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Glossary of Terms

Adjustable Rate Mortgage
An adjustable-rate mortgage is a type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan. Normally, the initial interest rate is fixed for a period of time, after which it resets periodically, often every year or even monthly.

Amortization
Amortization is the paying off of debt with a fixed repayment schedule in regular installments over a period of time. Consumers are most likely to encounter amortization with a mortgage or car loan.

Annual Percentage Rate (APR)
An annual percentage rate (APR) is the annual rate that is charged for borrowing, expressed as a single percentage number that represents the actual yearly cost of funds over the term of a loan. This includes any fees or additional costs associated with the transaction.

Appraised Value
An opinion of a property's fair market value, based on an appraiser's knowledge, experience, and analysis of the property.

Asset
An asset is anything owned of monetary value including real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, etc.).

Assignment
The transfer of a mortgage from one entity to another.

Balance Sheet
A financial statement that shows assets, liabilities, and net worth as of a specific date.

Balloon Mortgage
A mortgage with level monthly payments that amortize over a stated term but also requires that a lump sum payment be paid at the end of an earlier specified term.

Balloon Payment
The final lump sum paid at the maturity date of a balloon mortgage.

Buy Down - Optional Discount Points
A payment to the lender from the seller, buyer, or a third party, that is made in order to reduce the interest rate.

Cap
The highest point to which an adjustable rate mortgage (ARM) can rise in a given time period or the highest rate that investors can receive on a floating-rate type bond. The issuer typically sets the cap at the time the contract is issued. With an ARM, it is detailed in the terms of the mortgage document.

Closing
A meeting held to finalize the sale of a property. The buyer signs the mortgage documents and pays closing costs; also called "settlement"

Closing Costs
These are expenses, over and above the price of the property, that are incurred by buyers and sellers when transferring ownership of a property. Closing costs normally include an origination fee, property taxes, charges for title insurance and escrow costs, appraisal fees, etc. Closing costs will vary according to the area of the country and the lender used.

Closing Disclosure (CD)
The Closing Disclosure (which replaced the HUD-1 Settlement Statement/Truth in Lending Disclosure in 2015) must be received by the borrower at least three days prior to Consummation. Most lenders will prepare and deliver this document to the borrower.

Consumer Reporting Agency (or Credit Bureau)
An organization that handles the preparation of reports used by lenders to determine a potential borrower's credit history. The agency gets data for these reports from a credit repository and from other sources.

Consummation Date
The date that the borrower signs the Note and is obligated to the debt. Closing documents may not be signed for three business days after the borrower receives the CD. This date does not necessarily coincide with the Funding and Closing Date. If the lender requires original signed documents to be received and reviewed before funding, the Consummation Date and Closing Date will not be on the same day.

Conversion Clause
A provision in an ARM allowing the loan to be converted to a fixed-rate at some point during the term. Usually conversion is allowed at the end of the first adjustment period. The conversion feature may cost extra.

Credit Report
A report detailing an individual's credit history that is prepared by a credit bureau and used by a lender to determine a loan applicant's credit worthiness.

Credit Risk Score
A credit score measures a consumer's credit risk relative to the rest of the U.S. population, based on the individual's credit usage history. The credit score most widely used by lenders is the FICO® score, developed by Fair Isaac and Company. This 3-digit number, ranging from 300 to 850, is calculated by a mathematical equation that evaluates many types of information that are on the credit report. Higher FICO® scores represents lower credit risks, which typically equate to better loan terms. In general, credit scores are critical in the mortgage loan underwriting process.

Deed of Trust
Agreement under which a borrower (the trustor) conveys the right of ownership (title) of his or her assets or property to a trustee as a security for the sum advanced by a lender (the beneficiary of the trust). If the loan is paid back as agreed, the trustee reconveys the title to the trustor. If not, the trustee has the legal power to sell (liquidate) the assets or property.

Default
Failure to make payments in a timely manner or to comply with other requirements of a mortgage.

Delinquency
Failure to make payments on time.

Deposit
This is a sum of money given to bind the sale of real estate, or a sum of money given to ensure payment or an advance of funds in the processing of a loan.

