Decision Tools
Common Mortgage Terms
We understand the mortgage process is complicated, especially if this is your first time through it. To help demystify the process, we have compiled a list of common mortgage terms and their definitions.
Mortgage Terms
APR vs. Interest Rate
ANNUAL PERCENTAGE RATE (A.P.R.) - A measurement used to compare different loans offered by competing lenders, which takes into account both the interest rate and closing fees. Unlike an interest rate, an APR gives you a bigger picture when shopping for the best deal on a loan. For example, an APR lets you see the total cost of a mortgage, including closing fees and lender points over the life of a loan - not just the interest due. Even though lenders are required by law to show a loan's APR, they don't all use the same fees in their calculation, resulting in skewed comparisons. So always check to make sure that the APRs you are comparing include similar fees.
INTEREST RATE - The rate used to calculate your monthly payment.
ARM (Adjustable Rate Mortgage)
For the initial fixed period of these loans, the rate and monthly principal and interest payments are fixed. These will adjust after the initial fixed period ends according to a specific index or rate set by your lender, depending on what type of ARM you select.
Balloon Note
These loans have a fixed rate and monthly principal and interest payments, but will have a "lump sum" due before the end of its term. Basis Point A finance term meaning a yield of 1/100th of 1% annually. 100 basis Points equal 1%.
Combined Loan to Value (CLTV)
The total percentage of the home's value that is being mortgaged. For example, if you had a first mortgage for 80% of the home's value and a second for 15% of the home's value, then the CLTV would be 95%.
Conforming
A mortgage that IS eligible for purchase by Fannie Mae and Freddie Mac.
Debt to Income (DTI)
The percentage of your gross income that you pay out in bills. This would also include your future mortgage payments. For example, if you made $1000 before taxes each month and had $300 in bills, your DTI would be 30%. Generally lenders only include debts that show up on your credit report.
Discount Points
Money paid to the lender in exchange for a lower interest rate. For example, if you qualified for 6% but agreed to pay the bank 1% of the loan amount up front they would give you a lower rate, such as 5.75%.
Fixed Rate Mortgage
These loans have a fixed rate and monthly principal and interest payments over the life of the loan.
Full Amortized Loan
A loan of regular payments, which cause the principal and interest to be completely paid by the due date.
Good Faith Estimate
An estimate of the closing costs associated with financing provided by the broker to the customer during the initial application process.
Home Equity Line of Credit
A variable rate line of credit secured by a homeowner's equity. The lender provides funds on demand, with a corresponding lien against the property. The loan must be repaid in installments after a specified draw period.
Interest only
A loan where your payment is only the interest due each month, meaning there is no reduction in the amount you owe.
Interest Rate Cap
The maximum interest rate increase of an Adjustable Rate Mortgage. For example, a 7% loan with a 5% interest rate cap would have a maximum interest rate for the life of the loan, which could not exceed 12%.
Loan to Value (LTV)
The ratio expressed as a percentage of the loan amount to the lesser of the sales price or appraised value (value) of real property. For example, if a house was worth $100,000 and you were trying to borrow $80,000, the loan to value (LTV) would be 80%.
Negative amortization
A condition where the loan balance goes up, rather than down, as payments are made. If a payment is not large enough to cover the interest due the difference is added to the principal. Negative amortization can occur in certain types of adjustable rate mortgages.
Non-Conforming
A mortgage that IS NOT eligible for purchase by Fannie Mae and Freddie Mac.
Option Arm
Also known as a "pick a pay" this type of loan gives you three payment options each month: 1) A minimum payment established when your loan closes, 2) An Interest-Only Payment based on a preset index and margin, and 3) A fully amortized payment based on the same index and margin. Option Arms can be a very valuable tool if used properly. However one must always be careful because by making only the minimum payment you may not cover all of the interest due, and could find yourself in a negative amortization situation where the actual principal on your loan increases.
PI (Principal and Interest)
Used to indicate that only principal and interest are included in a quoted monthly payment.
PITI (Principal, Interest, Taxes, and Insurance)
Used to indicate that the four major portions, Principal, Interest, Taxes, and Insurance are included in a quoted payment.
