Personal Banking
Glossary of Mortgage Terms
Adjustable-Rate Mortgage (ARM) A mortgage with an interest rate and payment that change periodically over the life of the loan based on changes in a specified index.
Annual Percentage Rate (APR) Calculated by using a standard formula, the APR shows the cost of a loan; expressed as a yearly interest rate, it includes the interest, points, mortgage insurance, and other fees associated with the loan.
Appraisal A document that gives an estimate of a property’s fair market value; an appraisal is generally required by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property.
Balloon Mortgage A mortgage that typically offers low rates for an initial period of time (usually 5, 7, or 10) years; after that time period elapses, the balance is due or is refinanced by the borrower.
Closing Costs Customary costs above and beyond the sale price of the property that must be paid to cover the transfer of ownership at closing; these costs generally vary by geographic location and are typically detailed to the borrower after submission of a loan application.
Debt-to-Income Ratio A comparison of gross income to housing and non-housing expenses, expressed as a percentage. Also called the bottom ratio or back-end ratio.
Discount Point Normally paid at closing and generally calculated to be equivalent to 1% of the total loan amount, discount points are paid to reduce the interest rate on a loan.
Escrow Account A separate account into which the lender puts a portion of each monthly mortgage payment; an escrow account provides the funds needed for such expenses as property taxes, homeowners insurance, mortgage insurance, etc.
Fixed-Rate Mortgage A mortgage with payments that remain the same throughout the life of the loan because the interest rate and other terms are fixed and do not change.
Good Faith Estimate An estimate of all closing fees including prepaid and escrow items as well as lender charges; must be given to the borrower within three days after submission of a loan application.
Loan-To-Value Ratio (LTV) A percentage calculated by dividing the amount borrowed by the price or appraised value of the home to be purchased; the higher the LTV, the less cash a borrower is required to pay as down payment.
Origination Fee The charge for originating a loan; is usually calculated in the form of points and paid at closing.
PITI Principal, Interest, Taxes, and Insurance - the four elements of a monthly mortgage payment; payments of principal and interest go directly towards repaying the loan while the portion that covers taxes and insurance (homeowner’s and mortgage, if applicable) goes into an escrow account to cover the fees when they are due.
Private Mortgage Insurance (PMI) Privately-owned companies that offer standard and special affordable mortgage insurance programs for qualified borrowers with down payments of less than 20% of a purchase price.
Rate Lock-In The process by which a lender commits to lend at a particular rate as long as the mortgage transaction closes within a specified time period. The document, which specifies the terms of the lock-in, is called a rate commitment or lock-in agreement.
Title Insurance Insurance that protects the lender against any claims that arise from arguments about ownership of the property; also available for homebuyers.
