrower’s initial cash payment. If, for example, the note specifies that a fully amortizing annual rate of 11% be used to calculate the initial monthly payment, and that rate is “bought down” 2%, the IBPR is 9%.
Interest: The fee charged for borrowing money.
Interest Rate Cap: A provision of an ARM limiting how much interest rates may increase per adjustment period. See also Rate Caps and Lifetime Cap.
Lender: An institution that makes loans to borrowers on real estate.
Lien: A legal claim against a property that must be paid when the property is sold.
Life of Loan Cap: See Rate Caps.
Lifetime Cap: A provision of an ARM that limits the total increase in interest rates over the life of the loan.
Loan Commitment: See Commitment Letter.
Loan Origination Fee: See Points.
Loan Servicing: The collection of mortgage payments from borrowers and related responsibilities of a loan servicer.
Loan-To-Value Ratio (LTV): The loan-to-value ratio (LTV) is the original loan amount divided by the lower of the sales price or the appraised value.
LP: Loan Prospector - FHLMC.
Margin: The amount the lender adds to the index to determine the Fully Indexed Accrual Rate. Usually the margin is a fixed percentage throughout the loan. (Also called “Spread.”)
Mortgage: A legal document that pledges a property to the lender as security for payment of a debt.
Mortgage Banker: A company that originates mortgages exclusively for resale in the secondary market.
Mortgage Broker: A company that for a fee matches borrowers with lenders.
Mortgage Insurance: See Private Mortgage Insurance.
Mortgage Insurance Premium (MIP): The fee paid to FHA or a private insurer for mortgage insurance.
Mortgagee: The lender in a mortgage agreement.
Mortgagor: The borrower in a mortgage agreement.
Negative Amortization: If the payments are too small to cover the interest due on the loan, the remaining interest owed is added to the outstanding loan balance, causing “negative amortization.” The loan gets bigger, rather than smaller as it does with positive amortization. Interest is then charged on the deferred interest in future months. (Also called “Deferred Interest.”)
Net Worth: The value of all assets, including cash, less total liabilities. It is often used as an underwriting guideline to indicate an individual’s credit worthiness and financial strength.
Notice of Default: A formal written notice to a borrower that a default has occurred and that legal action may be taken.
Office of Thrift Supervision (OTC): The Office of Thrift Supervision (OTC) was formed to charter federal thrifts, serve as the primary federal examiner and regulator of federal and state-charted savings associations (formally insured by the FSLIC), and administer laws governing savings and loan holding companies. See FIRREA.
Origination Fee: A fee paid to a lender for processing a loan application; it is stated as a percentage of the mortgage amount, or points.
P&I: Principal and interest.
Payment Adjustment Period: The length of time (typically a year) between changes to the AML borrower’s P&I payments. On a longer payment change AML, for instance a three-year or five-year AML, the initial Payment Adjustment Period may still be one year if there is a payment discount or buydown, causing the payments to change after the first year.
Payment Buydown: Payment buydowns occur when a third party, typically a builder, pays part of the initial P&I payment for a year or two, so that the borrower has smaller payments and can qualify for the loan. Payment buydowns can result in rapid payment increases in the initial years of the loan.
Payment Cap: A limit on the amount the payment can be changed at the end of each Payment Adjustment Period. It can be a percentage of the previous payment, a fixed dollar amount, or specified change in the interest rate on which the payment is calculated. It does not have to be the same as the interest rate cap.
Payment Discount: In a payment discount, the lender reduces the first year’s interest rate to make the mortgage more attractive to borrowers. It can be offered on either AML’s or FRM’s and usually results in a payment jump after the first year.
Period Cap: See Rate Caps.
Points: A one-time charge by the lender to increase the yield of the loan; a point is one percent of the amount of the mortgage.
Pre-Qualification: The process of determining how much money a prospective home buyer will be eligible to borrow before application for a loan.
Principal: The amount borrowed or remaining unpaid; also that part of the monthly payment that reduces the outstanding balance of a mortgage.
Principal, Interest, Taxes and Insurance (PITI): Principal, Interest, Taxes and Insurance are components of a mortgage payment.
Private Mortgage Insurance (PMI): Insurance provided by non-government insurers that protect lenders against loss if a borrower defaults.
Qualifying Ratios: Guidelines applied by lenders to determine how large a loan to grant a home buyer.
Rate Caps: A limit on the amount the interest rate charged to the borrower can be changed. Usually there are two caps. One is the “Period Cap” which limits the amount the interest rate may change at the end of each adjusted period. The second is the “Life of Loan” (LOL) cap, which sets the highest interest rate that can ever be charged. The LOL cap is often specified as “X”% above either the initial rate or the fully-indexed accrual rate. (Also called “Interest Rate Caps.”)
Rate Index: See Index.
Real Estate Owned (REO): A term frequently used by lending institutions as applied to ownership of real property acquired for investment or as a result of foreclosure.
Real Estate Settlement Procedures Act (RESPA): A federal law that requires lenders to provide home mortgage borrowers with information about known or estimated settlement costs.
Recasting: Adjusting the terms of an existing mortgage.
Resolution Trust Company (RTC): See FIRREA.
Second Mortgage: A mortgage that has rights that are subordinate to the rights of the first mortgage holder.
Secondary Mortgage Market: The buying and selling of existing mortgages.
Seller Contributions: See Seller-Provided Funds.
Seller-Provided Funds: Seller-provided funds include all transaction costs paid by the seller except the real estate agent’s (or broker’s) fee. May include items such as points, origination fees, insurance premiums, etc. Since these are normally paid by the buyer, it is assumed that some or all of the seller provided items are added to the sales price of the home, typically allowing 3% on 95% LTV and 6% on 90% LTV. (Also called “Seller Contributions.”)
Servicer: The party who has entered into an agreement with the insured to service a loan.
Settlement: See Closing.
Single Premium: A premium which provides coverage for more than one year.
Spread: See Margin.
Teaser: Similar to a Payment Discount, but implies either an unusually large initial rate discount or an attempt by the lender to lure an otherwise unqualified borrower into the mortgage. Almost always results in a difficult payment increase for the borrower at the discount period’s end.
Title: A legal document establishing the right of ownership.
Truth-In-Lending (TIL): A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the APR and other changes.
Underwriting: The process of evaluating a loan application to determine the risk involved for the lender.
VA Mortgage: A mortgage that is guaranteed by the Department of Veterans Affairs.

Last Updated:5/19/08

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