The Mortgage Masters Glossary

Adjustable-rate mortgage (ARM)

A mortgage loan with an interest rate that can change over time, typically based on an index.​​​​

Amortization

The process of paying off a mortgage loan over time through scheduled payments that include both principal and interest.

Appraisal

A professional evaluation of a property's value, typically conducted by a licensed appraiser.

Annual Percentage Rate (APR)

A measure of the cost of credit, expressed as a yearly interest rate. It includes the interest rate as well as any fees or additional costs associated with the loan. The APR is intended to make it easier for consumers to compare the true cost of different loans by taking into account not just the interest rate, but also any points, broker fees, and other charges that may be involved in obtaining the loan. It is important to note that APR is typically higher than the stated interest rate because it includes these additional costs.

Balloon mortgage

A type of mortgage loan that requires a large lump-sum payment at the end of a set period, usually five to seven years.

Cap

A limit on the amount that the interest rate or monthly payments on an adjustable-rate mortgage can increase over the life of the loan.

Closing costs

The fees associated with obtaining a mortgage loan, such as origination fees, title fees, and appraisal fees.

Collateral

Property or assets pledged as security for a loan.

Credit score

A numerical representation of an individual's creditworthiness, based on credit history and other financial factors.

Debt-To-Income Ratio

A financial metric that compares the amount of money a person earns to the amount they owe in debt, used by lenders to assess a borrower's ability to repay a loan.

Default

Failure to pay the mortgage payments over a specified period of time.

Down payment

The initial payment made by the borrower towards the purchase of a property.

Equity

The difference between the value of a property and the amount still owing on the mortgage loan.

Escrow

Escrow refers to a separate account held by a neutral third party, usually a title company or attorney, where funds are held to pay for certain expenses related to the property, such as property taxes and insurance.

Fixed-rate mortgage

A mortgage loan with an interest rate that remains the same for the duration of the loan term.

Interest

The cost of borrowing money, typically expressed as a percentage of the loan amount.

Lender

An institution or individual that provides the funds for a mortgage loan.

Loan to Value (LTV)

A metric used by lenders to determine the risk of a home loan. It is calculated by dividing the loan amount by the value of the property. For example, if a borrower is looking to purchase a $200,000 home and they are requesting a $160,000 loan, the LTV ratio would be 80%. The LTV ratio is used by lenders to evaluate the risk of a loan, as a higher LTV ratio means that the borrower has less equity in the property and is therefore considered a higher risk. Lenders may also use the LTV ratio to determine the required down payment or the interest rate for a loan.

Mortgage insurance

 Insurance that protects the lender in case of default by the borrower.

Points

Points refer to a one-time fee that a borrower can pay to a lender in order to lower the interest rate on a loan. Each point is equal to 1% of the loan amount. For example, on a $200,000 loan, one point would cost $2,000. Paying points can be beneficial for borrowers who plan to stay in their home for a long period of time, as the lower interest rate will result in a lower overall cost of the loan. However, if the borrower plans to move or refinance soon, it may not be worth paying the points as they may not recoup the cost in the short term.

PITI

An acronym for Principal, Interest, Taxes, and Insurance. It is a measure of a borrower's monthly housing expenses and is used by lenders to determine the borrower's ability to repay a mortgage loan. Principal is the amount borrowed, Interest is the cost of borrowing the money, Taxes refer to property taxes, and Insurance is the cost of homeowners insurance. Together, these four costs make up the total monthly mortgage payment. Lenders will typically require that a borrower's monthly housing expenses, including PITI, do not exceed a certain percentage of their gross income.

Prepayment Penalty

A prepayment penalty is a fee that is charged to a borrower when they pay off a loan before its scheduled maturity date.

Principal

The amount of money borrowed, not including interest.

Refinancing

The process of obtaining a new mortgage loan to pay off an existing one.

Reserves

Mortgage reserves are assets, usually in the form of cash or investments, that a borrower has available to them after closing on a mortgage loan, which can be used to cover mortgage payments in case of an emergency or job loss and is often required by lenders as a way to mitigate the risk of default on a loan.

Title

Legal documentation proving ownership of a property.

Title insurance

Insurance that protects the lender and/or the borrower against any losses due to disputes over the ownership of a property.

Underwriting

The process of evaluating a mortgage loan application and determining whether to approve it based on the borrower's creditworthiness, income, and other factors.