Adjustable-rate mortgage (ARM):

A mortgage whose interest rate changes over a time based on an index plus a margin.

Amortization:

The gradual repayment of a mortgage by making payment installments.

Amortization schedule:

A timetable for repayment of a mortgage showing the amount of each payment applied to interest and principal and the remaining balance.

Annual percentage rate (APR):

The total yearly cost of a mortgage stated as a percentage of the loan amount; includes the base interest rate, primary mortgage insurance, and loan origination fee (points).

Appraisal:

A professional opinion of the market value of a property.

Assumable mortgage:

A mortgage that can be taken over ("assumed") by the buyer when a home is sold.

Assumption:

The transfer of the seller's existing mortgage to the buyer.

Cap:

A provision of an ARM limiting how much the interest rate or mortgage payments may increase.

Cash reserve:

A requirement of some lenders that buyers have sufficient cash remaining after closing to make the first two mortgage payments.

Clear title:

A title that is free of liens and legal questions regarding ownership of the property.

Contingency:

A condition that must be met before a contract is legally binding.

Conventional mortgage:

Any mortgage that is not insured or guaranteed by the federal government.

Deed:

The legal document conveying title to a property.

Deed of trust:

The document used in some states instead of a mortgage; title is conveyed to a trustee rather than to the borrower.

Discount points:

See Points.

Down payment:

The portion of the purchase price that the buyer pays in cash and does not finance with a mortgage.

Due-on-sale clause:

A provision in a mortgage allowing the lender to demand repayment in full if the borrower sells the property securing the mortgage.

Earnest money:

A deposit given to the seller to show that a prospective buyer is serious about purchasing the house.

Easement:

A right of way giving persons other than the owner access to or over a property.

Equity:

The difference between the market value of a property and the homeowner's outstanding mortgage balance.

Equity loan:

A loan based on the borrower's equity in his or her home.

Escrow:

The holding of documents and money by a neutral third party prior to closing; also, an account held by the lender into which a homeowner pays money for taxes and insurance.

FHA loan:

A mortgage that the Federal Housing Administration insures.

First mortgage (lien):

This is the mortgage that has first claim in the event of default.

Fixed-rate mortgage:

A mortgage in which the interest rate does not change during the entire term of the loan.

Flood insurance:

Insurance required for properties in federally designated flood areas.

Hazard insurance:

Insurance to protect the homeowner and the lender against physical damage to a property from fire, wind, vandalism, or other hazards.

Homeowner's insurance:

An insurance policy that combines liability coverage and hazard insurance.

Interest:

The fee charged for borrowing money.

Interest rate cap:

A provision of an ARM limiting how much interest the rate may increase per adjustment period. See also Lifetime cap.

Lien:

A legal claim against a property that must be paid when the property is sold.

Lifetime cap:

A provision of an ARM that limits the total increase in interest rates over the life of the loan.

Loan servicing:

The collection of mortgage payments from borrowers and related responsibilities of a loan servicer.

Loan-to-value ratio (LTV):

The relationship between the amount of a mortgage and the total value of the property.

Lock-in:

A written agreement guaranteeing the homebuyer a specified interest rate provided the loan is closed within a set period of time. The lock-in also usually specifies the number of points to be paid at closing.

Margin:

The set percentage the lender adds to the index rate to determine the interest rate of an ARM.

Mortgage:

A legal document that pledges a property to the lender as security for payment of a debt.

Mortgage banker:

A company that originates mortgages exclusively for resale in the secondary market.

Mortgage broker:

A company that for a fee matches borrowers with lenders.

Mortgage insurance:

See Private mortgage insurance.

Mortgage insurance premium:

The fee paid by a borrower to FHA or a private insurer for mortgage insurance.

Mortgage note:

A legal document obligating a borrower to repay a loan at a stated interest rate during a specified period of time; the agreement is secured by a mortgage.

Origination fee:

A fee paid to a lender for processing a loan application; it is stated as a percentage of the mortgage amount, or points.

Owner financing:

A purchase in which the seller provides all or part of the financing.

Payment cap:

A provision of some ARMs limiting how much a borrower's payments may increase regardless of how much the interest rate increases; may result in negative amortization.

PITI:

Stands for principal, interest, taxes, and insurance - the components of a monthly mortgage payment.

Points:

A one-time charge by the lender to increase the yield of the loan; a point is 1 percent of the amount of the loan.

Prepayment penalty:

A fee charged to a borrower who pays off a loan before it is due.

Pre-qualification:

The process of determining how much money a prospective homebuyer will be eligible to borrow before applying for a loan.

Principal:

The amount borrowed or remaining unpaid; also, the part of the monthly payment that reduces the outstanding balance of a mortgage.

Private mortgage insurance (PMI):

Insurance provided by non-government insurers that protect lenders against loss if a borrower defaults.

Qualifying ratios:

Guidelines applied by lenders to determine how large a loan to grant a home- buyer.

Rate lock:

See Lock-in.

Refinancing:

The process of paying off one loan with the proceeds from a new loan secured by the same property.

Second mortgage:

A mortgage that has rights that are subordinate to the rights of the first mortgage holder.

Settlement sheet:

The computation of costs payable at closing which determines the seller's net proceeds and the buyer's net payment.

Survey:

A drawing showing the legal boundaries of a property.

Title:

A legal document establishing the right of ownership.

Title company:

A company that specializes in insuring title to property.

Title insurance:

Insurance to protect the lender (lender's policy) or the buyer (owner's policy) against loss arising from disputes over ownership of a property.

Title search:

A check of the title records to ensure that the seller is the legal owner of the property and that there are no liens or other claims outstanding.

Truth-in-Lending:

A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage including the APR and other charges.

Underwriting:

The process of evaluating a loan application to determine the risk involved for the lender.

VA loan:

A loan that the Veterans Administration guarantees.