Mortgage Glossary: Terms and Definitions To Know

The mortgage industry uses its fair share of special terminology that not everyone may be familiar with.

When it comes to borrowing decisions, knowing common terms used in mortgage lending can help you feel more confident in your choices.

To help, we've put together a glossary for some mortgage terms you need to know.

Adjustable Rate Mortgage (ARM)

A mortgage that will have a fixed rate for a set period and then an adjustable rate per the terms of the loan agreement. There are different types of ARMs, and adjustable interest rate terms vary per loan.

For example, BECU's 5/5 ARM offers an interest rate that remains fixed for the first five years. The rate adjusts every five years, no more than 2% each adjustment. The total rate increase will never exceed 5% above the initial rate.

Annual Percentage Rate (APR)

This includes your interest rate — annual interest charge — plus any points or lender fees. Your APR is usually higher than your locked interest rate.

Appraisal

An analysis performed by an independent contractor to determine a property's current market value. An appraiser is hired by the lender. Once a buying contract is signed, the lender schedules an appraisal to evaluate a property; properties are assigned a total value based on square footage, neighborhood, recent comparative home sales in the area, property condition and other factors.

In order for a lender to finance a home, the property must appraise at the agreed upon sale price. Should it appraise for a higher amount, the difference is known as a homebuyer's instant equity. Should the home appraise for lower than the agreed upon sale price, sometimes the seller might agree to adjust the contract price to meet the appraised value. If not the lender must determine whether to lend more money to the buyer, or the buyer must make up the difference with cash.

Buyer's Costs

Along with the property purchase price, a buyer usually pays additional costs at closing. These costs often include:

• Inspection fee.
• Appraisal fee.
• Lender's title insurance.
• Escrow fees.
• Recording fees.
• Homeowner's insurance (one year).
• Property taxes (up to six months).
• Lender fee(s). 

Buyer's Market

A housing market that favors the buyer. A buyer's market typically involves excess housing inventory (multiple properties from which to choose, or more supply than demand), which gives the buyer more leverage to negotiate favorable buying terms, such as the seller paying for repairs following an inspection report, the seller paying closing costs or a lengthier closing period, which can reduce the buyer's costs.

Closing Costs

The fees collected at the end of a real estate transaction. All funds are typically collected by a third-party title company. Buyer and seller pay different fees; the seller typically pays sales tax and a portion of real estate agent commissions; the buyer typically pays lender, appraisal and escrow costs, and may pay a portion of agent compensation.

Closing Date

The day, month and year agreed to by the buyer and seller by which to complete the buying process. The date is noted in the offer. The transaction paperwork must be signed by all parties and the sale funded, then recorded, into the county's records before or on the closing date. Buyers can accomplish this process before the actual date, and all taxes and fees will be prorated in accordance with the closing date. Buyers and sellers will also use the date to change over utility accounts.

Closing Period

The length of time between the seller accepting the buyer's offer and the closing date.

Commission

Percentage of the home sale paid to the real estate representatives of the buyer and seller. A typical commission to each agent is 3%. The commission is extracted from the purchase amount paid to the seller. Historically, the seller would pay both buyer and seller agents' commissions, but a recent legal settlement allows buyers and sellers to negotiate who will pay those costs and how much they will be.

Contract

The legally binding agreement detailing the terms of a property sale and purchase. The contract can be adjusted based on buyer and seller requests; changes are facilitated by both parties' real estate agents and included as addendums.

There are few permissible methods to break a contract. A buyer can legally back out if financing doesn't come through, the property title isn't clear, the property fails inspection, or the seller does not meet contracted dates. Likewise, a seller can back out of a sale should the buyer not meet contracted dates.

Contingency

A specified condition in a home sales contract that must be satisfied before the sale can occur. A home sale enters contingency when an offer on a home has been made and the seller has accepted the offer. The final sale of the home is contingent upon certain criteria such as the borrower being approved for a loan, the house passing inspection and appraisal.

Credit Report

A report of your past and current credit situation, including loan payment history and details of your credit accounts. Learn how to better understand your credit report.

Credit Score

A credit score is a rating from 300 to 850. It is calculated based on different values assigned to your payment, debt and credit history. Factors such as missed payments detract from your score, while factors such as reduced debt will increase your score. Lenders consider both credit history and credit score as part of lending decisions. The three credit bureaus (Experian, Equifax and TransUnion) use different FICO scoring models for mortgage applications. BECU reviews credit reports and uses the middle credit score from the three credit bureaus.

