Frequently Used Mortgage Terms

Adjustable Rate Mortgage (ARM) — A type of mortgage loan on which payments may be adjusted as frequently as each month based on changes in the ARM interest rate index. (Each individual contract may stipulate interest rate limits and frequency of payment adjustments, known as caps.)

Amortization — The repayment of a debt in a specified number of equal periodic installments that may include a portion of principal and accrued interest.

Annual Percentage Rate (APR) —The annual cost of a mortgage including interest, loan fees and other costs.

Appraised Value — The estimated value of a home established by a professional who has knowledge of real estate prices and markets.

Assumability — The ability of a mortgage loan to be taken over by a new borrower.

CLTV (Combined Loan To Value) — The ratio that the combined principal amount of the 1st mortgage and the loan amount of the 2nd mortgage has to the property's appraised value. You may see this represented as an 80%LTV / 95% CLTV.

Debt-to-Income Ratio — The ratio of monthly debt payments to monthly gross income. Lenders use a housing ratio (mortgage payment divided by monthly income) and a total ratio (all debt including the mortgage payment) to determine whether a borrower's income qualifies him or her for a mortgage.

Deferred Interest — When monthly mortgage payments do not cover all the interest due, the interest not covered is added to the unpaid principal balance. This is also referred to as negative amortization.

Down Payment — The amount of the purchase price a buyer pays, in cash, at the time the loan originates.

Impounds — Property taxes and hazard insurance payments are included in the mortgage payment.

FHA Loan — A loan insured by the Department of Housing and Urban Development of the Federal Housing Administration.

First Mortgage — The primary loan on the property. It will be in first position on the title report.

Fixed Rate Mortgage — A mortgage loan with a constant interest rate and payment throughout the life of the loan. The interest rate and payment amount are established at the time of origination.

Fully Indexed Interest Rate — This interest rate is the sum of the index rate on an adjustable rate mortgage plus the margin.

Index — Any number of economic indicators lenders use to calculate interest rate adjustments for adjustable rate mortgages. Examples include the 12-MTA, 11th District Cost of Funds, and
LIBOR rates.

Initial Interest Rate — The introductory rate on an adjustable rate mortgage (ARM) The initial interest rate will usually changes at the first rate adjustment period.

Interest Rate Cap — The most the interest rate on an ARM can increase or decrease at each adjustment period.

Lifetime Interest Rate Cap — The maximum the interest rate on an ARM can increase or decrease over the life of the loan. Sometimes this is called the “ceiling rate.”

LTV (Loan-to-Value) — The ratio that the principal amount of the loan has to the property's appraised value. You may see this represented as an 80% loan or, a 95% LTV.

Margin — Margin or spread is the difference between the interest rate charged on a loan and the index. The margin remains fixed over the life of the loan.

Non-Owner Occupied —A rental property owned by the borrower whether it be a single-family residence, condo, townhouse or 2-4 units.

Owner-occupied — A residence lived in by the borrower.

Payment Cap — The limit that the monthly payment can change from one adjustment period to another.

PMI (Private Mortgage Insurance) — An insurance policy offered by a private company to protect a lender against loss on a defaulted mortgage loan. Usually, PMI is required only for loans with a high loan-to-value ratio. The borrower usually pays the PMI premiums.

Points — An amount equal to 1% of the principal amount of the mortgage. Points are a one-time charge.

Prepayment Penalty — A fee charged to a borrower who pays a loan before it is due. Not allowed for FHA or VA loans.

Principal — The amount of the mortgage loan.

Purchase Price — The total selling price of the home, which includes the cash down payment and the principal on the loan.

Refinance — Homeowners usually consider refinancing to reduce their monthly mortgage payment or to draw from the equity that has built up over a period of time. This is used to pay off an existing mortgage loan.

Second Home — Property that the borrower also uses as a residence in another area…not as a rental.

Second Mortgage — A smaller fixed rate loan or an adjustable line of credit (HELOC) that is subordinate or junior to the first mortgage. They are sometimes used for additional purchase money or to draw cash out from the equity in the home for debt consolidation, home improvements or simply to get cash out.

Title Insurance — The insurance that protects the lender and the homeowner against loss resulting from any inconsistencies in the title of a property.

VA Loan — A loan that is partially guaranteed by the Veterans Administration and made by a private lender.