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Mortgage Basics


  • Adjustable Rate Mortgage A mortgage loan were the interest rate adjusts periodically based on the changes of a specified index such as the one-year Treasury Bill or the LIBOR.
  • Amortization The calculation of the amount of the installment payment it takes to pay off the obligation at the end of a fixed period of time.
  • Annual Percentage Rate (APR) The total cost of a mortgage stated as a yearly rate. It is typically higher than the note rate because it includes the base interest rate plus specific closing costs.
  • Appraisal A professional report that estimates the market value of a property.
  • Assessed Value The value a tax authority places on real property for the purpose of assessing yearly property taxes.
  • Balloon Mortgage A mortgage that is amortized over a stated period but provides for a lump-sum payment due at an earlier period, e.g. 30-year due in 15, where the payments are based on 30-year repayment but the loan is due paid in full in 15 years.
  • Cap Limits how much the interest rate on an adjustable rate mortgage (ARM) can increase or decrease.
  • Cash to Close Liquid assets available to be used to pay the closing costs involved with a mortgage transaction.
  • Collateral Property pledged as security for a loan, such as property pledged as security for a mortgage.
  • Conventional Mortgage A mortgage not obtained under a government-insured program.
  • Deed A legal document that is recorded in the county conveying title to a property.
  • Deed of Trust The legal document that pledges the property for the security of a mortgage loan.
  • Default Failure to make mortgage payments in a timely manner or to comply with other requirements outlined in the note.
  • Earnest Money Agreement (Sales Contract) The written agreement between the buyer and seller of a property, which stipulates the amount of the purchase, closing date and any repairs or other conditions that must be met before the transaction (purchase) is completed.
  • Easement A right of way given to persons other than the owner for access to or over their property.
  • Equity The portion of a property’s value over and above the amount owed against it.
  • Escrow A disinterested third party that handles legal documents and funds on behalf of the seller and buyer.
  • First Mortgage A real estate loan that has priority over any other subsequently recorded mortgages.
  • Fixed Interest Rates An interest rate which does not change during the term of the loan.
  • Foreclosure A legal procedure in which the mortgage loan is in default and the property taken from the borrower and sold by the lender to pay off the loan against the property.
  • Gift Letter A written letter signed by the individual giving funds for the purpose of buying a home which states there is no obligation to repay the sum of money being given.
  • Gross Monthly Income Total monthly income earned before taxes or other deductions.
  • Hazard Insurance Also referred to as homeowners or fire insurance; coverage for physical damage to a property from fire, wind, vandalism or other hazards.
  • Home Equity Line of Credit (HELOC) Also referred to as a revolving line of credit; usually a second mortgage, which allows the borrower to obtain multiple advances up to a specific credit limit.
  • Index Generally a published number or percentage, such as the yield on the One-Year Treasury Bill, which is used to compute the interest rate for an adjustable rate mortgage.
  • Jumbo Loan A loan that exceeds the Fannie Mae legislated mortgage amount, which is currently $333,700. Jumbos are also called non-conforming loans.
  • Legal Description Describes the location of the property which has been recorded at the county.
  • Lien A legal claim or attachment against property as security for a loan.
  • Loan-To-Value Ratio The ratio between the amount of any mortgages against a property divided by the sales price or appraised value.
  • Monthly Payment Usually the amount of principal, interest, taxes and insurance paid each month on a mortgage loan.
  • Mortgage The conveyance of an interest in real property given as security for the repayment of a loan.
  • Origination Fee A fee paid to the lender for processing a loan application. The origination fee is stated in the form of points. One point equals one percent of the mortgage amount.
  • PITI Reserves A cash amount a borrower must have left over after making a down payment and paying the closing costs for the purchase of a home.
  • Private Mortgage Insurance (PMI) Insurance written by a private company to protect the lender against loss resulting from nonpayment or default.
  • Purchase Contract (Earnest Money Agreement/Offer) A written agreement between a buyer and seller of real property, setting forth the price and terms of the sale, also known as a sales contract.
  • Qualifying Ratios Calculations that are used in determining whether a borrower can qualify for a mortgage. The two calculations are housing expense divided by gross income, and the total debt including other monthly debt payments divided by gross income.
  • Rate Lock A commitment issued by a lender to a borrower guaranteeing a specific interest rate for a specific period of time.
  • Title Insurance Provides insurance that public records have been examined to insure that there are no liens or other claims against the property.
  • Truth in Lending Act A federal law that requires lenders to fully disclose the terms and conditions of a mortgage including the Annual Percentage Rate (APR) and other charges.
  • Underwriting The process of evaluating a loan application to determine credit worthiness and risk involved for the lender.
  • VA Loan A loan that is guaranteed by the U.S. Department of Veterans Affairs, also known as a government loan.