As you know knowledge can become power when used appropriately. Knowing the meaning of mortgage terms you’ll run across during the buying process, might help determine how much you pay for your first mortgage, or closing fees.

If you think most of the professionals you’ll run across are there to benefit you financially, you better think again. Your lawyer, your broker, your banker etc, would only relate to you what’s going on with the buying process based on your knowledge of basic mortgage terms.

You can use this article as a reference, to master loan mortgage terminology. Below are some of the home mortgage terms you’ll run across during any home buying process. The mortgage terms have been alphabetized for easy reference point. 

Mortgage Terms

Amortization: This is the division of your home loan into periodic payments, using the interest rate specified in your mortgage. Most times, you’ll hear the term been used to refer to fixed payment schedules, which includes both your principal and interest. The length of the mortgage years is usually the amortization period.

Annual Percentage Rate (APR): This is what the money you borrowed would cost your on an annual basis. Do remember, that your annual cost might be higher than your quoted home loan rate, due to the addition of extra bank fees. By law, mortgage bankers are required to disclose the true annual cost of your mortgage, by adding all the fees you paid. So you might get a mortgage with 6% fixed rate, but with a first year annual percentage rate of 7.5%, due to the added fees.

Application Fee: This is the upfront fee the mortgage banker charges to commence the home buying loan process. You can always ask that the fees be waived, if the loan closes. The fee is also a way to discourage real estate buyers that are not serious.

Assets: Whatever you own that has some value, is known as your asset. Most common forms of assets includes, cash that you can prove its origin, bonds, stocks, jewelry, automobiles etc.

Adjustable-Rate Mortgage (ARM): This is also sometimes called variable rate mortgage. Just like the name implies, your mortgage loan rate will adjust periodically, based on the terms in your home loan agreement. The adjustment period and mechanism, is usually spelled out in your mortgage loan agreement documents. An adjustable rate mortgage will have some type of a rate cap, meaning their will be some limitations as to how high, or how low your interest rate would go, over the life-span of the home loan.

Appraisal: This is a true estimate of what the home you’re trying to buy is actually worth. While Appraisers have professional standards they go by, the numbers from different appraisers can defer significantly, depending on what lender you choose to use. Mortgage bankers prefer to use their own appraiser, but you’ll be paying for it.

Assessment: Occasionally, your locality might decide to build a massive improvement in your town’s infrastructure, and you’ll be assessed a specific amount for a specific period, for such improvements. This can also be used to subsidize the construction of stadiums, shopping malls, Aquariums, etc.

Assignment Agreement: This is a standard agreement, specifying the transfer of real estate mortgage from one party to another.

Assumability: This refers to an assumable mortgage, that can be transferred from the real estate owner to a new buyer. As a rule of thumb, you need the mortgage bankers approval to make the transfer legal. The new buyer of your real estate may have to go through a credit review process, and the current mortgage holder would most likely charge a fee.

Assumption Agreement: When a buyer of real estate property decides to take over an existing mortgage loan payment, it is called an assumption agreement. While the new buyer may save money because this is an existing home loan, the seller is still on the hook for the money owed, unless the original mortgage holder agrees to the transfer.

Assumption Fee: When the original mortgage banker agrees to a home loan transfer to another person or entity, most likely you’ll be charged an assumption fee.

Balloon Mortgage: This is usually a mortgage with a substantial payment due at the end of the term of the home loan. Typical of this type of mortgage are low payments, and with the right agreement in place, the balloon payment can be refinanced or payed-off.

Blanket Mortgage: This is a mortgage that covers more than one piece of real estate property. If you own one property and looking to buy another one, the mortgage banker might just give a mortgage with a blanket agreement that covers both real estate property. Your payment or lack of payment affects both properties simultaneously.

Bridge Loan: Mostly found in commercial real estate lending. This is a trust loan certificate that uses the borrowers ownership of a certain piece of real estate, as collateral on a new loan on another piece of real estate. The term for such loans, is usually short in duration. You might also hear it been called “swing loan”. In the construction industry, bridge loans are very common.