Down Payment
Part of the purchase price of a property that is paid in cash and not financed with a mortgage.

Effective Gross Income
A borrower’s normal annual income, including overtime that is regular or guaranteed. Salary is usually the principal source, but other income may qualify if it is significant and stable.

Equity
The amount of financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on the mortgage.

Equal Credit Opportunity Act (ECOA)
A Federal law requiring lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, sex, age, marital status, receipt of income from public assistance programs or past exercising of rights under the Consumer Credit Protection Act.

Escrow
In general, a procedure whereby a disinterested third party handles legal documents and/or funds on behalf of a seller or buyer. An escrow account can be created by an attorney to handle the buyer’s deposit on the property, by the lender to cover repairs that will not be completed before the closing or by the lender to pay the property taxes and insurance premiums.

Escrow Disbursements
The use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, and other property expenses as they become due.

Escrow Payment
The part of a mortgagor’s monthly payment that is held by the servicer to pay for real estate taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due.

Fair Credit Reporting Act (FCRA)
A Federal law which requires a lender, when rejecting a loan request because of adverse credit information, to inform the borrower of the source of such information.

Federal National Mortgage Association FNMA (Fannie Mae)
A tax-paying corporation created by Congress to support the secondary mortgage market by purchasing and selling residential mortgages insured by the Federal Housing Administration, guaranteed by the Veterans Administration, in addition to conventional home mortgages.

FHA Mortgage
A mortgage that is insured by the Federal Housing Administration (FHA). Also known as a government mortgage.

FICO® Score
Fair Isaac and Company (FICO®) scores are the most widely used credit score in U.S. mortgage loan underwriting. This 3-digit number, ranging from 300 to 850, is calculated by a mathematical equation that evaluates many types of information that are on your credit report. Higher FICO® scores represent lower credit risks, which typically equate to better loan terms.

Finance Charge
Any fee representing the cost of credit, or the cost of borrowing, which can consist of accrued interest or fees charged for some forms of credit such as financial transaction fees.

First Mortgage
The primary (1st) lien against a property.

Fixed Installment
The monthly payment due on a mortgage loan including payment of both principal and interest.

Fixed-Rate Mortgage (FRM)
Mortgage interest that is fixed throughout the entire term of the loan.

Flood Certification
The process of analyzing whether a property is located in a known flood zone.

Forbearance
In the context of a mortgage process, forbearance is a special agreement between the lender and the borrower to delay a foreclosure. The literal meaning of forbearance is “holding back.”

Foreclosure
A legal procedure in which property mortgaged as security for a loan is sold to satisfy the defaulting borrower’s debt.

General Warranty Deed
Agreement that conveys a grantor's interests in, and title to, a property to a grantee. It warrants that if the title is defective, or has a claim on it, the grantee can hold the grantor liable.

Grace Period
The grace period is the provision in most loan and insurance contracts which allows payment to be received for a certain period of time after the actual due date. During this period no late fees will be charged, and the late payment will not result in default or cancellation of the loan. A typical grace period is 15 days.

Hazard Insurance
A contract undertaken by an insurer to compensate the insured for loss on a specific property.

Home Equity
Home equity is the value of ownership built up in a home or property that represents the current market value of the house less any remaining mortgage payments. This value is built up over time as the property owner pays off the mortgage and the market value of the property appreciates.

Housing Expense Ratio
The percentage of gross monthly income budgeted to pay housing expenses.

Index
An index is a statistical measure of change in an economy or a securities market.

Indexed Rate
An interest rate charged on loans to a borrower that is calculated by taking the sum of a benchmark index interest rate and a specified margin. The indexed rate is used to calculate the interest rate on an adjustable-rate mortgage (ARM). The benchmark index rate is a variable rate, while the specified margin remains fixed.

Initial Interest Rate
This refers to the original interest rate of the mortgage at the time of closing. This rate changes for an adjustable-rate mortgage (ARM) and is also known as "start rate" or "teaser."

Installment
The regular periodic payment that a borrower agrees to make to a lender.

