Amortization Schedule: a schedule that shows the gradual repayment of debt through regular installments, including the amount of each payment applied to interest and principal and the remaining principal balance after each payment is made.
Annual Percentage Rate (APR): a measure of the total cost of credit (interest and other charges) expressed as a yearly percentage rate; provides a good basis for comparing the cost of loans since all lenders must apply the same rules in calculating the APR.
Adjustable-Rate Mortgage (ARM): a mortgage loan that increases or decreases monthly payments at intervals stated in the note when rates change; change in monthly payment amount subject to limitations.
Appraisal: a document from a licensed professional that gives an estimate of a property’s fair market value based on property features and sales of comparable homes in the area (called “comps”); appraisal required by lender before loan approval to ensure that mortgage loan amount matches or falls below property value
Closing: a meeting, typically held at a title company or attorney’s office where the borrower finalizes a sale or refinances a property by signing mortgage documents paying closing costs, also known as the “settlement”
Closing Costs: fees for final property transfer not included in the price of the property, including charges such as origination fees, discount points, appraisal fees, survey, title insurance, legal fees, real estate professional fees, prepayment of taxes and insurance, and real estate transfer taxes
Construction Loan: a short-term loan to finance the cost of building a new home where the lender pays the builder based on milestones accomplished during the building process, such as once a subcontractor pours the foundation and inspectors approve it
Conventional Loan: private sector loan not guaranteed or insured by the U.S. government
Credit History: a record of an individual that lists current and past debts and the payment history for each, the results of which generate a credit report that lenders use to gauge a potential borrower’s ability to repay a loan
Credit Score: a score calculated by credit reporting agencies using a person’s credit report to determine the likelihood of a loan being repaid on time. Scores range from about 300 to 850; a lower score means a person is a higher risk, while a higher score means that there is less risk
Debt-to-Income Ratio: a comparison or ratio of your monthly debt to monthly gross income
Deed: a document that legally transfers ownership of property from one person to another, placed on public record with the property description and owner’s signature; also known as the title
Down Payment: the portion of a home’s purchase price paid in cash and not part of any mortgage loan or line of credit secured by the property; amount varies based on loan type and determined by taking the difference of the sale price and actual amount of any debt secured by the property
Earnest Money Deposit: a deposit made by the potential homebuyer to show serious interest in buying the house; may be applied toward down payment at closing; forfeited to seller unless the purchase contract expressly provides conditions for return to buyer if the sale does not go through
Escrow: deposit of funds by borrower to lender to pay taxes and insurance premiums when they become due; sometimes a deposit of funds to an attorney or escrow agent, which are disbursed once certain requirements are met
Equity: an owner’s financial interest in a property, calculated by subtracting the amount still owed on the mortgage loan(s) from the property’s market value
Fixed-Rate Mortgage: a mortgage with principal and interest payments that remain the same throughout the life of the loan because the interest rate and other terms don’t change
Good Faith Estimate: an estimate of all closing fees, including pre-paid and escrow items as well as lender charges, given to the borrower within three days after submission of a loan application
Home Equity Line of Credit: a mortgage loan, typically either a first or second lien, that allows a borrower to obtain cash against the equity of a home up to a predetermined amount
Home Inspection: an inspection that evaluates the structural and mechanical condition of a property, often included as a contingency by the purchaser (not to be confused with property appraisal)
Homeowner’s Insurance: an insurance policy, also called hazard insurance, that provides protection against damage to a dwelling from fire, storms, or other damages, typically required by lenders and often as an escrowed cost: generally excludes flood insurance, which must be purchased separately
HUD1 Settlement Statement: also known as “settlement sheet” or “closing statement,” because it itemizes all funds due from the buyer and credited to the seller at or before closing, including real estate commissions, loan fees, points and escrow amounts
Interest: a percentage rate used to calculate the monthly payment on outstanding balance of a mortgage loan
Loan-to-Value (LTV) Ratio: a percentage calculated by dividing your mortgage loan by the appraised value of the home; the higher the LTV, the less cash a borrower is required to pay as a down payment
Market Value: amount a willing buyer would pay a willing seller for a home; appraised value is an estimate of the current fair market value
Mortgage: a security agreement between the lender and the buyer in which the property is collateral for the loan; mortgage gives the lender the right to collect payment on the loan and to foreclose if the loan obligations are not met
Mortgage Insurance: insurance required for the loan-to-value ratio that exceeds a certain percent, which insures the lender against loss caused by a borrower’s default on the mortgage; issued by a private mortgage insurance (PMI) company, or in the case of an FHA loan, by the federal government; percentage of coverage and the amount of the premium will vary depending on the type of loan and the mortgage insurance company
Origination: the process of preparing, submitting, and evaluating a loan application; generally includes a credit check, verification of employment, and a property appraisal
Origination Fee: a fee or charge for work involved in the evaluation, preparation and submission of a proposed mortgage loan
PITI: abbreviation for Principal, Interest, Taxes and Insurance, which make up a monthly mortgage payment
Points: a point is equal to one percent of the principal amount of your mortgage; lenders often charge points in both fixed-rate and adjustable-rate mortgages to increase the yield on the mortgage and cover loan closing costs; typically collected at closing and may be paid by the borrower or the home seller or split between them
Pre-Approval: lender commits to lend to a potential borrower up to a stated loan amount based on receipt of a completed loan application that includes credit reports, income, debt, savings, and underwriter review; commitment remains in effect for a specified period if the borrower continues to meet the qualification requirements; contingent upon lender’s receipt of an acceptable property appraisal
Prepayment: any amount paid to partially or fully reduce the principal balance of a loan before the due date
Principal: remaining amount owed on a loan at any given time; original loan amount minus total repayments of principal made; does not include interest paid on the loan
Pre-Qualify: a lender informally determines the maximum amount an individual is eligible to borrow; not a commitment by a lender
Private Mortgage Insurance (PMI): insurance that protects the lender against loss caused by borrowers failing to make loan payments, generally for loans with LTV greater than 80 percent
Refinance: process of paying off one loan with proceeds from a new loan, using the same property as collateral
Second Mortgage: additional mortgage on a property; in the case of a borrower default, the first mortgage holder has repayment priority over any second mortgage holder; riskier for lender and usually carries higher interest rate than first mortgage loan
Survey: property diagram that indicates legal boundaries, easements, encroachments, rights of way, improvement locations, etc.; conducted by licensed surveyors and normally required by lender to confirm that property boundaries and features are correctly described in legal description of property; ensures there are no encroachments or easements that would adversely impact the value or use of the property
Title: legal document establishing right of ownership recorded to make it part of public record, also known as “deed”
Title Insurance: insurance policy that protects residential or commercial property owners and their lenders against losses related to property’s title or ownership, including errors and omissions of closing attorney and/or title company, such as unpaid prior liens, unpaid property taxes, and failure to comply with the lender’s closing requirements
Title Search: review of public records, generally at local courthouse, to ensure buyer is purchasing a house from the legal owner; also verifies any unpaid liens, overdue special assessments, other claims or outstanding restrictive covenants in the records, which would adversely affect marketability or value of title
Underwriting: process of evaluating a loan application to determine risk involved for lender; involves analysis of borrower’s creditworthiness, ability to repay the loan and acceptability of the property as collateral to secure the loan
Warranty Deed: legal document that includes guarantee that the seller is the true owner of the property, has the right to sell the property, and that there are no claims against the property