Buy Down: Builders of new housing developments will sometimes subsidize the interest rate paid by buyers of the new homes, for a specific period of time to stimulate sales. The terms are usually spelled out, and your initial low mortgage payments will eventually rise higher, as the subsidy expires.

Collateral: Whatever you pledge as security to guarantee the repayment of a debt. While looking at a home mortgage loan, the collateral is the land and house, including your personal guarantee. If you own other assets and the bank forecloses on your house, but the sale did not fully satisfy the mortgage loan, your interest in other assets would be seized as collateral for the unpaid portion of the mortgage.

Closing Costs: This is the actual cost needed to complete a real estate transaction. Your complete closing cost is required to be listed in HUD-1 Settlement Statement, and good Faith Estimate. The cost of your closing will include points paid on your home loan, title insurance, real financing costs, taxes, any prepaid or escrowed cost, etc.

Co-Borrower: Anyone listed on the loan documents as part of the borrowing entity. If two or more people buy a house and sign for the home loan mortgage, all are equally responsible for paying back the loan. In a nutshell, the bank can go after the person with the most wealth, if the loan is not repaid.

Co-Signer: This is almost similar to a co-borrower obligation, except for the ownership. A co-signer is equally responsible for the new home loan, but has no ownership percentage in the real estate property.

Commitment Letter: This is the initial approval letter given to a borrower, to let him or her know the loan has been approved, with certain conditions. The commitment letter would also list the mortgage amount to be granted, the repayment terms, the rate of interest, any origination fees, and the monthly payments.

Credit: Your ability to enter into a loan agreement is called credit. The amount of credit that can be extended to a borrower takes into account the person’s ability to pay, and current financial metrics.

Credit Bureau: This is sometimes called credit agency. We currently have three major credit bureaus in America, and they collect, tabulate and keep records of your financial history. All the banks are obligated not by law, but by common interest to report how you paid your loan, or if you defaulted. When you sign the mortgage application, you’re also given the banker the permission to seek your credit report from this credit bureaus.

Credit Report: Is a detailed list of your income and financial obligations, as collected by a credit agency. You’ll see all your past and present financial obligations. There are limitations of how long derogatory information can remain on your credit report. Late payments and bankruptcy will actually disappear after so many years.

Credit Score: This is commonly known as your FICO score, and it’s a computer generated number, that ranges from 300 to 850 based on your financial health, and how you handled past loan obligations. Bankers rely greatly on your FICO score, to gauge the chances of your sticking to any new loan terms.

Debt: This is the money owed by any person or institution, to another institution or person.

Default: Like the name implies, you failed to meet the obligations of your loan agreement, thus triggering a default. Default can also occur, if one fails to fulfill certain agreements as specified in the loan documents. For example, you’re required to maintain a full coverage insurance on your car loan. Your loan can be in default, if you fail to keep a full insurance policy, regardless if you’re current on your loan payment.

Down Payment: This is the portion of the real estate price that must be paid upfront, before financing can take place. The funds are usually held in escrow as a sign of good faith in completing the deal, and then transferred to the seller at closing.

Escrow: At closing, you’ll hear the parties talking about escrow. Simply means money held by a third party to fulfill certain obligations, as required by the mortgage loan terms. Most times, the real estate taxes, insurance premiums, water bills, and similar expenses will be escrowed.

Equity: If you owe $100,000 on your home, and it then appraises for $230,000, you have an equity of $130,000. Your home equity will fluctuate, based on the current real estate trends, and your home loan balance.

Fixed-Rate Mortgage: Probably the most common form of interest rate on a mortgage loan. Just like the name implies, the interest rate on the home mortgage will not change or adjust during the life-span of the loan. Mind you, you can have a fixed rate loan for about 10 years before it changes.

Foreclosure: This is a process initiated by the lender to get back the real estate property, due to missing several payments for many months or years. A visit to your municipal court, will expose you to the process of what happens when a homeowner cannot meet the monthly mortgage payment.

Good Faith Estimate: This is required by law. Your mortgage loan officer is required to give you an estimated cost of your mortgage loan, within three days of signing the mortgage loan application.

Hazard Insurance: In a nutshell, this type of insurance will provide compensation to the insured party, in case of substantial damage or loss. This can be added to your regular homeowners policy, and will go beyond what is not covered.

