Loan Glossary

Please feel free to read through any terms that you are not familiar with. If there are any additional mortgage terms that is not listed and you have questions about, please send us an email at mortgageinfo@nationmortgage.com

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Annual account fee - A yearly amount charged by some lenders to service a home equity line of credit. Usually no more than $100.

Acquisition indebtedness - A loan you get to build your house, a loan to buy your house or any loan you take out to substantially improve your home. Interest paid on such a loan is generally tax-deductible.

Annual Percentage Rate (APR) - The cost of a mortgage stated as a yearly rate. It includes interest, mortgage insurance and certain points or credit costs.

Appraisal - The examination of property by a professional appraiser to estimate fair market value. Appraised value - An opinion of a property's fair market value, based on an appraiser's inspection and analysis of the property. Some home equity loans are based on a percentage of the appraised value, others on the assessed value.

Appreciation - An increase in a home’s value. Appreciation increases the amount of equity, making more available to be borrowed in a home equity loan. The opposite of depreciation.

Assessed value - The value placed on a piece of property by the local tax assessor for the purpose of taxation.

Assessment - The process of placing a value on property for the purpose of levying a property tax. Often lower than the appraised value, so a loan or line of credit based on the assessed value will consequently be smaller.

Balloon loan - A loan that allows borrowers to make interest-only payments, or payments of some combination of interest and principal, until the loan term expires. Then the balance must either be paid off or refinanced.

Cash flow - The amount of money available monthly after paying debts.

Cash-out refinance - A refinancing transaction based on the equity in the home. The new loan exceeds the total amount of money needed to repay the existing first mortgage and any additional liens. The borrower receives the cash balance of the loan. For instance, someone might refinance a first mortgage of $80,000 into a new $90,000 loan and take the $10,000 difference out in cash for other expenses.

Closed-end loan - A home equity loan that lasts for a specific term. Closing costs - Costs incurred by the borrower in the course of finalizing a home equity loan.

Collateral - An asset pledged as security in a loan. In a home equity loan, the home is the collateral.

Combined loan-to-value (CLTV) ratio - A person’s overall mortgage debt load, expressed as a percentage of the home’s fair market value. Someone with a $50,000 first mortgage and a $20,000 home equity loan secured against a $100,000 house would have a CLTV ratio of 70 percent.

Credit report - A report that contains information about your borrowing habits and money-managing skills. Lenders use it to determine whether to approve a loan and to set the terms. A person with a good credit report is likely to get a better interest rate than someone with a poor credit report.

Credit score - A number, roughly between 300 and 800, that reflects the credit history detailed by a person’s credit report. Lenders calculate this number with the assistance of computer systems as part of the process of assigning rates and terms to the loans they make.

Debt consolidation - A popular use of home equity in which people move high-rate credit card balances to low-rate mortgage loans. By taking a credit card balance at 18 percent interest and moving it to a home equity line with 8 percent or 9 percent interest, people may save thousands of dollars. Home equity line interest is usually tax-deductible too, magnifying the savings.

Debt-to-income ratio - The percentage of a person’s gross, or pretax, monthly income, expressed as a percentage of monthly debt obligations, such as credit card balances, car loans, and mortgage or rent payments.

Default - Failure to make mortgage payments on time and as agreed to in the terms of the loan. Default leads to foreclosure.

Depreciation - A decline in a value of a home. It decreases the amount of home equity, lessening the amount that can be borrowed in a home equity loan.

Down payment - The difference between the purchase price and the amount financed in a mortgage. It is usually between 10 and 20 percent.

Early closing cost reimbursement - Some line-of-credit lenders waive underwriting costs when a line is opened in anticipation of future profits. If a line is then closed early -- often within three years -- these institutions impose those fees retroactively.

Earned and unearned income - Two different sources of income: earned income comes from wages, salary or business profits; unearned income comes from sources such as interest, dividends, rental income and pension benefits.

Equity - The value of a homeowner's unencumbered interest in real estate. Equity is the difference between the home’s fair market value and the unpaid principal balance of the mortgage and any liens. Equity increases as the mortgage is paid down or as the property appreciates in value.

Fair market value - The likely selling price of a home. In a mortgage or a home equity loan, fair market value is often determined by appraisal.

Federal Truth in Lending Act - This law requires lenders to inform a borrower about the terms of a loan, including a home equity loan, at the time a borrower is given an application. Lenders must disclose the APR and payment terms and must inform borrowers what will be charged to open or use the account. Lenders also must explain if a loan includes a variable rate.

Fees - Certain types of fees apply most commonly to a home equity line of credit (see inactivity fee, annual account fee, early closing cost reimbursement and transaction fee). Others are common to all types of mortgage loans (see origination fee, prepayment penalty).

First lien - Primary claim by the lender for satisfaction of outstanding debt. A first mortgage creates a first lien. First mortgage - A mortgage that is the primary lien against a property.

Fixed-rate loan - A type of home equity loan that features a fixed monthly payment and term, much like a standard 30-year fixed mortgage. Different from a home equity line of credit.