Preliminary Approval
A loan approval that is issued based on the satisfaction of certain conditions. Essentially, the bank has approved the loan if all the information about the loan can be validated. For example, an appraisal would be a condition of a preliminary approval (prelim) that would satisfy what your broker has stated as the value of the property. When all of the conditions on a preliminary approval are met, a final approval is issued and the loan may then close.
Prepaid costs
Not closing costs charged by a third party, such as the appraisal, but rather things like the interest on your mortgage for a portion of the month, and reserves for your taxes and insurance.
Prepayment penalty
A penalty specified under a note, mortgage, or deed of trust and imposed when the loan (or a percentage thereof) is paid before it is due. These are usually for a set period of time from loan inception (i.e.: one year, three years, five years, etc.).
Regulation Z (Truth in Lending)
Requires that a borrower be advised in writing, prior to signing and in a specific, uniform manner, of the interest rate and all costs and fees incurred in a proposed loan transaction.
Seller Carry-back
This is when the seller of a property agrees to act like a bank and hold a portion of the financing in his/her own name. For example, if you were buying a property for $100,000 and only came up with $80,000 at closing, the seller could "carry back" $20,000 in order to complete the purchase.
Seller Concessions
An agreement by the seller to pay for a set amount of the buyer's closing costs. These concessions are deducted from the sales price. For example, if the purchase price is $100,000 and there is $2,000 in seller concessions, then the actual amount the seller gets is $98,000.
Sub-prime
A term that refers often to non-conforming loans, not necessarily bad credit. To be politically correct, some lenders now refer to them as Non-Prime. However, they do encompass poor credit loans as well.
Yield spreads premium/rebate**
Money paid to the Mortgage Broker by the lender in exchange for selling you a higher rate than that for which you qualified. For example, if you qualified for 6% but the broker sold you 6.5%, then the lender would pay the broker additional compensation for selling you the higher interest rate. This is above and beyond any other fees the broker is charging you.
** A note of caution about Yield Spread:
You should always ask if you are being charged a Yield Spread and definitely get an answer why if you are being charged one.
Be aware, however, that if you choose a "No Closing Cost" option with your mortgage, a Broker will charge you a Yield Spread, which will be reflected in a higher Wholesale interest rate and monthly payment. This option means that you would not have to pay the Closing Costs directly associated with your loan upfront at close of escrow. The Yield Spread would be used to cover the closing costs directly associated with your loan. There are certainly scenarios where this option makes more financial sense than either paying your costs up front or borrowing. Our Break Even Calculator an help you determine if this option makes sense for you.
Wholesale or Par Rate
The rate you qualify for that doesn't require any payment to the lender or qualify the broker for any compensation from the bank.
Personal Mortgage Terms
Bank Statement (Business or Personal)
The lender uses your monthly deposits into a single checking or savings account in order to determine your monthly income. You can usually provide between 6 and 24 months of consecutive statements under these programs. Generally, the more statements you can provide, the more favorable the loan terms will be. People who are self-employed or have multiple sources of income might choose this option.
Full Documentation
This option requires you to provide full documentation on all your sources of income, and usually applies to salaried employees or people who are self-employed with a stable history of income. This would include w-2 forms, pay stubs, bank statements, brokerage account statements, etc. People who are able and/or willing to provide all documentation on their income and assets should choose this option as you will generally get better rates, and have access to a greater variety of products.
Gross Income
Total income before any expenses or taxes are deducted. Liquid Assets Personal and Real property - items of value than can be quickly converted into cash. Bank accounts, stocks, bonds, mutual funds, real estate, personal property, etc.
NINA (No Income No Asset)
You do not list income or a source of income. Essentially, the bank is lending based on your credit and equity in the subject property. You may have to verify your employment or at least state where you work on the loan application.
No Doc
You do not provide the amount of income you earn or its source, and no employment verification is needed. People who might be currently unemployed or who do not want to disclose anything about their employment, income, or assets would choose this option.
Stated Asset
You state the value of your liquid assets but do not provide documentation to back it up.
