Glossary of Terms
5/1 Adjustable Rate Mortgage
A 5/1 adjustable rate mortgage (ARM) or 5-year ARM is a mortgage loan where “5” is the number of years your initial interest rate will stay fixed. The “1” represents how often your interest rate will adjust after the initial five-year period ends. The most common fixed periods are 3, 5, 7, and 10 years and “1,” is the most common adjustment period. It’s important to carefully read the contract and ask questions if you’re considering an ARM.
​
Adjustable Rate Mortgage (ARM)
An adjustable rate mortgage (ARM) is a type of loan for which the interest rate can change, usually in relation to an index interest rate. Your monthly payment will go up or down depending on the loan’s introductory period, rate caps, and the index interest rate. With an ARM, the interest rate and monthly payment may start out lower than for a fixed-rate mortgage, but both the interest rate and monthly payment can increase substantially.
​
Amortization
Amortization means paying off a loan with regular payments over time, so that the amount you owe decreases with each payment. Most home loans amortize, but some mortgage loans do not fully amortize, meaning that you would still owe money after making all of your payments.
​
Annual Percentage Rate (APR)
An annual percentage rate (APR) is a broader measure of the cost of borrowing money than the interest rate. The APR reflects the interest rate, any points, mortgage broker fees, and other charges that you pay to get the loan. For that reason, your APR is usually higher than your interest rate.
​
Balloon loan
For mortgages, a balloon loan means that the loan has a larger-than-usual, one-time payment, typically at the end of the loan term. This one-time payment is called a “balloon payment, and it is higher than your other payments, sometimes much higher. If you cannot pay the balloon amount, you might have to refinance, sell your home, or face foreclosure.
​
Construction loan
A construction loan is usually a short-term loan that provides funds to cover the cost of building or rehabilitating a home.
​
Conventional loan
A conventional loan is any mortgage loan that is not insured or guaranteed by the government (such as under Federal Housing Administration, Department of Veterans Affairs, or Department of Agriculture loan programs).
​
Co-signer or co-borrower
A co-signer or co-borrower is someone who agrees to take full responsibility to pay back a mortgage loan with you. This person is obligated to pay any missed payments and even the full amount of the loan if you don’t pay. Some mortgage programs distinguish a co-signer as someone who is not on the title and does not have any ownership interest in the mortgaged home.
​
Down payment
A down payment is the amount you pay toward the home upfront. You put a percentage of the home’s value down and borrow the rest through your mortgage loan. Generally, the larger the down payment you make, the lower the interest rate you will receive and the more likely you are to be approved for a loan.
​
Earnest money
Earnest money is a deposit a buyer pays to show good faith on a signed contract agreement to buy a home. The deposit is held by a seller or third party like a real estate agent or title company. If the home sale is finalized or “closed” the earnest money may be applied to closing costs or the down payment.
​
Equity
Equity is the amount your property is currently worth minus the amount of any existing mortgage on your property.
​
Escrow
An escrow account is set up by your mortgage lender to pay certain property-related expenses, like property taxes and homeowner’s insurance. A portion of your monthly payment goes into the account. If your mortgage doesn’t have an escrow account, you pay the property-related expenses directly.
​
FHA loan
FHA loans are loans from private lenders that are regulated and insured by the Federal Housing Administration (FHA). FHA loans differ from conventional loans because they allow for lower credit scores and down payments as low as 3.5 percent of the total loan amount. Maximum loan amounts vary by county.
​
Fixed-rate mortgage
A fixed-rate mortgage is a type of home loan for which the interest rate is set when you take out the loan and it will not change during the term of the loan.
​
Foreclosure
Foreclosure is when the lender or servicer takes back property after the homeowner fails to make mortgage payments. In some states, the lender has to go to court to foreclose on your property (judicial foreclosure), but other states do not require a court process (non-judicial foreclosure).
