Important Mortgage Loan Terminology You Need To Know

By Mark Di Vincenzo. May 7th 2016

Americans don’t tend to be good savers. In fact, according to a recent survey by bankrate.com, only about half of Americans have more emergency savings than credit card debt.

So if we don’t have a lot of money, we need to borrow it to buy cars, houses and sometimes even to pay our light bills. Given this dependence that many of us have on lenders, it makes sense to learn the language of lending, so here is a glossary of loan terms, in alphabetical order:

Adjustable Rate – An interest rate that changes periodically.

Adjustable-Rate Mortgage (ARM) – A mortgage in which the interest rate changes when market conditions rise and fall.

Amortization -- A monthly repayment schedule in which a loan is repaid in fixed payments of principal and interest.

Annual Percentage Rate (APR) -- The annual cost of a loan that takes into account interest, points, origination fees and mortgage insurance.

Application -- An initial statement of personal and financial information required to approve a loan.

Asset -- Anything of monetary value that someone owns, including real estate, vehicles, money in bank accounts and investments.

Balloon Mortgage -- A short-term fixed-rate loan with low payments for a set number of years and one large final “balloon” payment on the remainder of the principal.

Basis Point -- A unit of measure: 1/100th of one percent. For example, the difference between a 9.0-percent loan and a 9.5-percent loan is 50 basis points.

Cash Out -- A scenario in which a borrower receives a loan that exceeds the amount to buy a car or a house.

Ceiling -- The maximum allowable interest rate of an adjustable-rate mortgage.

Closing – A meeting between the buyer, seller and lender or their agents at which property and money legally changes hands.

Closing Costs – The fees that must be paid by either the buyer or seller to allow the closing to occur. These fees may include a loan origination fee, discount points, attorney's fees, title insurance, appraisal, survey, among others. (For more information on closing costs, Important Closing Costs And Fees To Consider When Buying A House.)

Collateral -- Assets that back a mortgage loan.

Commission -- Money paid to a salesman or real estate agent or broker by the seller.

Construction Loan -- A short-term interim loan to fund the construction of a house. This money goes to a builder. After construction, the homeowner must apply for a permanent mortgage to repay the construction loan.

Co-Signer -- This is a person who signs the promissory note with the borrower and promises to repay the loan if the borrower does not. Some loans require a co-signer and some don't.

Credit Report – This details the credit history of a borrower to help determine whether he is likely to repay the loan.

Default – This means being late in repaying a loan for a certain period. Missing one or two payments usually does not mean the borrower is in default. If he is in default, he may have to pay penalties or he may have to repay the entire loan immediately.

Deferment -- This means the borrower is given extra time to repay the principal of the loan, but he may have to make interest payments.

Discount Points -- Money paid to a lender at closing in exchange for lower interest rates. Each point is equal to 1 percent of the loan amount.

Down Payment -- Money a buyer pays to lower the amount of the loan or mortgage.

Earnest Money – A deposit made by a buyer toward the down payment that shows he is a serious buyer.

Equity – This is the difference between the current market value of an item or property and the amount of the outstanding loan. If a house is worth $200,000 and the homeowner owes $100,000 on the mortgage, his equity in the house is $100,000.

Escrow – A title company or lawyer that holds money or documents until the escrow instructions are fulfilled.

Federal Home Loan Mortgage Corporation (Freddie Mac) – A quasi-governmental agency that buys conventional mortgages from banks and approved mortgage companies.

Federal Housing Administration – A government agency that insures residential mortgage loans made by private lenders. (For more information on FHA mortgage loans, see The Benefits Of FHA Home Mortgage Loans.)

Federal National Mortgage Association (Fannie Mae) – A corporation created by Congress that buys and sells residential mortgages.

Fixed Rate -- An interest rate that is fixed for the term of the loan.

Fixed-Rate Mortgage - A mortgage with an interest rate that doesn’t change for the life of the loan.

Good-Faith Estimate – A written estimate of costs the borrower will have to pay at closing.

Gross Monthly Income -- The total amount earned by the borrower each month. This includes wages, dividends, rental income and so on.

Home Equity Loan -- A loan secured by the equity in your home. A borrower might want one to do home improvements or pay for college among other things. (To learn more about home equity loans, see Helpful Advice On Taking Out A Second Home Loan Mortgage.)

Interest – The fee paid to borrow money.

Interest Rate -- The percentage of the loan amount you're charged for borrowing money. Sometimes it stays the same and sometimes it goes up and down.

Jumbo Loan -- A mortgage larger than the limits set by Fannie Mae and Freddie Mac. Because these corporations don’t back jumbo loans, they usually come with higher interest rates.

Lender -- The bank, mortgage company or person offering the loan.

Lien -- A claim by one person on the property because of an unpaid debt.

Loan Consolidation – Two or more loans combined into one larger loan. The loan usually will cost the borrower more in the long run, but it may make the loan easier for the borrower to repay.

Lock In -- A lender's guarantee of an interest rate for a set period of time.

Mortgage – A document creating a lien on a property as security for the payment of a debt.

Mortgage Insurance -- Insurance the buyer must purchase to cover the lender's risk when a down payment is less than 20 percent of the purchase price. (To learn more about mortgage insurance, see Understanding The Cost Of Private Mortgage Insurance.)

Origination Fee – A fee charged by a lender for processing a mortgage, usually expressed as a percentage of the loan. This fee pays for the work in evaluating and processing the loan.

Prequalification -- The process of determining how much money someone can afford to borrow.

Prime Rate – The lowest commercial interest rate charged by a bank on short-term loans to its most credit-worthy customers.

Principal -- The amount of debt, not counting interest, left on a loan.

Refinancing -- The process of paying off one loan with the proceeds from a new loan.

ServicingThis is taking care of the loan after the money is disbursed and until the loan is completely repaid. This includes billing the borrower, recording payments and keeping track of the amount of money left to be repaid.

Sweat Equity -- Value added to a property by improvements made by the owner.

Title Insurance -- Insurance that protects the lender or the buyer against loss due to disputes over ownership of a property.

Underwriting -- The process of verifying data and evaluating a loan for approval. The underwriter gives the final loan approval.

The bottom line is that you should never take out a loan without a full understanding of all the loan terms involved. Therefore, before you take out your next loan, check out this guide on important mortgage loan terminology. It could end up saving you some serious heartache down the road.

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