Loan Glossary
Here's what you need to know about loans. This basic glossary of lending terms will help you get a handle on appraisals, credit, mortgages and more. Have questions? Contact us here.
- Adjustable Rate Mortgage
A mortgage loan that allows the lender (the bank) to adjust the interest rate periodically. Don’t worry, you won’t be blindsided – the rate changes in accordance with a specific index that you and the bank have agreed to at the start of the loan. - APR (Annual Percentage Rate)
The cost of credit, expressed as a percentage rate per year. - Amortization
A way to pay off your entire loan by paying off the principal and the interest in a series of installments. The principal balance gets smaller and smaller, and eventually you’ve paid the loan in full. - Appraiser
A person who has the right qualifications (education, training, experience and license) to estimate the value of your property. - Balloon Mortgage
A mortgage with level monthly payments that you can eventually pay off in full (amortize) over a stated term. However, you also owe an additional lump sum (like a balloon on the end of a string), due at the end of a specified term. - Bridge or Swing Loan
A second mortgage that is secured by the borrower’s present home (which is usually for sale). The proceeds of this mortgage can be used for closing on a new house before the borrower’s current house is actually sold. - Cap (Interest Rate)
The maximum amount that the bank can increase your interest rate on an adjustable rate mortgage. - Closing
The finalizing of a deal in real estate. Usually, closing includes the delivery of a Deed, Mortgage, financial adjustments, the signing of documents, and the payment necessary to seal the sale or loan transaction. - Collateral
The property that is pledged as security for a debt. - Credit Report
A detailed report on your credit, employment and residence history. Credit reports also list any judgments, tax liens, bankruptcies or similar matters of public record entered against you. Banks will use this credit report to determine whether or not they should lend you any money. - Debit-to-Income Ratios
Formulas that help the bank figure out whether you qualify for a mortgage. They consist of two separate calculations: a monthly housing expense-to-income ratio and a total obligations-to-income ratio - Equity
The difference between how much your house is actually worth (fair market or appraised value) and how much of your mortgage you still owe (outstanding mortgage balances). - Escrow Account
A trust account that’s like a “holding tank” for outgoing payments (real estate taxes, insurance premiums, etc). The account holds the funds as they are received each month, until the time that they are disbursed to pay bills. - Fixed-Rate Mortgage
A mortgage that retains one interest rate for the entire term of the mortgage. (It’s the opposite of the adjustable-rate mortgage we talked about earlier.) - Home Equity Line of Credit (HELOC)
A loan that uses the equity value in your home as security (usually a second mortgage). The funds are drawn as needed by using a special set of checks. - Home Equity Loan
Another type of loan secured by the equity value in your home. The difference is that you don’t get a set of checks – you receive a single lump sum at closing. - Lien
When one person has a legal claim to someone else’s property, as security for a debt or charge. - Loan-To-Value (LTV)
The ratio between the unpaid principal balance of the mortgage and the property's appraised value (or sales price, if it is lower). - Origination Fees
The fees the bank charges you for the services they perform as you’re starting a new mortgage: preparing loan documents, making credit checks, inspecting and sometimes appraising a property. The fees may be computed as a percentage of the face value of the mortgage. Private Mortgage Insurance (PMI)
Insurance written by a private company that protects you, or the bank, against loss caused if you default on the loan. Conventional loans with a LTV ratio greater than 80% must have PMI.