Debt-To-Income Ratio

This ratio compares a borrower's total debt payments to their gross monthly income and is used by lenders to determine an individual's ability to afford a loan.

Deed

A legal document signed by both the buyer and seller outlining the terms and conditions conveying the ownership rights of a property.

Earnest Money

A deposit a buyer makes to a third party such as a real estate broker or title company after the seller accepts the offer. This deposit is typically 1%-3% of the home's purchase price, but it can vary based on the type of transaction and the nature of the market.

Earnest money helps protect the seller if the contract falls through under circumstances not covered by a contingency. It is intended to show a potential buyer's commitment to a property: Buyers forfeit earnest money to the seller if the buyer backs out of the contract without a contingency in place.

Earnest money is not in addition to your down payment, however, you will most likely use cash from your intended down payment to pay the earnest money. The money is kept by the title company or legal firm and is contributed toward the overall down payment.

Equity

The accumulated value of a property. You can increase the equity of a property by paying your mortgage debt. Outside influences that can increase or decrease your equity in your home can include inflation, deflation, neighborhood condition, property condition and amenities.

Example:

• Heidi pays $64,000 as a down payment to buy a home priced at $750,000.
• The house is appraised at $775,000.
• Heidi's property immediately gains $25,000 in instant equity.
• Heidi's total equity at the time of purchase equals $89,000: $775,000 minus the purchase price ($750,000), plus the down payment ($64,000).

Escrow

An account that holds a portion of your monthly mortgage payment that may be applied to property tax and homeowner's insurance. Your lender may establish the escrow account on your behalf; you pay the bill each month.

Many lenders, like BECU, require the use of an escrow account. This assures your lender that all of your financial obligations will be fulfilled.

Excise Tax

Excise tax is a property sales tax: The fee charged on the sale of real estate. It is collected by the state. Real estate excise tax is typically paid by the seller at closing.

Fixed-Rate Mortgage

A loan that charges the same interest rate for the duration of the loan.

Your mortgage advisor will ask how long you intend to stay in the home -the longer you reside at a property, the more likely a fixed-rate mortgage makes sense.

Forbearance

A period during which your monthly loan payments are temporarily suspended or reduced. Borrowers may qualify for this option if they are unable to make loan payments. If a borrower is struggling to keep up with mortgage payments forbearance could help avoid delinquent payments and foreclosure.

Foreclosure

A legal process in which a homeowner forfeits their rights to their property because of their inability to make timely payments.

Home Inspection

A thorough review of the inside and outside of a home. Homebuyers, not lenders, initiate an inspection either before or after an offer; the terms of a buying contract may dictate whether an inspection affects the sale of the home. Buyers may negotiate an option to terminate a sale with a failed inspection.

Inspectors grade a home's condition based on an evaluation of its foundation, structure, plumbing, fixtures, appliances, crawl spaces, utilities and more. Inspection costs vary. The size of the home is often a factor in the price. The buyer pays for the inspection and decides if the inspection is satisfactory to them.

Homeowner's Insurance

Insurance that guarantees funds to restore a home if it's damaged. Homeowner's insurance is required by law on all financed transactions. The first year of homeowner's insurance is paid at closing as part of the buyer's closing costs.

Interest Rate

The amount of interest which you will be annually charged to borrow money. The lower the interest rate, the less your monthly payment. Your lender can "lock in," or guarantee, an interest rate for a specific window of time; your closing period usually takes place during this window. Rates can vary based on factors like your credit history and the size of the loan, and external circumstances such as the stock market and global economic conditions. Research whether financial experts advise buying now or later.

Lender

The bank, credit union or financial institution that originates and underwrites mortgage loans for borrowers.

Loan Term

The amount of time your lender agrees to loan you money, and the amount of time you have to pay off your loan completely in regular monthly payments. Mortgage loan term lengths generally range from 10 to 30 years.

Mortgage

A loan from a lender used to buy a home, property or other type of real estate.

Mortgage Advisor

Guides individuals through the process of obtaining a mortgage. Mortgage advisors can be self-employed or work for a financial institution.

Offer

The buying contract, generated by the buyer's real estate agent and signed by the buyer. The offer lists the purchase price and terms the buyer is willing to agree to. Terms can include the closing date, inspection addendums, requests for home appliances and more.

Points

An interest rate unit of measure. Buyers can purchase points to lower their mortgage's interest rate. Each point is assigned a cost. Talk to your mortgage advisor about whether paying more up front will benefit you by reducing the interest you'll pay over the life of the loan.

