Loan Lingo

The following is a list of definitions that will help you ask the right questions and compare information when you are shopping for a mortgage loan.

Add-On-Rate -- A type of loan repayment schedule that breaks the principal into equal installments. The interest payment is added on to the principal. Total monthly payments are high in the beginning but, over time, the interest payment is reduced as the principal balance is reduced.
Adjustable Rate Mortgage (ARM) -- Interest rates on this type of mortgage are periodically adjusted up or down, depending on a specified financial index.
Amortization -- A method of equalizing monthly mortgage payments over the life of the loan, even though the proportion of principal to interest changes over time. In the early part of the loan, principal repayment is very small and interest repayment very high; at the end of the loan, that relationship is reversed.
Annual Percentage Rate (APR) -- The actual finance charge for a loan, including points and loan fees, in addition to the stated interest rate.
ARM -- see Adjustable Rate Mortgage
Balloon Payment -- A large principal payment due all at once at the end of some loan terms.
Binder -- Small but serious amount of money ($100-$1000) accompanying an offer to buy, along with a brief written agreement to go to contract for the sale of property.
Buydown Mortgage Loan -- With this type of loan, either the seller or the buyer can pay additional discount points to "buy down" the starting rate of the loan to a rate below the average market rate. In a buydown mortgage, the interest rate steps up slightly the second year and again the third. The rate then remains fixed for years 3-30. Many first time homebuyers look for this type of loan, particularly when the seller is willing to "buy down" the rate.
Cap -- Limit on how much the interest rate can change in an adjustable rate mortgage (ARM).
Credit Rating -- An evaluation of ability to to repay a loan. It is based on the borrower's current financial situation as well as past performance in debt repayment, taking into account any defaults, and history of slow or delinquent payments.
Down Payment -- Percentage of the purchase price that the buyer must pay in cash and may not borrow from the lender. The down payment plus the loan amount make up the total purchase price of the house. The down payment is made at the time of closing, and is usually obtained from funds provided by the buyer or the next proceeds from the sale of the buyer's previous residence. The amount of down payment required will vary with the type of loan.
Earnest Money Deposit -- This is the amount of money given by the buyer at the time of signing the sales contract to show good faith in going through with the purchase. It is usually placed in escrow by the Realtor/Builder and is used as part of the down payment.
Escrow -- A fund or account held by a third-party custodian until conditions of a contract are met.
Finance Charge -- The total cost, including all fees, points and interest payments a borrower pays to obtain credit.
Fixed Rate Mortgage -- Interest rates on this type of mortgage remain the same over the life of the loan term. Compare to Adjustable Rate Mortgage.
Graduated Payment Mortgage -- Monthly payments start low and increase at a predetermined rate. Compare to Adjustable Rate Mortgage (ARM).
Interest -- The cost of borrowing money, usually expressed as a percentage over time.
Lien -- A security claim on property until a debt is satisfied.
Origination Fee -- Application fee(s) for processing a proposed mortgage loan.
PITI -- This represents the total monthly payment including Principal, Interest, Taxes and Insurance the borrower(s) will be paying the lender.
Point -- One percent of the loan principal which is charged in addition to interest and fees.
Prepayment Penalty -- A fee paid by a borrower who pays off the loan before it is due.
Prequalification -- Informal estimate of how much financing a potential borrower might expect to obtain. Done before paying substantial loan application fees.
Principal -- The amount of money borrowed, for which interest is charged; or, one of the parties to a contract.
Prorate -- Divide or assess proportionately, as in the case of daily interest accrued prior to closing.
Qualifying Income Ratio -- Used by lenders to decide whether to offer an individual a loan. One kind compares only the amount of the proposed monthly mortgage payment to the monthly income. Another compares the amount of all monthly obligations to the monthly income.
RESPA Statement -- (Real Estate Settlement Procedures Act) -- A precise breakdown of closing costs for both sellers and buyers.
Revolving Debt -- An arrangement for credit in which the customer receives purchases or services on an ongoing basis prior to payment. Repayment is usually at regular intervals but not for a specified amount or term, i.e. charge cards.
Table Fund -- The use of money on deposit to fund a loan at closing.
VA Mortgage -- A mortgage that is guaranteed by the Department of Veterans Affairs. Veterans Administration is an independent agency of the federal government created to administer a variety of benefit programs designed to facilitate the adjustment of returning veterans to civilian life. The VA home loan guaranty program is designed to encourage lenders to offer long term, low down payment mortgages to eligible veterans by guaranteeing the lender against loss.
Variable Rate Mortgage -- A mortgage agreement that allows for adjustment of the interest rate in keeping with the fluctuating market and terms agreed on in the note.
Yield -- Ratio of income from an investment to total cost of the investment over a given period of time. Return on investment.