What's What
A Glossary of Terms for the Mortgage Industry

Adjustable Rate Mortgage (ARM) —interest rates on this type of mortgage are periodically adjusted up or down, depending on a specified financial index.

Amortization —repayment of a mortgage debt with equal periodic payments of both principal and interest, calculated to retire the obligation at the end of a fixed period of time.

Annual Percentage Rate (APR) —the actual finance charge for a loan, including points and loan fees, in addition to the stated interest rate.

Application Fee —a one-time fee charged by the mortgage company for processing your application for a loan. Sometimes called the "origination fee."

Appraisal —an expert opinion of the value or worth of a property.

ARM —see "Adjustable Rate Mortgage."

Broker —an individual who acts as the agent of the seller or buyer. A real estate broker must be licensed by the state.

Buy-Down Mortgage —a mortgage with a belowmarket interest rate made by lender in return for an interest rate subsidy in the form of additional discount points paid by the builder, seller, or buyer.

Buyer’s Market —economic conditions in which the supply of housing exceeds demand. Sellers may be forced to make substantial price concessions.

Cap —limit on how much the interest rate can increase in an ARM.

Closing ---"closing the deal," the meeting where the deed to property is legally transferred from seller to buyer.

Commission —fee (usually a percentage of total transaction) paid to an agent or broker for services performed.

Comparative Market Analysis —a survey of attributes and selling prices of comparable houses on the market or recently sold; used to help determine pricing strategy for a seller’s property.

Condominium (condo) —type of real estate ownership where the owner has title to a specific unit and shared interest in common areas.

Contingency —a condition in a contract that must be met for the contract to be binding.

Contract —binding legal agreement between two or more parties that outlines the conditions for the exchange of value.

Cooperative (Co-op) —real estate ownership where all shareholders own the whole property, but each has proprietary occupancy rights for specific units.

Counteroffer —when the seller or buyer responds to a bid. If you decide to offer $100,000 for a home listed at $150,000, the seller might counter your offer and propose that you purchase the home for $140,000. That new proposal, and any subsequent offer, is called a counteroffer.


Credit Report — a credit report lists all of your credit accounts such as charge cards, and provides detail on payment history. Lenders use this information in determining eligibility for loans.

Down Payment —percentage of the purchase price that the buyer must contribute with their own funds.

Earnest Money —a deposit paid when the sale contract is signed before the closing. In some locations, it’s called the "Binder."

Equity —the difference between the market value of the property and what is owed on the property.

Escrow —a fund or account held by a third — party custodian until conditions of a contract are met.

Fee Simple —the most basic type of ownership, under which the owner has the right to use and dispose of the property at will.

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."

Foreclosure —the legal action taken to extinguish a homeowner’s right and interest in a property, so that the property can be sold in a foreclosure sale to satisfy a debt.

Graduated Payment Mortgage (GPM) —monthly payments start low and increase at a predetermined rate. Compare to "ARM".

Hazard Insurance —compensates for property damage from specified hazards such as fire and wind.

Homeowner’s Insurance —coverage that included hazard insurance, as well as personal liability and theft.

Home Warranty —a service contract that covers appliances (with exclusions) in working condition in the home for a certain period of time, usually one year.

Interest —the cost of borrowing money, usually expressed as a percentage over time.

Lien —a security claim on property until a debt is satisfied.

Loan-to-Value Ratio —the ratio of the loan amount compared to the value of the property. Referred to as "LTV."

Market Value —the price that is established by present economic conditions, location, and general trends.

Market Price —the actual price at which a property sells.

Mortgage —security claim by a lender against property until the debt is paid.

Multiple Listing Service (MLS) —a system that provides to its members detailed information about properties for sale.

PITI —principal, interest, taxes, and insurance, forming the basis for monthly mortgage payments.

Point —one percent of the loan principal paid up front to reduce the interest rate on the loan.

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. Completed before the borrower pays substantial loan application fees.

Principal —the amount of the money borrowed, for which interest is charged.

Mortgage Insurance (MI) —special insurance that protects the lender in case of borrower default. It’s typically required when the borrower makes less than a 20% down payment.

Realtor —a member of the National Association of Realtors.

Title —document that indicates ownership of a specific property.

Title Insurance —protects against loss from legal defects in the title.

Title Search —detailed examination of the entire document history of a property title to make sure there are no legal encumbrances.
© 2004 Pillar Financial L.L.C.