Insured Mortgage
A mortgage that is protected by the Federal Housing Administration (FHA) or by private mortgage insurance (PMI).

Interest
The fee charged for borrowing money.

Joint Tenancy
An undivided interest in a property, taken by two or more joint tenants. Upon the death of a joint tenant, the interest passes to the surviving joint tenant(s), rather than to the heirs of the deceased.

Late Charge
The penalty a borrower must pay when a payment is made after a grace period (usually 15 days) after the due date.

Liabilities
A person's financial obligations (debts). Liabilities include long-term and short-term debt.

Line of Credit (LOC)
An agreement by a commercial bank or other financial institution to extend credit up to a certain amount for a certain time.

Liquid Asset
A cash asset or an asset that is easily converted into cash.

Loan A sum of borrowed money (principal) that is generally repaid with interest.

Loan Estimate (LE)
The Loan Estimate (which replaced the Good Faith Estimate/Truth in Lending Disclosure in 2015) must be provided within 3 days of application and is a binding disclosure preventing lenders from arbitrarily changing loan terms and costs to the borrower.

Lender Credits
Money credited to a borrower during the origination of a loan often designed to lower fees and costs.

Lender Fees
Lender Fees are charged by financial institutions for processing and funding a loan that might include application fees, processing fees, recording fees, underwriting fees and more. Lender fees are items payable in connection with a loan and contribute to the total amount of the borrower’s costs. These are the cost of doing business.

Loan-to-Value (LTV) Percentage
The relationship between the principal balance of the mortgage and the appraised value (or sales price if it is lower) of the property. For example, a $100,000 home with an $80,000 mortgage has an LTV of 80 percent.

Lock-In Period
The guarantee of an interest rate for a specified period of time by a lender, including loan term and points, if any, to be paid at closing. Short term locks (less than 21 days), are usually available after lender loan approval only. However, many lenders may permit a borrower to lock a loan for 30 days or more prior to submission of the loan application.

Margin
The portion of the interest rate on an adjustable-rate mortgage that is over and above the adjustment-index rate. This portion is retained as profit by the lender.

Maturity
The date on which the principal balance of a loan becomes due and payable.

Monthly Fixed Installment
The portion of the total monthly payment that is applied toward principal and interest. When a mortgage negatively amortizes, the monthly fixed installment does not include any amount for principal reduction and doesn't cover all of the interest. The loan balance therefore increases instead of decreasing.

Mortgage
A legal agreement that conveys the conditional right of ownership on an asset or property by its owner (the mortgagor) to a lender (the mortgagee) as security for a loan.

Mortgage Assumption
Mortgage assumption is the conveyance of the terms and balance of an existing mortgage to the purchaser of a financed property, commonly requiring that the assuming party is qualified under lender or guarantor guidelines.

Mortgagee
The lender in a mortgage transaction.

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

Mortgage Broker
An individual or company that brings borrowers and lenders together for the purpose of loan origination.

Mortgage Insurance
A contract that insures the lender against loss caused by a mortgagor's default on a government mortgage or conventional mortgage. Mortgage insurance can be issued by a private company or by a government agency.

Mortgage Insurance Premium (MIP)
The consideration paid by a mortgagor (borrower) for mortgage insurance—either to the FHA or to a private mortgage insurer.

Mortgage Life Insurance
A type of term life insurance purchased for the purpose that if the borrower dies while the policy is in force, the debt is automatically paid by insurance proceeds.

Mortgage Note
A written promise to pay a sum of money at a stated interest rate during a specified term. The note contains a complete description of the conditions under which the loan is to be repaid and when it is due.

Mortgagor
The borrower in a mortgage agreement.

Negative Amortization
Negative amortization is an increase in the principal balance of a loan caused by making payments that fail to cover the interest due. The remaining amount of interest owed is added to the loan's principal, which ultimately causes the borrower to owe more money.

Net Worth
The value of all of a person's assets, including cash.

Non-Liquid Asset
An asset that cannot easily be converted into cash.

Note
A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time.

