Mortgage & Real Estate Glossary
A few terms you might come across while shopping for and purchasing your new property.

ARM or adjustable-rate mortgage:
A mortgage loan with an interest rate that adjusts periodically over the life of the mortgage based on changes in a specified index.

Adjustment interval
On an ARM, the time between changes in the interest rate or monthly payment. The rate adjustment interval is often displayed in x/y format, where "x" is the period until the first adjustment, and "y" is the adjustment period thereafter. For example, a 5/1 ARM is one on which the initial rate holds for 5 years, after which it is adjusted every year. The rate adjustment interval and the payment adjustment interval are the same on a fully amortizing ARM, but may not be on a negative amortization ARM.

Amortization schedule
A table showing the mortgage payment, broken down by interest and amortization, the loan balance, tax and insurance payments if made by the lender, and the balance of the tax/insurance escrow account.

Appraisal
A written estimate of a property's current market value prepared by an appraiser.

APR
The Annual Percentage Rate, which must be reported by lenders under Truth in Lending regulations. It is a comprehensive measure of credit cost to the borrower that takes account of the interest rate, points, and flat dollar charges. It is also adjusted for the time value of money, so that dollars paid by the borrower up-front carry a heavier weight than dollars paid ten years down the road. However, the APR is calculated on the assumption that the loan runs to term, and is therefore potentially deceptive for borrowers with short time horizons.

Assumable mortgage
A mortgage contract that allows, or does not prohibit, a creditworthy buyer from assuming the mortgage contract of the seller. Assuming a loan will save the buyer money if the rate on the existing loan is below the current market rate, and closing costs are avoided as well. A loan with a "due-on-sale" clause stipulating that the mortgage must be repaid upon sale of the property, is not assumable.

Balloon mortgage
A mortgage which is payable in full after a period that is shorter than the term. In most cases, the balance is refinanced with the current or another lender. On a 7-year balloon loan, for example, the payment is usually calculated over a 30-year period, and the balance at the end of the 7th year must be repaid or refinanced at that time. Balloon mortgages are similar to ARMs in that the borrower trades off a lower rate in the early years against the risk of a higher rate later. They are riskier than ARMs because there is no limit on the extent of a rate increase at the end of the balloon period.

Bimonthly mortgage
A mortgage on which the borrower pays half the monthly payment on the first day of the month, and the other half on the 15th.

Charge-off:
The portion of principal and interest due on a loan that is written off when deemed to be uncollectible.

Conventional mortgage:
A mortgage loan that is not guaranteed or insured by the U.S. government or its agencies, such as the VA, FHA or RHS.

Credit scoring:
A process that uses recorded information about individuals and their loan requests to assess - in a quantifiable, objective, and consistent manner - their future performance regarding debt repayment.

Cumulative interest
The sum of all interest payments to date or over the life of the loan. This is an incomplete measure of the cost of credit to the borrower because it does not include up-front cash payments, and it is not adjusted for the time value of money.

Default:
The failure of a borrower to comply with the terms of a note or the provisions of a mortgage.

Delinquency:
A mortgage loan on which a payment has not been made by the due date.

Escrow
An agreement that money or other objects of value be placed with a third party for safe keeping, pending the performance of some promised act by one of the parties to the agreement. It is common for home mortgage transactions to include an escrow agreement where the borrower adds a specified amount for taxes and hazard insurance to the regular monthly mortgage payment. The money goes into an escrow account out of which the lender pays the taxes and insurance when they come due.

Fixed-rate mortgage:
A mortgage loan with an interest rate that does not change during the entire term of the loan.

Forbearance:
The lender's postponement of legal action when a borrower is delinquent. It is usually granted when a borrower makes satisfactory arrangements to bring the overdue mortgage payments up to date.

Foreclosure:
The legal process by which property that is mortgaged as security for a loan may be sold to pay a defaulting borrower's loan.

Intermediate-term mortgage:
A mortgage loan with a contractual maturity at the time of purchase equal to or less than 15 years.

Loan servicing:
The tasks a lender performs to protect a mortgage investment, including collecting monthly payments from borrowers and dealing with delinquencies.

Loan-to-value (LTV) ratio:
The ratio, at any point in time, of the unpaid principal amount of a borrower's mortgage loan to the value of the property that serves as collateral for the loan (expressed as a percentage).

Modification:
Any change to the original terms of a mortgage.

Mortgage:
A legal document that pledges property to a lender as security for the repayment of the loan. The term also is used to refer to the loan itself.

Multifamily mortgage loan:
A mortgage loan secured by a property containing five or more residential dwelling units.

Preforeclosure sale:
A procedure in which the borrower is allowed to sell his or her property for an amount less than what is owed on it to avoid a foreclosure. This sale fully satisfies the borrower's debt.

Repayment plan:
An agreement between a lender and a borrower who is delinquent on his or her mortgage payments, in which the borrower agrees to make additional payments to pay down past due amounts while still making regularly scheduled payments.

Reverse mortgage:
A financial tool that provides seniors with funds from the equity in their homes. Generally, no borrower payments are made on a reverse mortgage until the borrower moves or the property is sold. The final repayment obligation is designed not to exceed the proceeds from the sale of the home.

Secondary mortgage market:
The market in which residential mortgages or mortgage securities are bought and sold.

Underwriting:
The process of evaluating a loan application to determine the risk involved for the lender. It involves an analysis of the borrower's ability and willingness to repay the debt and the value of the property.