Mortgage 101 – Terminology
Glossary of Commonly Used Home Loan Terms
At LendFriend, we understand that sometimes the home loan process can be challenging. Part of that challenge comes from new terms that may be specific to the real estate industry that you may not have seen or heard of before. Below is a list of commonly used terms or phrases that you will encounter in a real estate transaction and their definitions. Having this glossary by your side when going through the process will help you understand the lingo and be an expert throughout the process!
Adjustable Rate Mortgage (ARM)
A home loan with a variable interest rate. With an ARM, the initial interest rate is fixed for an initial period. After the initial period and at the end of each Adjustment Period, the interest rate will reset (yearly or semi-annually based on your loan terms) using a published index (for example, SOFR) that tracks changes in the current finance market. ARMs also have caps or a maximum and minimum that the interest rate can change at each Adjustment Period.
The time between interest rate adjustments on an ARM after the initial period. The initial period begins on the start date of the loan and continues for a fixed amount of time (typically between 1 to 10 years). For example, a 5/1 ARM has an initial period of 5 years and an adjustment period every year after the initial period and a 5/6 ARM has an initial period of 5 years and an adjustment period every 6 months after the initial period.
Monthly pay down of the principal portion of your loan based on the amortization schedule specific for borrower’s loan terms.
A schedule that outlines how, over the term of your mortgage, the principal of the loan will decrease based on the terms of the borrower’s loan. Note: Amortization Schedules only apply in amortizing loans, not interest only loans.
Annual Percentage Rate (APR)
The total cost of the loan each year. The APR factors in the interest rate for the loan as well as discount points paid (if any), lender closing costs and certain other credit charges a borrower is required to pay.
The increase in the market value of a home due to changing market conditions and/or home improvements.
The value that the public tax assessor for each county has assigned to the property. The assessed value is used to calculate the property taxes associated with the property.
Cash, property, stocks, bonds, mutual funds, and bank deposits owned by an individual or entity.
Balloon Payment Mortgage
A mortgage loan that does not fully amortize the principal loan amount over the term of the loan. Balloon payment mortgage require a payment of all remaining principal at the end of the life of the loan.
The meeting between buyer and seller to finalize the sale of the property is finalized. At the closing, buyers and sellers sign the final documents, the buyer accepts ownership of the property, and all funds are wired to the seller. Modern day closings can take place virtually depending on your transaction.
The costs to complete the real estate transaction. These costs are in addition to the price of the home and are paid at Closing. They include points, taxes, title insurance, financing costs, items that must be prepaid or escrowed and other costs.
A document that provides the final accounting of a loan’s interest rate and fees, closing costs, monthly mortgage payment and the grand total of all payments and finance charges.
Comparables (aka Comps)
Properties that are similarly sized and have similar features as the subject property. They are also in close proximity to subject property. Buyers, sellers, real estate agents and appraisers all use comparables to assess a home’s market value.
A legal document under which ownership of a property is conveyed.
A portion of the price of a home, usually between 3-25%, not borrowed and paid at closing.
Stands for Debt-to-income, which is a ratio calculated using your total monthly debt expenses and monthly housing payment divided by your monthly income.
Due Diligence (Real Estate Lending)
Reasonable steps taken by a lender to satisfy a legal requirement when providing a loan for a home (such as confirming borrower’s employment and income, reviewing the credit report to confirm borrower is in good standing, confirming the seller owns the property and reviewing the appraisal to confirm market value).
Due Diligence (Real Estate Purchase)
Reasonable steps taken by a person to satisfy a legal requirement when buying a home (such as paying for a home inspection of the premises, reviewing the title report to confirm the seller owns the property and obtaining an appraisal to confirm market value).
A deposit made to a seller at the time of contract execution and represents a buyer’s good faith to buy a home
The portion of the home you own or the cash you’d receive if the home sold at market value less the amount of the home loan that remains outstanding.
A professional inspection of a home to determine the condition of the property. The inspection should include an evaluation of the plumbing, heating and cooling systems, roof, wiring, foundation, and pest infestation.
A policy that protects you and the lender from damage to the structure of the house (such as from a fire, earthquake or flood); a liability, such as an injury to a visitor to your home; or damage to your personal property, such as your furniture, clothes or appliances.
The published index of interest rates used to calculate the interest rate for an ARM. The index is usually a 30-day average of the interest rates on a particular type of security such as the SOFR.
The price a borrower pays to borrow money or the cost a lender charged to lend money. It is expressed as an annual percentage of the loan amount. Interest makes up a portion of the payment made to the lender for amortizing loans and all of the payment to the lender on interest only loans.
Interest Only Mortgage
A mortgage where the borrower pays only the interest on the loan for a specified amount of time.
A property not considered to be a primary residence or a vacation home that is purchased by an individual to generate income, gain profit from reselling or to gain tax benefits.
A percentage added to the Index for an ARM to establish the interest rate on each adjustment date.
What a willing, ready and bank qualified buyer will pay for a property and what the seller will accept for it.
An opinion of how much the property would sell for in a competitive market typically calculated using comparables.
A legal document that pledges property to a lender as security for the repayment of the loan. The term is also used to refer to the loan itself.
Private Mortgage Insurance (PMI)
Insurance that protects lenders against losses caused if a borrower’s default on a mortgage loan. Private mortgage insurance is typically required if the borrower’s down payment is less than 20 percent of the purchase price for a conventional loan and at all times for an FHA loan.
Mortgage Loan Originator
Mortgage loan originators help borrowers through the mortgage application process and the loan closing. This can involve collecting your credit and financial information, assessing your needs and what loan options make sense for you, negotiating rates and submitting your application for underwriting.
Points (or Discount Points)
An amount paid by the borrower to the lender at closing to lower the interest rate charged by the lender. Points equate to a percentage of the entire loan amount. For instance, 1 point equals 1% of the loan amount so if the borrower agrees to pay 1 point on a $500,000 loan, the borrower will pay $5,000 to the lender at closing.
Pre-qualification letter (or Pre-approval letter)
A document from a lender stating that the lender is tentatively willing to lend to you, up to a certain amount, based on the information provided by the borrower. Your loan cannot be fully approved by the lender until all aspects have been fully underwritten by the lender, including going under contract to purchase a home and receiving an appraisal confirming market value of the property.
The principal is the balance outstanding on your loan.
A loan processor is responsible for assembling, administering and processing your application paperwork after you go under contract to purchase a home and before it gets approved by the loan underwriter.
The limit on the amount an interest rate on an ARM can increase or decrease during an adjustment period.
During the contract period, certain costs associated with the property may be that the seller agrees to pay. This can include costs related to needed repairs and/or closing costs/fees.
The term is how long you have to repay the loan. For most types of home loans, the mortgage terms are typically 15, 20 or 30 years in length.
Title insurance protects lenders and buyers from financial loss due to defects in the chain of title or ownership of the parcel that pre-dates the issuance of the policy.
An underwriter is a financial expert who reviews your finances and assesses how much risk a lender will take on if they decide to give you a loan. Underwriting simply means that your lender verifies your income, assets, debt and property details in order to issue final approval for your loan.
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