​
Home appraisal
An appraisal is a written document that shows an opinion of how much a property is worth. The appraisal gives you useful information about the property. It describes what makes it valuable and may show how it compares to other properties in the neighborhood. An appraisal is an independent assessment of the value of the property.
​
Home equity line of credit (HELOC)
A home equity line of credit (HELOC) is a line of credit that allows you to borrow against your home equity.
​
Home equity loan
A home equity loan (sometimes called a HEL) allows you to borrow money using the equity in your home as collateral.
​
Homeowner's insurance
Homeowner’s insurance pays for losses and damage to your property if something unexpected happens, like a fire or burglary. When you have a mortgage, your lender wants to make sure your property is protected by insurance.
​
Interest-only loan
An interest-only mortgage is a loan with scheduled payments that require you to pay only the interest for a specified amount of time.
​
Interest rate
An interest rate on a mortgage loan is the cost you will pay each year to borrow the money, expressed as a percentage rate. It does not reflect fees or any other charges you may have to pay for the loan.
​
Jumbo loan
Each year Fannie Mae, Freddie Mac, and their regulator, the Federal Housing Finance Agency (FHFA), set a maximum amount for loans that they will buy from lenders.
​
Lenders title insurance
Lender’s title insurance protects your lender against problems with the title to your property-such as someone with a legal claim against the home.
​
Mortgage
A mortgage is an agreement between you and a lender that allows you to borrow money to purchase or refinance a home and gives the lender the right to take your property if you fail to repay the money you've borrowed.
​
Mortgage closing costs
Mortgage closing costs are all of the costs you will pay at closing. This includes origination charges, appraisal fees, credit report costs, title insurance fees, and any other fees required by your lender or paid as part of a real estate mortgage transaction.
​
Mortgage insurance
Mortgage insurance protects the lender if you fall behind on your payments. Mortgage insurance is typically required if your down payment is less than 20 percent of the property value. Mortgage insurance also is typically required on FHA and USDA loans.
​
Mortgage loan modification
A mortgage loan modification is a change in your loan terms.
​
Mortgage refinance
Mortgage refinance is when you take out a new loan to pay off and replace your old loan. Common reasons to refinance are to lower the monthly interest rate, lower the mortgage payment, or to borrow additional money. When you refinance, you usually have to pay closing costs and fees.
​
PITI
Principal, Interest, Taxes, and Insurance, known as PITI, are the four basic elements of a monthly mortgage payment.
​
PMI
Private Mortgage Insurance (PMI) is a type of mortgage insurance that benefits your lender. You might be required to pay for PMI if your down payment is less than 20 percent of the property value and you have a conventional loan. You may be able to cancel PMI once you’ve accumulated a certain amount of equity in your home.
​
Prepayment penalty
A prepayment penalty is a fee that some lenders charge if you pay off all or part of your mortgage early. If you have a prepayment penalty, you would have agreed to this when you closed on your home. Not all mortgages have a prepayment penalty.
​
Reverse mortgage
A reverse mortgage allows homeowners age 62 or older to borrow against their home equity. It is called a “reverse” mortgage because, instead of making payments to the lender, you receive money from the lender. The money you receive, and the interest charged on the loan, increases the balance of your loan each month.
​
Second mortgage
A second mortgage or junior lien is a loan you take out using your house as collateral while you still have another loan secured by your house.
​
USDA Loan
The Rural Housing Service, part of the U.S. Department of Agriculture (USDA) offers mortgage programs with no down payment and generally favorable interest rates to rural homebuyers who meet the USDA’s income eligibility requirements.
​
VA loan
A VA loan is a loan program offered by the Department of Veterans Affairs (VA) to help servicemembers, veterans, and eligible surviving spouses buy homes. The VA does not make the loans but sets the rules for who may qualify and the mortgage terms. The VA guarantees a portion of the loan to reduce the risk of loss to the lender. The loans generally are only available for a primary residence.
​
​
​
​
Source: Consumer Financial Protection Bureau