Mortgage Term Dictionary

Last updated: October 7, 2015

Definitions of Technical Terms

Annual Percentage Rate (APR)

A measure of the cost of credit, expressed as a yearly rate. It includes interest as well as other charges. Because all lenders, by federal law, follow the same rules to ensure the accuracy of the annual percentage rate, it provides consumers with a good basis for comparing the cost of loans, including mortgage plans. APR is a higher rate than the simple interest of the mortgage.

Collateral

Security in the form of money or property pledged for the payment of a loan. For example, on a home loan the home is the collateral and can be taken away from the borrower if mortgage payments are not made.

Down Payment

The portion of a home's purchase price that is paid in cash and is not part of the mortgage loan. This amount varies based on the loan type, but is determined by taking the difference of the sale price and the actual mortgage loan amount. Mortgage insurance is required when a down payment less than 20% is made.

Escrow

Funds held in an account to be used by the lender to pay for home insurance and property taxes. The funds may also be held by a third party until contractual conditions are met and then paid out.

Interest Rate

The amount of interest charged on a monthly loan payment, expressed as a percentage.

Lender

A term referring to a person or company that makes loans for real estate purchases. Sometimes referred to as a loan officer or lender.

Loan Origination Fee

A charge by the lender to cover the administrative costs of making the mortgage. This charge is paid at the closing and varies with the lender and type of loan. A loan origination fee of 1-2% is common.

Mortgage

A lien on the property that secures the promise to repay a loan. A security agreement between the lender and the buyer in which the property is collateral for the loan. The mortgage gives the lender the right to collect payment on the loan and to foreclose if the loan obligations are not met.

Private Mortgage Insurance (PMI)

It protects the lender against the loss if the borrower defaults. Usually required when the down payment is less than 20% of the sales price or if refinancing, the loan is for more than 80% of appraised value. It is usually removed when you acquire 20% equity in your home.

Points

A fee paid to reduce or buy down the interest rate of the loan. Points is sometimes used to reference an origination fee.

Pre-Approval

A lender commits to lend to a potential borrower a fixed loan amount based on a completed loan application, credit reports, debt, savings, and has been reviewed by an underwriter. The commitment remains as long as the borrower still meets the qualification requirements at the time of purchase. This does not guarantee a loan until the property has passed inspection underwriting guidelines.

REALTOR®

A real estate agent or broker who is a member of the National Association of Realtors and its local and state associations