Ever wonder what a certain finance acronym or term means? While not every single term is in this list, we have created a pretty comprehensive one for our customers to reference. Below you will find the most common terms used during the home buying process as well as financial terms used across industries. Enjoy!
2/1 Buy Down Mortgage The 2/1 Buy Down Mortgage allows the borrower to qualify at below market rates so they can borrow more. The initial starting interest rate increases by 1% at the end of the first year and adjusts again by another 1% at the end of the second year. It then remains at a fixed interest rate for the remainder of the loan term. Borrowers often refinance at the end of the second year to obtain the best long term rates. However, even keeping the loan in place for three full years or more will keep their average interest rate in line with the original market conditions.
Acceleration Clause Provision in a mortgage that allows the lender to demand payment of the entire principal balance if a monthly payment is missed or some other default occurs. Very rare in residential mortgages.
Additional Principal Payment A way to reduce the remaining balance on the loan by paying more than the scheduled principal amount due.
Adjustable-Rate Mortgage (ARM) A mortgage with an interest rate that changes during the life of the loan according to movements in an index rate. Sometimes called AMLs (adjustable mortgage loans) or VRMs (variable-rate mortgages).
Adjusted Basis The cost of a property plus the value of any capital expenditures for improvements to the property minus any depreciation is taken.
Adjustment Date The date that the interest rate changes on an adjustable-rate mortgage (ARM).
Adjustment Period The period elapsing between adjustment dates for an adjustable-rate mortgage (ARM).
Affordability Analysis An analysis of a buyers ability to afford the purchase of a home. Reviews income, liabilities, and available funds, and considers the type of mortgage you plan to use the area where you want to purchase a home, and the closing costs that are likely.
Amortization The gradual repayment of a mortgage loan, both principal and interest, by installments.
Amortization Term The length of time required to amortize the mortgage loan expressed as a number of months. For example, 360 months is the amortization term for a 30-year fixed-rate mortgage. In layman terms, it’s the total time allotted to repay your loan in full.
Annual Percentage Rate (APR) The cost of credit, expressed as a yearly rate including interest, mortgage insurance, and loan origination fees. This allows the buyer to compare loans, however, APR should not be confused with the actual note rate.
Appraisal A written analysis prepared by a qualified appraiser and estimating the value of a property. See our page on Appraisal Basics in the Resource tab.
Appraised Value An opinion of a property’s fair market value, based on an appraiser’s knowledge, experience, and analysis of the property.
Asset Anything owned of monetary value including real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, etc.).
Assignment The transfer of a mortgage from one person to another.
Assumability An assumable mortgage can be transferred from the seller to the new buyer. Generally requires a credit review of the new borrower and lenders may charge a fee for the assumption. If a mortgage contains a due-on-sale clause, it may not be assumed by a new buyer.
Assumption Fee The fee paid to a lender (usually by the purchaser of real property) when an assumption takes place.
Balance Sheet A financial statement that shows assets, liabilities, and net worth as of a specific date.
Balloon Mortgage A mortgage with level monthly payments that amortizes over a stated term but also requires that a lump sum payment be paid at the end of an earlier specified term.
Balloon Payment The final lump sum paid at the maturity date of a balloon mortgage.
Before-tax Income Income before taxes is deducted.
Biweekly Payment Mortgage A plan to reduce the debt every two weeks (instead of the standard monthly payment schedule). The 26 (or possibly 27) biweekly payments are each equal to one-half of the monthly payment required if the loan were a standard 30-year fixed-rate mortgage. The result for the borrower is a substantial saving in interest.
Bridge Loan A second trust that is collateralized by the borrower’s present home allowing the proceeds to be used to close on a new house before the present home is sold. Also known as “swing loan.”
Broker A company that brings borrowers and lenders together for the purpose of loan origination.
Buy-down When the seller, builder or buyer pays an amount of money up front to the lender to reduce monthly payments during the first few years of a mortgage. Buy-downs can occur in both fixed and adjustable rate mortgages.
Cap Limits how much the interest rate or the monthly payment can increase, either at each adjustment or during the life of the mortgage. Payment caps don’t limit the amount of interest the lender is earning and may cause negative amortization.
Certificate of Eligibility A document issued by the federal government certifying a veteran’s eligibility for a Department of Veterans Affairs (VA) mortgage.
Certificate of Reasonable Value (CRV) A document issued by the Department of Veterans Affairs (VA) that establishes the maximum value and loan amount for a VA mortgage.
