Loan Glossary

Adjustable-rate loans, also known as variable-rate loans, usually offer a lower initial interest rate than fixed-rate loans. The interest rate fluctuates over the life of the loan based on market conditions; however, the loan agreement may set maximum and minimum rates. When interest rates rise, generally, so do your loan payments; and when interest rates fall, your monthly payments may be lowered.


Annual percentage rate (APR) is the cost of credit expressed as a yearly rate. The APR includes the interest rate, points, broker fees, and certain other credit charges that the borrower is required to pay.


Conventional loans are mortgage loans less than $417,000 other than those insured or guaranteed by a government agency such as the FHA (Federal Housing Administration), the VA (Veterans Administration), or the Rural Development Services (formerly known as Farmers Home Administration, or FmHA).


Debt-to-Income Ratio is the ratio, expressed as a percentage, that results when a borrower's monthly payment obligation on long-term debts is divided by his or her gross monthly income.


Equity is the percentage of property value held by the owner; the difference between the current market value of a property and the outstanding mortgage balance.


Escrow is the holding of money or documents by a neutral third party prior to closing. It can also be an account held by the lender (or servicer) into which a homeowner pays money for taxes and insurance.


First Mortgage is a mortgage that is in first lien position, taking priority over all other liens. In the case of a foreclosure, the first mortgage will be repaid before any other mortgages.


Fixed-rate loans generally have repayment terms of 3, 5, 7, 10, 15, 20, or 30 years. Both the interest rate and the monthly payments (for principal and interest) stay the same during the life of the loan.


Flood Insurance is a form of hazard insurance required by lenders to cover properties in flood zones.


Good Faith Estimate is a written estimate of costs the borrower will have to pay at closing, provided by a lender within three days of a loan application.


HUD-1 Settlement Statement is a form that itemizes the closing costs associated with purchasing a home.


Interest rate is the cost of borrowing money expressed as a percentage rate. Interest rates can change because of market conditions.


Loan origination fees are fees charged by the lender for processing the loan and are often expressed as a percentage of the loan amount.


Loan to Value Ratio (LTV) is the percentage of the property value borrowed. (Loan amount/property value = LTV)


Lock-in refers to a written agreement guaranteeing a home buyer a specific interest rate on an owner-occupied residential home provided that the loan is closed within a certain period of time, such as 60 or 90 days. Often the agreement also specifies the number of points to be paid at closing.


Mortgage refers to a document signed by a borrower when a home loan is made that gives the lender a right to take possession of the property if the borrower fails to pay off the loan.


Per Diem Interest is interest calculated per day. (Depending on the day of the month on which closing takes place, you will have to pay interest from the date of closing to the end of the month. Your first mortgage payment will probably be due the first of the following month.)


Points are fees paid to the lender for the loan. One point equals 1 percent of the loan amount. Points are usually paid in cash at closing. In some cases, the money needed to pay points can be borrowed, but doing so will increase the loan amount and the total costs.


Private mortgage insurance (PMI) protects the lender against a loss if a borrower defaults on the loan. It is usually required for loans in which the down payment is less than 20 percent of the sales price or, in a refinancing, when the amount financed is greater than 80 percent of the appraised value.


Title Insurance refers to insurance which protects the lender (lender's policy) or the buyer (owner's policy) against loss due to disputes over ownership of a property.


Title Search is an examination of municipal records to ensure that the seller is the legal owner of a property and that there are no liens other claims against the property.


Transaction, settlement, or closing costs may include application fees; title examination, abstract of title, title insurance, and property survey fees; fees for preparing deeds, mortgages, and settlement documents; attorneys' fees; recording fees; and notary, appraisal, and credit report fees. Under the Real Estate Settlement Procedures Act, the borrower receives a good faith estimate of closing costs at the time of application or within three days of application. The good faith estimate lists each expected cost either as an amount or a range.