Stated Income
You provide your annual income, but do not provide documentation to back it up. However, the lenders will require written verification of your employment. You would also need to verify your assets if the lender requires it. For example, you could state that you make $40,000 a year as a teacher. You would not need to provide pay stubs or W2's, but the lender would need a written verification that you are employed. People who are self-employed or recently self-employed and who may show historical losses on their income might choose this option.
Property and Escrow Terminology
2 Family (Duplex)
A single housing structure that contains two units.
3-4 Family
A single housing structure that contains 3 or 4 units. Generally, when a housing structure has more than 4 units it is considered commercial property.
Appraisal
An opinion of value based upon a factual analysis. Legally, an estimation of value by two disinterested persons of suitable qualifications.
Full Appraisal
A complete examination of the interior and exterior of the property.
Drive by Appraisal
An exterior examination only of the property.
AVM (Automated value Model)
A computerized estimate of your homes value based on information available through various sources online.
CC&Rs (Covenants, Conditions, and Restrictions)
A term used to describe the restrictive limitations that may be placed on property. They typically apply to condos.
Condominium
A housing structure that contains multiple units. A condo is considered to be a High-Rise if the building is 5 or more stories tall.
Condo-Tel
A building that has individually owned condos but also operates as a hotel by renting/leasing some of the units.
Depreciation
Loss of value in any asset brought about by age, physical deterioration or functional or economic obsolescence.
Escrow
The deposit of instruments and funds with instructions to a neutral third party to carry out the provisions of a set agreement or contract; when everything is deposited and recorded to carry out the instructions, it is called a completed escrow.
Foreclosure
A proceeding in or out of court, to extinguish all rights, title, and interest of, the owner(s) in order to sell the property to satisfy a lien against it.
Homeowner's Association
An association of people who own homes in a given area, usually formed by the builder, for the purpose of maintaining or improving the quality of the area. Required by statute in some states for Condominiums, Townhouses, and Planned Unit Developments. The duties of both the builder and the association are controlled by statute.
Manufactured Property
This is property that is manufactured in a factory and then transported to a lot.
Mixed Use Property
This is a property that has both residential and commercial uses. An example would be a convenience store on the first floor and a residence on the second.
Modular Property
A modular home is a factory-built house or building intended for residential occupancy that comprises "modules" with three walls and a roof or ceiling. It has to be equipped with complete plumbing, electrical, and heating facilities, and designed to be moved to a site for installation on a foundation and to be connected to service facilities, and used as a place of residence.
Mortgage Insurance
Insurance purchased by the borrower to partially protect the lender against loss if the borrower defaults. Normally required for loans with an LTV greater than 80% (20% down). FHA loans and most first buyer programs require mortgage insurance regardless of the LTV. Insurance purchased for non-FHA loans is commonly called PMI (Private Mortgage Insurance). Some large lenders self-insure and do not require the buyer to purchase PMI. The interest rate, however, may be slightly higher. Normally, mortgage insurance may be dropped when the LTV is below 80%.
Non-Warrantable Condo
A condo that is in a condo project that is either less than 50% complete or occupied. For example, if a condo development had plans for 100 units to be built in 4 segments of 25, then until half of the 100 units were occupied, the condos would be considered non warrantable.
Rowhouse
Similar to a Townhouse, Rowhouses share common walls with the adjacent units. Rowhouse groups consist of a minimum of 3 and a maximum of 6 units.
Single Family
A single housing structure (i.e. a stand-alone house).
Single Family Rural Property
A single housing structure (i.e. a stand-alone house) in a rural area.
Stated Value
You state the value of your property in lieu of an appraisal. This is generally available on smaller second mortgages.
Tax assessment
The value the city or county gives your property for tax purposes.
Title Insurance
Insurance against loss resulting from defects of title to a specifically described parcel of real property. Defects may run to the fee (chain of title) or to encumbrances. Essentially, it protects the new lien holder in case information missing from the title search could cause them to not be repaid.
Townhouse
A home that is attached to one or more other houses. The land the home sits on is also owned by the purchaser (if you don't own the land, it is a condo).
Working Property
A residential property that is also used to earn income. An example would be a house on 20 acres that was also used to raise and sell horses.
