Understanding Mortgage Terminology

Whether you are a first-time home buyer or considering your next home purchase, the following definitions may be useful as you navigate the home purchasing and financing process.

Glossary of Mortgage Terms

Annual Percentage Rate (APR) – an interest rate reflecting the cost of a mortgage as a yearly rate. This rate is likely to be higher than the stated note rate on the mortgage because it includes points and other credit costs. The APR allows home buyers to compare different types of mortgages based on the annual cost for each loan.

Appraisal – an estimate of the value of property made by a qualified professional, called an “appraiser.”

Closing – the meeting between the buyer, seller and lender, or their agents, where the property and funds legally change hands.

Closing Costs – usually include an origination fee, points, appraisal fee, title search and insurance, survey, taxes, recording fee, credit report charge and other costs assessed at a closing. The costs of closing usually are 4% – 7% of the mortgage amount.

Commitment – an agreement, in writing, between a lender and a borrower to loan money at a future date, subject to the completion of paperwork or compliance with stated conditions.

Down Payment – the up-front cash you will pay toward the purchase of your home. The down payment reduces the amount that will need to be financed.

Equity – the difference between the fair market value and current mortgage amount.

Escrow – refers to a neutral third party who carries out the instructions of both the buyer and seller to handle all the paperwork of settlement, or “closing.” Escrow may also refer to an account held by the lender into which the home buyer pays money for taxes or insurance payments.

Gross Monthly Income – the total amount the borrower earns per month before any expenses are deducted.

Index – a published interest rate to which lenders may add a margin to adjust the interest rate up or down on an adjustable rate mortgage.

Interest Rate Cap – a consumer safeguard which limits the amount the interest rate on an adjustable rate mortgage may change, per adjustment period and/or the life of the loan.

Lien – a claim upon a piece of property for the payment or satisfaction of a debt or obligation.

Loan-To-Value Ratio – the relationship between the amount of the mortgage loan and the appraised value of the property, expressed as a percentage.

Market Value – the price of a house or other property as compared to recent sales of comparable houses within the same geographic area.

Mortgagee – the lender.

Mortgagor – the borrower, or home owner.

Points – the one-time fee that lenders charge at closing. The number of points you pay may vary depending on the type of loan and the interest rate option. One point equals one percent of the mortgage amount.

Principal – the amount of debt, not counting interest, left on a loan.

Private Mortgage Insurance (PMI) – enables home buyers to purchase a home with less than a 20% down payment. It is an insurance policy you buy to protect the lender from non-payment of the mortgage loan and is required on all loans with less than a 20% down payment. Generally, PMI is obtained by the lender for the borrower and is customary throughout the industry.

Recording Fees – money paid for recording a home sale with the local authorities, thereby making it part of the public record.

Survey – a measurement of land prepared by a registered land surveyor, showing the location of the land with reference to known points, its dimensions, and the location and dimensions of any building.

Title – a legal document evidencing a person’s right to, or ownership of, a property.

Title Insurance – insurance to protect the lender (lender’s policy) and/or the buyer (owner’s policy) against loss arising from disputes over ownership of property.