Change Frequency The frequency (in months) of payment and/or interest rate changes in an adjustable-rate mortgage (ARM).
Closing A meeting held to finalize the sale of a property. The buyer signs the mortgage documents and pays closing costs. Also called “settlement.”
Closing Costs These are expenses – over and above the price of the property- that are incurred by buyers and sellers when transferring ownership of a property. Closing costs normally include an origination fee, property taxes, charges for title insurance and escrow costs, city and county fees, attorney fees, appraisal fees, etc. Closing costs will vary according to the area (city and county) and the lenders used.
Compound Interest Interest paid on the original principal balance and on the accrued and unpaid interest.
Consumer Reporting Agency (or Bureau) An organization that handles the preparation of reports used by lenders and creditors to determine a potential borrower’s credit history. The agency gets data for these reports from a credit repository and from other sources.
Conversion Clause A provision in an ARM allowing the loan to be converted to a fixed-rate at some point during the term. Usually, the conversion is allowed at the end of the first adjustment period. The conversion feature may cost extra.
Credit Report A report detailing an individual’s credit history that is prepared by a credit bureau and used by a lender to determine a loan applicant’s creditworthiness.
Credit Risk Score A credit score measures a consumer’s credit risk relative to the rest of the U.S. population, based on the individual’s credit usage history. The credit score most widely used by lenders is the FICO® score, developed by Fair, Issac, and Company. This 3-digit number, ranging from 350 to 850, is calculated by a mathematical equation that evaluates many types of information that are on your credit report. Higher FICO® scores represent lower credit risks, which typically equate to better loan terms. In general, credit scores are critical in the mortgage loan underwriting process.
Debt Expense Ratio Total obligations as a percentage of gross monthly income including monthly housing expenses plus other monthly debts.
Deed of Trust The document used in some states instead of a mortgage. The title is conveyed to a trustee.
Default Failure to make mortgage payments on a timely basis or to comply with other requirements of a mortgage.
Delinquency Failure to make mortgage payments on time.
Discount Point(s) A borrower has the option to pay “discount point(s)” which are certain percentage point(s) of the loan amount (depending on interest rate markets) that will lower the rate on a mortgage. This can be advantageous if the borrower is planning on staying in the property for a very long time.
Down Payment Part of the purchase price of a property that is paid in cash and not financed with a mortgage.
Equity The amount of financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on the mortgage.
Earnest Money Deposit This is a sum of money given to bind the sale of real estate, generally considered a sign of good faith from the buyer to indicate a real interest in purchasing the property.
Escrow An item of value, money, or documents deposited with a third party to be delivered upon the fulfillment of a condition. For example, the deposit of funds or documents into an escrow account to be disbursed upon the closing of a sale of real estate.
Escrow Disbursements The use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, and other property expenses as they become due.
Escrow Account The part of a mortgagor’s monthly payment that is held by the servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due.
Fannie Mae A congressionally chartered, shareholder-owned company that is the nation’s largest supplier of home mortgage funds.
FHA Mortgage A mortgage that is insured by the Federal Housing Administration (FHA). Also known as a government mortgage.
FICO Score FICO® scores are the most widely used credit score in U.S. mortgage loan underwriting. This 3-digit number, ranging from 350 to 850, is calculated by a mathematical equation that evaluates many types of information that are on your credit report. Higher FICO® scores represent lower credit risks, which typically equate to better loan terms.
First Mortgage The primary lien against a property.
Fixed Installment The monthly payment due on a mortgage loan including payment of both principal and interest.
Fixed-Rate Mortgage (FRM) A mortgage interest that are fixed throughout the entire term of the loan.
Fully Amortized ARM An adjustable-rate mortgage (ARM) with a monthly payment that is sufficient to amortize the remaining balance, at the interest accrual rate, over the amortization term.
Good Faith Estimate A Good Faith Estimate (GFE) is a form that provides you with basic information about the terms of a mortgage loan for which you have applied and estimated costs to you in acquiring the loan. The lender or the mortgage company must provide you with a GFE within three business days of the receipt of your application or required information.
GNMA A government-owned corporation that assumed responsibility for the special assistance loan program formerly administered by Fannie Mae. Popularly known as Ginnie Mae.
Guaranteed Financial Corp. A mortgage company established in 2004 dedicated to one thing- fulfilling the American Dream! We had to throw ourselves in this list!
