We have listed a selection of commonly used mortgage terms to guide you through the mortgage process.
An amortization schedule shows the gradual repayment of debt through regular installments. It lists the amount of each payment applied to interest and principal and the remaining principal balance after each payment is made.
Annual Percentage Rate (APR)
APR is a measure of the total cost of credit (interest as well as other charges) expressed as a yearly percentage rate. It provides consumers with a good basis for comparing the cost of loans.
Closing refers to the meeting, typically held at an attorney's office, where the borrower finalizes a sale or refinances by signing the mortgage documents, paying closing costs, and other costs as applicable—also called the “settlement.”
Discount points are fees paid by a borrower to a lending institution in order to obtain a lower interest rate. One point is equal to one percent of the loan amount.
Earnest Money Deposit
Earnest money is a deposit made by the potential homebuyer to show that he or she is serious about buying the house. The money may be applied toward the down payment at closing. If the sale does not go through, the earnest money deposit may be forfeited to the seller unless the purchase contract expressly provides conditions for its return to the buyer.
Escrow is a deposit of funds by the borrower to the lender in order to pay taxes and insurance premiums when they become due. Escrow could also be a deposit of funds to an attorney or escrow agent which is disbursed once certain requirements are met.
Hazard insurance compensates for physical damage to property from fire, wind, vandalism, or other hazards.
A home inspection evaluates the structural and mechanical condition of a property. A satisfactory home inspection is often included as a contingency by the purchaser. This is not to be confused with the appraisal of the property.
Interest is the amount the borrower pays to the lender, expressed as a rate or dollar amount, to compensate the lending institution for the amount of loaned funds.
Loan-to-value is calculated by dividing the principal amount of the loan by the collateral’s appraised value or sales price (whichever is lower) – usually a percentage.
A mortgage is a legal document that pledges a property to the lender as security or collateral for payment of a debt. If a debt is not paid, the security or collateral can be forfeited or foreclosed upon.
Mortgage insurance may be required for higher loan-to-value ratios. This insures the lender against loss caused by a borrower's default.
An origination fee is a charge for work involved in the evaluation, preparation, and submission of a proposed mortgage loan.
PITI is an abbreviation for principal, interest, taxes, and insurance which can make up your monthly mortgage payment.
Refinancing is the process of paying off the original loan with the proceeds from a new loan using the same property as collateral. The refinance amount can be for the amount of the previous loan or, in some cases, also include taking accumulated equity out of the home as a cash-out refinance.
Title insurance protects against any errors resulting from the title search or from any potential disputes that may arise over property ownership. The protection only covers disputes or discrepancies made prior to your closing date. Title insurance is required by the lender, but not required for the borrower (though it could be useful).
A title search is a review of the public records, generally at the local courthouse, to make sure the buyer is purchasing a house from the legal owner. The title search also verifies there are no liens, overdue special assessments, other claims, or outstanding restrictive covenants in the records that would adversely affect the marketability or value of title.
Underwriting is the process of evaluating a loan application to determine the risk involved for the lender. It involves an analysis of the borrower's creditworthiness and the quality of the property itself.