Fixed-rate option - An option available on some home equity lines of credit which allows borrowers to fix the payments and interest on a portion of their balance. Customers usually can exercise the option a handful of times during the lives of their loans, and they may pay a fee for the privilege.

Foreclosure - The legal process by which a homeowner in default on a mortgage is deprived of interest in the property. This usually involves a forced sale of the property at public auction with the proceeds of the sale being applied to the mortgage debt.

Full income verification - A requirement for fully documented proof of income; loans of this type usually offer lower interest rates than no-income or "no-doc" verification loans.

High-LTV equity loan - A home equity loan that creates a total loan-to-value ratio of up to 125 percent or more.

Home equity - The part of a home’s value that the mortgage borrower owns outright; the difference between the fair market value of the home and the principal balances of all mortgage loans.

Home equity line of credit (HELOC) - A variation of home equity loan that allows a homeowner to write checks or otherwise draw money against the equity in the home on an ongoing basis. Usually, it is a revolving line of credit with a variable rate of interest, a set draw period and a repayment period after that. Best used for a series of expenses rather than one specific need.

Home equity loan - A loan based on the amount of equity a homeowner has in the property.

Inactivity fee - One of the fees charged by some home equity line of credit lenders. They make their money from interest payments when borrowers use the credit line, so the inactivity fee is a way for them to keep the profits rolling in.

Interest tax deduction - One of the chief advantages of taking out a home equity loan is that the interest paid on the loan is, within IRS limits, tax deductible. Tighter tax restrictions apply to borrowers who take out home equity loans that, along with a first mortgage, raise the debt to a level above the value of the property. In such circumstances, borrowers can deduct the interest on only part of home equity debt. The Internal Revenue Service determines the eligible debt by subtracting the amount borrowed to acquire the property -- the first mortgage -- from the fair market value of the home. However, if the borrowed amount is used entirely to improve a home, and therefore its value, then it may be completely deductible. A tax expert should be consulted.

Index rate - A composite rate used by lenders that reflects general trends of interest rates such as those on Treasury notes. When determining changes in interest rates on adjustable rate mortgages, lenders charge a set amount above the index rate.

Introductory rate - See teaser rate.

Jumbo mortgage - Mortgages larger than the limits set by Fannie Mae and Freddie Mac. A jumbo mortgage will carry a higher interest rate than a conventional mortgage.

Lien - A legal hold or claim from one person on the property of another. The lien placed by a first mortgage is special; it is called the first lien and takes precedence over others. Other mortgages, including home equity loans, are subordinate.

Line of credit - An agreement by a lender to extend credit up to a set amount for a specified time. In a home equity line of credit, the loan is secured by the borrower’s home.

Loan-to-value (LTV) ratio - The ratio of the mortgage loan amount to the property's appraised value or selling price, whichever is less. For example, if a home is worth $100,000 and the first mortgage amount is $80,000, the home has an 80 percent LTV.

Minimum transaction - Some lines of credit require that each draw upon the line be for no less than a certain amount.

No cash-out refinancing - A refinancing transaction in which the mortgage amount is limited to the outstanding unpaid principal balance of the existing first mortgage.

Origination fee - The fee a lender charges to process a loan. It usually includes the cost to prepare loan documents, check a borrower’s credit history, inspect the property and sometimes conduct an appraisal.

Owner’s equity - The remainder when an owner’s liability is subtracted from the asset.

Pre-payment penalty - A fee imposed by certain lenders when borrowers retire their mortgage debt early.

Prime for life - A type of line of credit loan coveted by consumers that fixes the interest at the prime rate for the life of the loan.

Prime rate - The rate of interest charged by banks to their best and most creditworthy customers. This fluctuating rate is often used as part of the variable rate of interest in a home equity line of credit.

Principal balance - The money still owed on the original amount of the mortgage, not including interest.

Private mortgage insurance (PMI) - Insurance that protects mortgage lenders against default on loans by providing a way for mortgage companies to recoup the costs of foreclosure. PMI is usually required if the down payment is less than 20 percent of the sale price. Home buyers pay for the coverage in monthly installments. PMI is usually terminated when the home buyer has built up 20 percent equity in the property.

Refinancing - Securing a new loan in order to pay off the existing mortgage or to gain access to the existing home equity.

Repayment period - In a home equity line of credit, that portion of the life of the loan that follows the draw period. During the repayment period, the borrower cannot take out any more money, but must pay down the loan.

Revolving line of credit - An agreement to lend a specific amount to a borrower, and to allow that amount to be borrowed again once it has been repaid. A home equity line of credit is a type of revolving credit.

Second mortgage - The term for a home equity loan with a fixed rate.

Subprime borrower - A borrower with a less-than-perfect credit report due to late payments or a default on debt payments. Lenders often grade them based on the severity of past credit problems, with categories ranging from "A- on down to D or lower.

Tax deduction - See interest tax deduction.

Teaser rate - often below prime, charged during initial period of loan and offered by lenders entice more people borrow from them.

Transaction fee - Underwriting process analyzing risk establishing terms conditions based borrower credit-worthiness value property that will be used secure loan. Variable fluctuates various benchmark rates. Most have rates adjust whenever changes.