Housing Expense Ratio The percentage of gross monthly income budgeted to pay housing expenses (total mortgage payment including taxes, insurance, and mortgage insurance). This ratio is must generally fall below 50%.
HUD-1 statement A document that provides an itemized listing of the funds that are payable at closing. Items that appear on the statement include real estate commissions, loan fees, points, and initial escrow amounts. Each item on the statement is represented by a separate number within a standardized numbering system. The totals at the bottom of the HUD-1 statement define the seller’s net proceeds and the buyer’s net payment at closing.
Hybrid ARM (3/1 ARM, 5/1 ARM, 7/1 ARM) A combination fixed rate and adjustable rate loan – also called 3/1,5/1,7/1 – can offer the best of both worlds: lower interest rates (like ARMs) and a fixed payment for a longer period of time than most adjustable rate loans. For example, a “5/1 loan” has a fixed monthly payment and interest for the first five years and then turns into a traditional adjustable rate loan, based on then-current rates for the remaining 25 years. It’s a good choice for people who expect to move or refinance, before or shortly after, the adjustment occurs.
Index The index is the measure of interest rate changes a lender uses to decide the amount an interest rate on an ARM will change over time. The index is generally a published number or percentage, such as the average interest rate or yield on Treasury bills. Some index rates tend to be higher than others and some more volatile.
Initial Interest Rate This refers to the original interest rate of the mortgage at the time of closing. This rate changes for an adjustable-rate mortgage (ARM). It’s also known as “start rate” or “teaser.”
Installment The regular periodic payment that a borrower agrees to make to a lender.
Insured Mortgage A mortgage that is protected by the Federal Housing Administration (FHA) or by private mortgage insurance (MI). Any loan in which a 20% or more down payment was not paid will have some form of mortgage insurance.
Interest The fee charged for borrowing money.
Interest Rate The percentage rate at which interest accrues on the mortgage. It is also the rate used to calculate the monthly payments.
Interest Rate Buy-down Plan An arrangement that allows the property seller to deposit money to an account. That money is then released each month to reduce the mortgagor’s monthly payments during the early years of a mortgage.
Interest Rate Ceiling For an adjustable-rate mortgage (ARM), the maximum interest rate, as specified in the mortgage note.
Interest Rate Floor For an adjustable-rate mortgage (ARM), the minimum interest rate, as specified in the mortgage note.
Late Charge The penalty a borrower must pay when a payment is made a stated number of days (usually 15) after the due date.
Lease-Purchase Mortgage Loan An alternative financing option that allows low and moderate-income home buyers to lease a home with an option to buy. Each month’s rent payment consists of principal, interest, taxes, and insurance (PITI) payments on the first mortgage plus an extra amount that accumulates in savings account for a down payment. The seller must obviously agree to the terms. Also referred to as a “Land Contract”.
Liabilities A person’s financial obligations. Liabilities include long-term and short-term debt.
Lifetime Payment Cap For an adjustable-rate mortgage (ARM), a limit on the amount that payments can increase or decrease over the life of the mortgage.
Lifetime Rate Cap For an adjustable-rate mortgage (ARM), a limit on the amount that the interest rate can increase or decrease over the life of the loan. See cap.
Line of Credit An agreement by a commercial bank or other financial institution to extend credit up to a certain amount for a certain time. Similar to a credit card.
Liquid Asset A cash asset or an asset that is easily converted into cash. The rule of thumb is that the asset is considered liquid if it can be converted into cash within one month.
Loan A sum of borrowed money (principal) that is generally repaid with interest.
Loan-to-Value (LTV) Percentage The relationship between the principal balance of the mortgage and the appraised value (or sales price if it is lower) of the property. For example, a $100,000 home with a $70,000 mortgage has an LTV of 70 percent.
Lock-In Period The guarantee of an interest rate for a specified period of time by a lender, including loan term and points, if any, to be paid at closing. The most common lock term is for 30 days (sometimes 45 days) to allow appropriate time to complete the processing of the loan. The rate can be locked anytime throughout the process of obtaining the loan.
Maturity Date The date on which the principal balance of a loan becomes due and payable.
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 mortgage market.
Mortgage Broker A company that brings borrowers and lenders together for the purpose of loan origination.
Mortgage Insurance A contract that ensures the lender against loss caused by a mortgagor’s default on a government mortgage or conventional mortgage. Mortgage insurance can be issued by a private company or by a government agency.
