Mortgages can be complicated, with lots of confusing terms and acronyms that seem like they come from another language.
But you don’t need to be a real estate agent or a lending professional to speak the language of mortgages. With this glossary, you’ll have a basic understanding of the most important terms in real-estate lending!
Mortgage Glossary of Terms: Part 1
The gradual repayment of a debt in small, scheduled payments, which combine the principle as well as the interest. An “amortization schedule” shows the amount of balance or interest on each payment, as well as the time frame to pay off the loan.
A professional assessment of the value of the home. Completed by trained professionals, appraisals are used to help lenders make decisions on whether or not to write a loan. They can impact loan approval.
Annual Percentage Rate. This is the cost to borrow money as stated on an annual basis. APR is used on almost all loans, including mortgage loans. In some cases the APR can include the interest rate as well as the fees.
A mortgage loan with an interest rate that can be adjusted over time. They are usually adjusted annually, and most have a cap on the amount of interest that can be charged. They usually come with an early period during which the rate is fixed.
A large payment at the end of a “balloon mortgage.” Balloon mortgages have low rates and smaller monthly payments, but do not fully pay off the loan. Once the terms are complete, the borrower has to make one large payment, the “balloon payment,” to finalize the debt.
Borrower-Paid Mortgage Insurance. This is an insurance program that covers the lender from financial loss but is paid by the borrower. Almost all mortgage insurance is paid by the borrower, but the advantage is that more loans are available thanks to BPMI.
A short-term loan used to help homeowners go from one house to another without selling their current home. These loans usually last long enough to sell the previous home, often less than a year.
A refinancing option that lets you turn current equity into cash. The cash can be used for many different purposes, but it’s often converted into home repairs, remodeling, or paying off debt.
Fees related to the real estate transaction and mortgage loan. The closing costs can include a wide range of items, including a loan-origination charge, realtor fees, government-recording fee, and taxes.
The property that secures the loan. The “collateral” is the property and home, and the bank keeps a right to claim this collateral if the loan is not repaid.
A formal letter issued by the lender that declares their intention to fund the loan. The letter generally states the terms and conditions that will be provided, as well as the total amount. This letter is often required by real estate agents and sellers before they will show a home.
A loan that is eligible for purchase on the secondary market by Fannie Mae or Freddie Mac. These loans will meet the guidelines, including loan limits, of these two government-backed organizations.
A home loan that is not guaranteed, supported, purchased, or provided in any way by a government office such as the VA, FHA, and USDA, or government-supported companies like Fannie Mae and Freddie Mac.
Debt-To-Income ratio. This is a representation of the amount of debt a borrower has compared to the amount of income they earn in a month. The total is used to make lending decisions. In general lenders like to see low DTIs; usually reaching 40% to 50% DTI creates financial risk to lenders.
When loan payments have not been made. A loan goes into delinquency after multiple payments have been missed. Delinquency can technically occur after a single missed payment, but usually the lender won’t take significant action unless multiple payments have been missed.
A portion of the purchase amount that comes directly from the borrower. The borrower usually borrows a specific amount, and the lender will require that they bring a down payment. However, there are loans that require no down payments.
The percentage of the home that you own. If you have a mortgage loan, the bank owns a portion and you own a portion. If you completely own the home, with no other ownership against your house, you have 100% equity.
Property, usually money, that is kept by a third party until a specific condition is met, at which point the property is released from escrow. In real estate, the home buyer pays money for closing the deal to an escrow agent, which holds the finances. Once the payments are made, the agent releases the money to the seller.
Federal National Mortgage Association. Fannie Mae is a publicly-traded company created and supported by the United States government that purchases loans on the secondary market. Created in 1938 and part of the New Deal, Fannie Mae works to make home loans more available for borrowers.
The Federal Housing Administration. Created in 1934 as part of the National Housing Act, this agency is now under the Department of Housing and Urban Development (HUD). This administration is responsible for setting construction and housing standards, and insures loans that meet their specific guidelines, which increases loan availability for the general public.
A loan insured by the FHA. The FHA does not loan money, but instead provides insurance to lenders on loans that meet the administration’s specific guidelines, which can include requirements for credit, down payments, and income.
Learn more in Mortgage Glossary of Terms: Part 2
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