A-Z Glossary of Mortgage Terms
Are you interested in getting a home mortgage? One great way to give yourself an advantage when selecting a home loan is to educate yourself about this type of loan. Here is an A-Z glossary of terms that it’s important to know when you’re getting a home mortgage.
Adjustable Rate. The rate of your interest on this type of loan may change over time depending on the market. That means that sometimes you’re paying a really low interest rate but sometimes you may pay a lot of interest. This can mean that your monthly mortgage payment will go up and down which can be hard when budgeting. If you’re considering this type of loan, be sure to look at the related terms “cap” and “ceiling” later in this glossary!
Amortization. This is a type of repayment structure that some people choose. In general it means that the interest is paid off in the first few years and the principal balance owed is paid towards the end of the repayment plan. It just has to do with how your loan payments are applied to the loan.
Annual Percentage Rate (APR). This is a really important number to look at when choosing any loan especially a home mortgage loan. It’s the amount of interest that you’re going to pay on your loan. You want to choose the lowest APR possible.
Application Fee. In order to get your home mortgage loan you are going to need to go through an application process. There will be a fee associated with this process. The fee covers such costs as the cost of requesting your credit report. Make sure that you are aware of what the application fee is before you apply for a mortgage loan.
Appraisal. This refers to when an expert comes in to state what the value of the home is. It is important for you to get an appraisal before buying a home so that you know the value of the home. It’s generally required when you get a home mortgage and you may have to pay a fee for it.
Balloon Payment. Sometimes the loan that you get requires you to make a balloon payment at the end of the loan term. This is a large sum that pays off the entire loan in one shot. Usually you make small monthly payments until the time when the balloon payment comes due and then you pay the remaining balance at once.
Cap. This is a term that you might see if you’re getting an adjustable rate mortgage and it’s a really important term. It refers to the limit allowed for increasing the interest rate or payment on the loan. In other words, it may say in your mortgage agreement that you have a variable rate but that it’s capped at a 5% increase for 5 years. (Also see the term “ceiling” below).
Cash Out. If you decide to refinance your home mortgage in the future then you may choose to “cash out” at that time, which literally means that you get cash back when refinancing.
Ceiling.Like “cap”, this is an important term to know if you’re getting an adjustable rate mortgage loan. It refers to the total highest interest rate you’re allowed to be charged on this type of loan. So you may have an interest rate that varies but it may have a ceiling of 15% and can never go higher than that.
Closing Costs. These are fees that are charged to the buyer (and may be shared with the seller) at the time of a home sale. Make sure that you understand whether or not the closing costs are covered by the home mortgage and what those costs are before you agree to them.
Contract of Sale. This is the legal agreement that you make with the seller of the home. It outlines all of the terms and conditions of the sale. Issues like the closing costs (defined above) may be included in this contract
Credit Limit.As you probably know, this is the total amount of credit that you will be allowed to take out on your loan. It is determined by a number of factors including your income and your credit score.
Down Payment.This is the amount that you pay down on the total price of the home before you get a mortgage. It is typically required that the buyer of a home put down some type of down payment. The more you can pay down, the less you need to borrow from a mortgage loan.
Due on Sale. This is a term that means that if you sell the home before you have finished paying off the mortgage then you will owe the total amount at the time of the sale. Be on the lookout for this term so that you know what you’re agreeing to on your mortgage.
Effective Interest Rate.This is a number that considers not only the traditional interest rate charges but also the effect of other fees on the total cost of the loan. When you are comparing different mortgages it is helpful to look at this number instead of only looking at the APR because it provides a more accurate representation of the total cost of the mortgage.
Equity. This is the difference between the appraised value of the home (see the definition of appraisal above) and the amount you owe left on your mortgage. This is a number you’ll need to know if you’re interested in refinancing your home mortgage.
Fixed Rate. In contrast to an adjustable rate loan, this type of mortgage has a specific set rate. This is nice because it means that your payments remain the same over time and it’s easier to budget for them. Ideally, you will lock in a low fixed rate for your mortgage.
FHA Loan.This is a type of loan that is backed up by the federal government.
Grace Period.You should always make loan payments on time. However, you may have a grace period after the due date during which time you won’t incur fees even though you are late.
Home Equity Line of Credit or Loan. This is a loan or line of credit that you can get
Jumbo Loan.This is a mortgage loan that is given for a higher amount than a traditional mortgage loan. It may be tougher to qualify for this type of loan. Only get one of these if you can truly afford it.
Loan to Value Ratio (LTV). This is a percentage that represents the ratio of the home’s appraised value (see appraisal defined above) to the loan amount. It is important to know because people with a high LTV number may require additional home insurance.
Minimum Payment.As you probably know, this is the minimum amount due each month on your loan. Make sure that you always pay this amount in full and on time.
Mortgage Banker vs. Mortgage Broker. These are both people who process your mortgage loan paperwork. The difference between them is that the banker actually funds the loan whereas the broker works with investors to get the loan funded for you.
Mortgage Insurance.You may be required to carry a certain amount of mortgage insurance if you are considered a risky borrower. For example, if you have a high LTV number (see definition above) then you may have to get this insurance.
Mortgagee vs. Mortgagor. The mortgage is the person who is borrowing the money (you). The mortgagor is the lender. This is important to remember when reading through the documents for your mortgage loan.
Negative Amortization. In some cases the “amortization” (defined above) is not actually enough to repay the entire loan. This happens sometimes when there are “caps” or “ceilings” in place that limit repayment. The result is that your loan gets bigger and bigger over time instead of smaller as you make payments. Beware of this situation.
PITI. This is the amount that you will pay in total each month on your mortgage loan. The term is an acronym that stands for the principal, interest, taxes and insurance that you are paying together each month.
Points.Mortgage payments are often discussed in relation to points. A point is the amount that is paid to keep the interest rate or to lower it. One point is the equivalent of 1% of the loan amount.
Prepayment Penalty.Sometimes you will be charged a fee if you choose to pay back your loan balance before the date due. Make sure that you are aware of this when you get a mortgage.
Qualifying Ratios.This is a number that you’ll hear about during the mortgage loan application process. It looks at the ratio of your debt to income to see if you qualify to get a home loan.
Right to Rescission.This is a right that the lender retains to void your contract. In other words, they can cancel your loan. This isn’t an issue for people who are getting a basic mortgage. However, it’s something to look out for on mortgage related loans such as home equity loans (defined above).
Servicing a Loan.This complex term simply refers to the process of collecting payment on the loan. Don’t get confused by it.
Title. This is the document that says that you legally own the home. It will be referred to in some of your mortgage paperwork.
Variable Rate.See adjustable rate above.
More by this Author
Financial literacy is a goal that all of us should have. It means that we understand our money. Many people choose to be ignorant about their own personal finances as well as about financial issues in...
How to properly void a check so that you won't have problems with your bank account.
Find out how long you should cook popular items on your George Foreman.