Mortgage Insurance Premium (MIP) The amount paid by a mortgagor for mortgage insurance.
Mortgage Life Insurance A type of term life insurance In the event that the borrower dies while the policy is in force, the debt is automatically paid by insurance proceeds.
Mortgagor The borrower in a mortgage agreement.
Negative Amortization Amortization means that monthly payments are large enough to pay the interest and reduce the principal on your mortgage. Negative amortization occurs when the monthly payments do not cover all of the interest cost. The interest cost that isn’t covered is added to the unpaid principal balance. This means that even after making many payments, you could owe more than you did at the beginning of the loan. Negative amortization can occur when an ARM has a payment cap that results in monthly payments not high enough to cover the interest due.
Net Worth The value of all of a person’s assets, including cash.
Non-Liquid Asset An asset that cannot easily be converted into cash.
Note A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.
Periodic Rate Cap A limit on the amount that the interest rate can increase or decrease during any one adjustment period, regardless of how high or low the index might be.
PITI Reserves A cash amount that a borrower must have on hand after making a down payment and paying all closing costs for the purchase of a home. The principal, interest, taxes, and insurance (PITI) reserves must equal the amount that the borrower would have to pay for PITI for a predefined number of months (usually two).
Points A point is equal to one percent of the principal amount of your mortgage. For example, if you take out a mortgage for $125,000 one point means $1,250 to the lender. Points usually are collected at closing and may be paid by the borrower or the home seller, or may be split between them. Guaranteed Financial rarely charges points on any of the loans it originates. In the event that points do need to be paid, they would be discussed at the inception of the process.
Prepayment Penalty A fee that may be charged to a borrower who pays off a loan before it is due. Guaranteed Financial does not originate loans with Prepay Penalties.
Pre-Approval The process of determining how much money you will be eligible to borrow before you apply for a loan.
Principal The amount borrowed or remaining unpaid. The part of the monthly payment that reduces the remaining balance of a mortgage.
Principal Balance The outstanding balance of principal on a mortgage not including interest or any other charges.
Principal, Interest, Taxes, and Insurance (PITI) The four components of a monthly mortgage payment. Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the monthly cost of property taxes and homeowners insurance, whether these amounts are paid into an escrow account each month or not.
Private Mortgage Insurance (PMI) Mortgage insurance provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults. Most lenders generally require MI for a loan with a loan-to-value (LTV) percentage in excess of 80 percent.
Qualifying Ratios Calculations used to determine if a borrower can qualify for a mortgage. They consist of two separate calculations: a housing expense as a percent of income ratio and total debt obligations as a percent of income ratio.
Rate Lock A commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified interest rate and lender costs for a specified period of time.
Real Estate Agent A person licensed to negotiate and transact the sale of real estate on behalf of the property owner. Different than a Realtor.
Real Estate Settlement Procedures Act (RESPA) A consumer protection law that requires lenders to give borrowers advance notice of closing costs.
Realtor® A real estate broker or an associate who is an active member in a local real estate board that is affiliated with the National Association of Realtors.
Recording The noting in the registrar’s office of the details of a properly executed legal document, such as a deed, a mortgage note, a satisfaction of mortgage, or an extension of mortgage, thereby making it a part of the public record.
Refinance Paying off one loan with the proceeds from a new loan using the same property as security.
Revolving Liability A credit arrangement, such as a credit card, that allows a customer to borrow against a pre-approved line of credit when purchasing goods and services.
Secondary Mortgage Market Where existing mortgages are bought and sold.
Security The property that will be pledged as collateral for a loan.
Seller Carry-back An agreement in which the owner of a property provides financing, often in combination with an assumable mortgage. See Owner Financing. No longer allowed on many loans.
Servicer An organization that collects principal and interest payments from borrowers and manages borrowers’ escrow accounts. The servicer often services mortgages that have been purchased by an investor in the secondary mortgage market.
Treasury Index An index used to determine interest rate changes for certain adjustable-rate mortgage (ARM) plans. Based on the results of auctions that the U.S. Treasury holds for its Treasury bills and securities or derived from the U.S. Treasury’s daily yield curve, which is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market.
Truth-in-Lending A federal law that requires lenders to fully disclose, in writing, 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 the risk involved for the lender. Underwriting involves an analysis of the borrower’s creditworthiness and the quality of the property itself.
VA Mortgage A mortgage that is guaranteed by the Department of Veterans Affairs (VA). Also known as a government mortgage.