Origination Fee
A fee paid to a lender for processing a loan application. The origination fee is stated in the form of points. One point is equal to 1% of the mortgage amount.

Owner Financing
A property purchase transaction in which the party selling the property provides all or part of the financing.

Per Diem Interest
The interest charge on a loan for one or more days. This does not necessarily mean that the interest on the loan compounds daily, per diem interest simply refers to the amount of interest that is due for one day that a loan is outstanding.

PITI Reserves
A cash amount that a borrower must have on hand after making a down payment and paying all closing costs for the purchase of a home. The principal, interest, taxes, and insurance (PITI) reserves must equal the amount that the borrower would have to pay for PITI for a predefined number of months (usually three).

Points
A point is equal to one percent of the principal amount of your mortgage. For example, if you get a mortgage for $165,000, one point equaling $1,650 would be paid to the lender. Points usually are collected at closing and may be paid by the borrower or the home seller, or may be split between both parties.

Pre-Approval
An evaluation of a potential borrower by a lender that determines whether the borrower qualifies for a loan from the lender, or the maximum amount that the lender would be willing to lend. The pre-approval process involves a thorough look into the income and expenses of the borrower, including a look at the borrower's credit report and score.

Preliminary Title Report
The results of a title company search prior to issuing a title binder or commitment to ensure clear title.

Prepaid Interest
The interest that a debtor pays before the first scheduled debt repayment. For taxation purposes, most kinds of prepaid interest are expensed over the life of the loan.

Prepayment Penalty
A charge imposed by the lender if the borrower pays off the loan early. The charge is usually expressed as a percent of the loan balance at the time of repayment, or a specified number of months interest. Pre-payment penalties are not commonly associated with traditional first mortgages.

Pre-Qualification
An initial evaluation of the credit worthiness of a potential borrower that is used to determine the estimated amount that the person can afford to borrow. Pre-qualification is a relatively simple and quick process of examining the potential borrower's income and expenses in order to generate an estimated borrowing range that they would likely be able to repay to the lender.

Primary Residence
A residence for which the borrower intends to occupy as the principal residence.

Principal
The amount borrowed or remaining unpaid or could also be the part of the monthly payment that reduces the remaining balance of a mortgage.

Principal Balance
The outstanding balance of principal on a mortgage not including interest or any other charges.

Principal & Interest (P&I)
A periodic payment usually paid monthly, that includes the interest charges for the period plus an amount applied to amortization of the principal balance; commonly used with amortizing loans.

Principal, Interest, Taxes, and Insurance (PITI)
The four components of a monthly mortgage payment. Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. Interest is the fee charged for borrowing money. Taxes and insurance refer to the monthly cost of property taxes and homeowners insurance, whether these amounts that are paid into an escrow account each month or not.

Private Mortgage Insurance (PMI)
Mortgage insurance provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults. Most lenders generally require PMI for a loan with a loan-to-value (LTV) percentage in excess of 80 percent.

Property Taxes
A levy on property that the owner is required to pay. The tax is levied by the governing authority of the jurisdiction in which the property is located; it may be paid to a national government, a federated state, a county or geographical region or a municipality.

Purchase Contract (Agreement Offer)
An agreement between a buyer and seller of real property, setting forth the price and terms of the sale. Also known as a sales contract.

Qualifying Ratios
Calculations used to determine if a borrower can qualify for a mortgage. They consist of two separate calculations: a housing expense as a percent of income ratio and total debt obligations as a percent of income ratio.

Rate Lock
A commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified interest rate and lender costs for a specified period of time.

Real Estate Agent
A person licensed to negotiate and transact the sale of real estate on behalf of the property owner.

Real Estate Settlement Procedures Act (RESPA)
A Federal law that requires lenders to give borrowers advance notice of closing costs for consumer protection purposes.

Recording
The noting in the registrar’s office of the details of a properly executed legal document, such as a deed, a mortgage note, satisfaction of mortgage, or an extension of mortgage, thereby making it a part of the public record.

Refinance
Paying off one loan with the proceeds from a new loan using the same property as security.