Preapproval

A formal statement showing how much money a lender conditionally agrees to give a homebuyer under a specified set of terms. Preapproval is determined after a lender reviews and verifies loan application materials.

Prequalification

A preliminary summary estimating how much a homebuyer likely can afford based on data a buyer submits to a lender. Some lenders, including BECU, do not require an application to issue a prequalification letter.

Private Mortgage Insurance (PMI)

Historically, lenders have typically required a 20% minimum down payment on a home. As home prices and the cost of living creep up, saving 20% of a home price can be daunting. Lenders allow potential homebuyers to purchase a home with a lower down payment if the borrower pays private mortgage insurance, or PMI, if it's a conventional mortgage.

Because credit unions return profits to members in the form of fewer fees and lower rates, credit unions typically charge a lower PMI fee.

Regulations vary per transaction, financial institution and state, but buyers usually must pay PMI until they have paid off 20% of their loan. Borrowers could be required to pay PMI for a minimum of two years, regardless of reaching the 20% threshold.

FHA loans, backed by the Federal Housing Administration, have different requirements for mortgage insurance. Talk to your lender about whether you can remove mortgage insurance from your FHA loan.

Principal

The original amount of money you borrow for your home. Over the course of your mortgage, a borrower will repay the principal along with interest.

Processing

When a financial institution analyzes your homebuying application along with your financial documents and the home-buying contract.

Property Tax

Property tax is paid bi-annually by the homeowner to the county in which the property is located. Property taxes are collected and distributed by the state and contribute to a variety of state-funded programs, including transportation, schools, public safety and more. Your assessed home value determines the amount you are taxed; falling home values typically result in falling property tax (a phenomenon that occurred during the Great Recession).

You may elect to directly pay property taxes to the county, or you may pay a portion of your property taxes with each mortgage payment. The tax payment will be held in an escrow account, allowing a third party to automatically pay your property taxes on your behalf. Depending on the loan, some lenders may require borrowers to use an escrow account and pay taxes and insurance monthly with their mortgage payments.

Real Estate Agent

A licensed professional who represents buyers or sellers in real estate transactions. A real estate agent is different from a Realtor; Realtors are certified real estate agents who are members of the National Association of Realtors(r) and adhere to an additional Code of Ethics. Whether buying or selling a home, a real estate agent should always look out for your best interest.

Refinance

Refinancing a mortgage means you pay off your existing loan and replace it with a new one. Refinancing allows you to explore different loan types and lenders. A borrower may consider refinancing based on factors like obtaining a lower interest rate or shorter loan term.

Selling Costs

Selling costs can include fees, taxes, utilities and insurance, such as:

• Real estate agent compensation fees.
• Staging fees to furnish the home for showing to prospective buyers.
• Seller closing costs, e.g., owner's title insurance, escrow fees, courier fee, notary fee.
• Outstanding home liens (e.g., utilities).
• Outstanding money owed on home mortgage(s).
• State excise taxes.

Seller's Market

A housing market that favors the seller. A seller's market typically exists when housing inventory is lower than housing demand. This sets up a situation where the buyer is forced to act quickly and sometimes aggressively to "win" a house (e.g., a bidding war that increases home price, waived inspection (or inspection with no concessions paid by seller) and a quick closing period.

Title

An official documentation linked to the property. A title can be held by multiple parties who own either a legal or equitable interest. A title that is "clean" or "clear" is a title that does not pose a problem — there are no outstanding creditor liens, levies, and no property ownership dispute. Third-party companies called title companies facilitate the review, transfer and recording of a property's title; they also conduct the funding of the home sale.

Title Company

Acts as a third-party intermediary to both buying and selling parties. The title company collects all buying and selling costs, transfers funds for the sale from the lender's financial institution, and is responsible for recording the sale with the county. Once a sale is recorded, the profit is released to the seller, and the keys are given to the buyer.

Underwriter

The department (underwriting) that analyzes the entire loan packet, including personal information, financial information and the buying contract. The underwriter ultimately confirms that the financial institution is willing to take on the risk, or debt. The term "underwriter" dates to a time when an insurance agent would take responsibility for the purchase of a large ship in exchange for a premium, paid by the person requesting coverage. The agent would sign "under" the inherent risks.

Resources

• Smart Budgeting for Prospective Homebuyers
• 8 Easy Steps To Homebuying (PDF)
• BECU Home Loans
• Meet with a Mortgage Advisor
• Home Buying Process

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