To help you understand refinancing lingo, our experts compiled a list of mortgage terms that may be helpful to you throughout the home loan process.
Adjustable-Rate Mortgage (ARM): The interest rate is periodically adjusted based on a pre-selected index. This means mortgage payments made by the borrower may change over time with the changing interest rate.
Amortization: The process of repaying your home loan, including accrued interest on the outstanding balance, in equal periodic payments over a fixed period.
Debt Consolidation: The process of combining your outstanding debts, including credit card balances and school loans, into one lump sum for the purpose of reducing the number of monthly payments.
Debt-to-Income Ratio: This ratio represents your monthly housing expenses as a percentage of your monthly gross income.
Deed of Trust: In many states, lenders use this document in place of a mortgage to secure the payment of a mortgage loan or note.
Equity: The equity you have built in your home is calculated as the difference between the market value of your home and the amount you still owe on it.
Escrow: The holding of important documents and money by a neutral third party or lender during the loan closing process.
Fixed-Rate Mortgage: The interest rate will stay the same throughout the entire term of the mortgage. In other words, your mortgage payment will be the same amount every month throughout the term of your loan.
Home Appraisal: The value of your house at its current market value.
Home Equity Line of Credit (HELOC): A home loan in which the lender agrees to lend a maximum amount to the borrower in the form of a line of credit. The borrower does not receive a lump sum amount, but instead uses the line of credit to borrow sums totaling no more than the amount.
Interest-Only Loan: For a set term, the borrower pays only the interest on the principal balance. During that set term, the principal balance remains unchanged. At the end of the interest-only term, the borrower may enter an interest-only mortgage, pay the principal or convert the loan to a principal-and-interest payment loan.
Jumbo Loan: A home loan that is larger than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. A jumbo loan usually carries a higher interest rate because it cannot be funded by either agency.
Mortgage Insurance: Provides protection to the lender when the down payment is less than 20 percent. Private Mortgage Insurance (PMI) is default insurance on mortgages, provided by private insurance companies. Federal Housing Administration (FHA) Mortgage Insurance is provided by the government.
Note: A legal document that obligates a borrower to repay a mortgage at a stated interest rate during a specified period of time. Also called promissory note.
Piggyback Loan: For borrowers who are unable to provide a larger down payment, there is an option to “piggyback” a second mortgage onto the first mortgage to help lower monthly payments.
PITI Payments: The sum of your monthly housing expenses, including Principal, Interest, Taxes and Insurance.
Principal-and-Interest Loan: With this loan, a percentage of your monthly mortgage payment goes to paying off the interest, and the remaining percentage goes towards the principal.
Purchase loan: A purchase loan is any loan secured by and made for the purpose of purchasing a home.
Refinance: Taking out a new home loan (usually at a lower interest rate) to pay off an existing mortgage (that’s at a higher interest rate). The benefits include lowering monthly mortgage payments and debt consolidation.
Title Insurance: Insurance that covers the legal fees and expenses necessary to protect a home buyer or a lender against errors in the title search.
Underwriting: The decision to grant a home loan to a potential home buyer based on the borrower’s credit, employment history, assets and other factors. The process matches the risk to an appropriate rate, term and mortgage amount.