Release of Lien
An evaluation of a potential borrower by a lender that determines whether the borrower qualifies for a loan from the lender, or the maximum amount that the lender would be willing to lend. The pre-approval process involves a thorough look into the income and expenses of the borrower, including a look at the borrower's credit report and score.

Rescission
Annulling a contract and placing the parties to it in a position as if there had not been a contract.

Reverse Mortgage
A type of mortgage designed for persons with substantial equity where the lender makes periodic payments to the borrower; the payments are taken from the equity in the property.

Revolving Liability
A credit arrangement, such as a credit card, that allows a customer to borrow against a pre-approved line of credit when purchasing goods and services.

Right of Rescission
Right afforded in certain jurisdiction whereby a borrower can cancel a mortgage loan (typically within 3 days of signing) upon changing his or her mind regarding purchase of the property.

Secondary Mortgage Market
A financial market in which existing mortgage loans are bought by other lenders, collection agencies, and investors.

Security
The property that will be pledged as collateral for a loan.

Seller Carry-back
An agreement in which the owner of a property provides financing, often in combination with an assumable mortgage. See Owner Financing.

Seller Credits
A credit to the borrower’s down payment or settlement costs made by the seller, as an alternative to a price reduction.

Servicer
An organization that collects principal and interest payments from borrowers in addition to managing the escrow accounts. The servicer often services mortgages that have been purchased by an investor in the secondary mortgage market.

Standard Payment Calculation
The method used to determine the monthly payment required to repay the remaining balance of a mortgage in substantially equal installments over the remaining term of the mortgage at the current interest rate.

Third-party Origination
When a lender uses another party to completely or partially originate, process, underwrite, close, fund, or package the mortgages it plans to deliver to the secondary mortgage market.

TIP
The Total Interest Percentage (TIP) is a new disclosure item created by the Dodd-Frank Act. The TIP indicates how much interest will be paid over the life of the mortgage loan, compared to the amount borrowed. TIP is calculated by adding up all of the scheduled interest payments, then dividing the total by the loan amount to get a percentage. The calculation assumes that all payments will be made as scheduled. The calculation also assumes the loan for the entire term. For example, a $100,000 loan has a TIP of 50% meaning that a total of $50,000 will be paid in interest over the life of the loan, in addition to repaying the $100,000 borrowed. If TIP is 100%, then $100,000 will be paid in interest (100% of the $100,000 loan amount) over the life of the loan. TIP for a loan can be found on Page 3 of the Loan Estimate or Page 5 of the Closing Disclosure. It is most useful as a comparison point between different Loan Estimates.

Title Insurance Policy
A contract in which an insurer, usually a title insurance company, agrees to pay the insured party a specific amount for any loss caused by defects of title on real estate in which the insured has an interest as purchaser, mortgagee or otherwise.

Title - Lender’s Policy
Most title insurance is lender’s title insurance, which is paid for by the borrower but protects only the lender.

Title - Owner’s Policy
Title insurance that protects the owner against loss if there is an adverse claim against the owner’s property and that provides legal counsel to defend against adverse claims. This is a separate policy and in some areas is paid for by the seller to protect the buyer’s equity in the property.

Title Search
An examination of public records to disclose the past and current facts regarding the ownership of a given piece of real estate.

TRID
The TILA-RESPA Integrated-Disclosure (created in 2015) consolidated 4 previous disclosures required under TILA and RESPA for closed-end credit transactions secured by real property into two forms: a Loan Estimate that must be delivered or placed in the mail no later than the third business day after receiving the consumer’s application, and a Closing Disclosure that must be provided to the consumer at least three business days prior to consummation.

Total Expense Ratio
Total obligations as a percentage of gross monthly income including monthly housing expenses plus other monthly debts.

Truth-in-Lending Act (TILA)
A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the annual percentage rate (APR) and other charges.

Underwriting
The process of evaluating a loan application to determine the risk involved for the lender. Underwriting involves an analysis of the borrower's creditworthiness and the quality of the property itself.

VA Mortgage
A mortgage that is guaranteed by the Department of Veterans Affairs (VA) as a government mortgage.