Glossary of Real Estate Mortgage Loan Terms for Borrowers
When applying for a real estate mortgage loan, it’s important to understand the terminology used by lenders and brokers. Here’s a glossary of terms that can help you navigate the loan application process.
Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage is a type of loan in which the interest rate changes over time based on market conditions.
Amortization refers to the process of paying off a loan over time with regular payments that include both principal and interest.
Annual Percentage Rate (APR)
The annual percentage rate is the interest rate charged on a loan over the course of a year, including all fees and charges associated with the loan.
An appraisal is an evaluation of a property’s value by a licensed appraiser. This is required by most lenders to determine the property’s value before approving a loan.
Closing costs are the fees associated with the purchase or refinance of a property, including title insurance, attorney fees, and appraisal fees.
Collateral is property or assets that are pledged to secure a loan. In the case of a mortgage loan, the property being purchased or refinanced is typically used as collateral.
Debt-to-Income Ratio (DTI)
The debt-to-income ratio is the percentage of a borrower’s monthly income that is used to pay debts, including mortgage payments, credit card payments, and other loans.
Equity is the difference between the value of a property and the amount owed on a mortgage loan. As a borrower pays down their mortgage, their equity in the property increases.
A fixed-rate mortgage is a type of loan in which the interest rate remains the same for the entire term of the loan.
An interest-only mortgage is a type of loan in which the borrower pays only the interest on the loan for a set period of time, typically 5-10 years.
Loan-to-Value Ratio (LTV)
The loan-to-value ratio is the percentage of the property’s value that is financed through a mortgage loan. A higher LTV means the borrower is borrowing a larger percentage of the property’s value.
Points are fees charged by lenders to borrowers to lower the interest rate on a loan. One point is equal to 1% of the loan amount.
A prepayment penalty is a fee charged by lenders if a borrower pays off their mortgage loan before the end of the term.
Private Mortgage Insurance (PMI)
Private mortgage insurance is insurance that protects the lender in case the borrower defaults on their mortgage loan. It is typically required for borrowers who have a down payment of less than 20%.
The term of a mortgage loan is the length of time over which the loan is repaid. Common terms include 15, 20, and 30 years.
Underwriting is the process of evaluating a borrower’s financial information, credit history, and the property being purchased to determine whether to approve the loan.
A bridge loan is a short-term loan used to bridge the gap between the purchase of a new property and the sale of an existing property.
Escrow is a process in which a neutral third party holds and distributes funds and documents during a real estate transaction, including the down payment, closing costs, and other fees.
Foreclosure is the process by which a lender takes possession of a property due to the borrower’s failure to make mortgage payments.
Good Faith Estimate (GFE)
A Good Faith Estimate is an estimate of the closing costs and other fees associated with a mortgage loan, provided by the lender to the borrower.
Loan servicing refers to the process of collecting mortgage payments, maintaining escrow accounts, and handling other administrative tasks related to a mortgage loan.
A mortgage broker is a licensed professional who acts as an intermediary between the borrower and the lender, helping the borrower find the right mortgage loan and guiding them through the loan application process.
Mortgage insurance is insurance that protects the lender in case the borrower defaults on their mortgage loan. It can be private mortgage insurance or government-backed mortgage insurance.
An origination fee is a fee charged by lenders to cover the administrative costs of processing a mortgage loan application.
The principal is the amount of money borrowed for a mortgage loan. As the borrower makes payments, the principal balance decreases.
Refinancing is the process of replacing an existing mortgage loan with a new loan, typically to take advantage of lower interest rates or to shorten the term of the loan.
Title is the legal ownership of a property. A title search is conducted during the loan application process to ensure that there are no liens or other encumbrances on the property that could affect the borrower’s ability to obtain a mortgage loan.
An underwater mortgage is a situation in which the amount owed on a mortgage loan is greater than the value of the property. This can make it difficult for the borrower to refinance or sell the property.
Understanding the terminology used in real estate mortgage loans can help borrowers navigate the loan application process and make informed decisions about their financing options. Always do your research and work with professionals who can help guide