Homeowners Insurance: This is the most common form of policy that protects the lender and real estate owner in case of any loss, due to acts of nature, fire or sometimes flood. A standard liability coverage is also included, just in case a visitors slips and falls on your property.

HUD-1 Uniform Settlement Statement: This is part of the documents you’ll be getting at closing, and it will list all the actual cost you paid for your mortgage loan. You might be surprised to find out, what your mortgage banker would bill you for.

Liabilities: All your debts, and financial obligations you agreed to honor, can be part of your liability.

Lien: This is a charge or claim against a property, for failing to make payment on a debt. If you call a plumber, and you refuse to pay, he or she can file a mechanics lien on your property. The mortgage the bank gave you is also a lien against your real estate property.

Loan: In general, when you borrow money from a bank, it’s called a loan. The fees and interest collected is how banks make substantial profit.

Loan Officer: Every bank has at least one or more loan officers to answer questions and initiate loan transactions. A good loan officer will be in a position to explain all the loan products offered by the bank, plus help you fill out the loan application.

Loan Origination Fees: The fees are usually called points. Each point equals one percent of your loan amount. Mortgage lenders charge you points for processing your loan application, and it will be reflected in your closing cost.

Lock-In Rate: If you found your dream home, and you’re concerned about interest rate rising during the home buying process, you can lock-in the rate for a specific period of time. A lock in rate should be in writing for it to be enforceable. Verbal commitment from your loan officer will not be sufficient.

Mortgagor: This is another name for the borrower on a mortgage loan. The mortgagor is the one required to fulfill the loan repayment terms.

Mortgagee: This is the lender in a mortgage loan transaction. It can be a bank or anyone that provided the money for your home loan.

Mortgage: Anytime you borrow money using your home as collateral, it is generally known as a mortgage. It becomes a permanent enforceable lien, once the loan closes.

Mortgage Broker: This is the person that brings together both the borrower and the lender, to enable the real estate mortgage transaction. The mortgage broker is usually paid on points by the borrower, lender or both.

Mortgage Insurance: This is an insurance policy that protects the lender in case of default by the borrower. The requirement is more common with loans with less than 20% down-payment, or borrowers with poor or bad credit.

Mortgage Lender: This can be anyone that provides the money needed to complete your real estate transaction.

Mortgage Note: This is a notarized and legal document you signed, showing how much you borrowed, and the repayment agreed terms. The note explains what will happen if you fail to make timely monthly payments on your loan, it’s promptly filed in your county courthouse right after closing.

Mortgage Rate: This is also called the interest rate, and it refers to what you’re charged for borrowing the money to buy your dream home.

Mortgage Servicer: Your loan would probably be transferred to a mortgage servicing company that’s task with collecting the monthly payments, and making sure the taxes and utility bills are paid on time.

Principal: Refers to the amount you’re borrowing from the lending institution to buy your house. The principal would also refer to the balance of your mortgage less the interest rate, if you decided to pay it off early.

Realtor: This is the real estate professional tasked with bringing sellers and buyers of real estate properties together. Legitimate ones will belong to the National Association of Realtors, or work for a broker that does.

Title: This is the document that shows who owns the property.

Title Insurance: You the borrower pays for this, and it ensures your real estate property is free from any other claims by another third party. After closing, if someone appears claiming they have legitimate rights to the property, the title insurance has to take care of the claim.

Truth-in-Lending Disclosure Statement: This is a lengthy form that is required by law, and it discloses all the pertinent details about your loan. It should contain the loan amount, fees, interest charges, terms of payment, and any other cost that was charged to the borrower for the mortgage loan.

Universal Residential Loan Application: This a standard loan application that requires you tell the lender about job and financial picture. It would also require you to list the price of the home you’re buying, your down-payment, and the mortgage amount you’re seeking to borrow. You’ll be required to explain the source or sources of your downpayment.

Underwriting Process: This is the lengthy process the lender uses to gauge your suitability for a mortgage loan. Expect the mortgage banker to pull your credit report, contact your current or past jobs, and current creditors, to help determine your worthiness for a home mortgage loan.