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A

A-Credit
Considered by many lenders to be a borrower with a credit rating of 720 or above.

Additional Principal Payment
A payment toward the principal of a loan that is greater than the amount scheduled to be payed.

Acceleration
The right of the lender to require the immediate repayment of the remaining balance of a mortgage loan after the borrower defaults.

Accrued interest
Unpaid earned interest adding to the amount owed.

Adjustable or Variable Rate Loans
The interest rate of the loan will rise or fall due to changes in market conditions through out the term of the loan. Typically, minimum and maximum interest rates are set by the lender. Your monthly payment amount will rise or fall based on these rates.

Affiliated Business Arrangement Disclosure
According to HUD, "When a lender, real estate broker, or other participant in your settlement refers you to an affiliate for a settlement service (such as when a real estate broker refers you to a mortgage broker affiliate), RESPA requires the referring party to give you an Affiliated Business Arrangement Disclosure."

Amortization
When payments are made on a regular basis in order to repay a mortgage. Payments must cover the principal and interest owed in order to be considered "fully amortizing."

Annual Percentage Rate (APR)
The cost of credit per year. The APR includes discount points, loan origination fee, prepayed interest, mortgage insurance, if required, and other credit related costs. For this reason it is generally higher than the interest rate.

Annuity
A type of insurance policy that requires the policy holder to make payments for a fixed period of time, and then begins to receive payments from the insurance company.

Appraisal
A written estimate or opinion of a property's value, made by a qualified professional called an "appraiser."

B

Balloon Mortgage
A mortgage with monthly payments that do not cover the entire loan amount within the term of the mortgage. As a result, at the end of the loan term, a large lump sum payment must be made in order to satisfy the debt.

Balloon Payment
At the end of the loan term a large lump sum payment made in order to satisfy the debt.

Billing Error
According to the Fair Credit Billing Act -- any mistake appearing in your monthly statement.

Borrower
A person who receives a loan and must repay the full amount with interest within a certain time period.

C

Cap (Interest) Limits the amount the rate of interest can rise or fall for an adjustable rate mortgage (ARM).

Caps (Payment)
Limits the size of the monthly payments on an adjustable rate mortgage (ARM).

Caps (Periodic)
Limits how much interest rates can change during a particular time period on an adjustable rate mortgage (ARM).

Caps (Lifetime)
Limits how much the interest rate can climb during the life of the loan on an adjustable rate mortgage (ARM).

Closing
For mortgage loans, the of signing mortgage documents, paying out funds, and transferring ownership of the property, if necessary.

Collateral
Something of value that a lender can take as compensation if a borrower does not repay a loan. With mortgage loans, the property serves as collateral.

Community Reinvestment Act (CRA)
A law that obligates lenders to serve minority communities.

Conversion Option
The option some adjustable-rate mortgages (ARM) offer to, after loan origination, change the adjustable interest rate to a fixed interest rate at the borrowers request.

Cost of Funds Index (COFI)
Certain adjustable-rate mortgages (ARM) are tied to this index and go up or down accordingly. It is based on the weighted monthly average advances, cost of deposits, etc. of members of the Federal Home Loan Bank of San Francisco.

Credit History
A record of a persons repayment record and debts. This record is used to estimate how likely it is a that certain borrower will repay a loan.

Credit Life Insurance
An insurance policy that pays off a certain debt or credit account if the borrower dies before satisfying the debt.

Credit Rating (Credit or FICO Score)
The means by which a borrowers credit record is rated. Credit history, debt payment history, current debts, and credit types are all considered when calculating an individuals credit rating. A credit rating will fall between 350 to 900. A high rating increases the likelyhood that a lender will approve a loan. A rating above 700 is generally considered to be very good, while below 620 is subprime.

Credit Report
A report from a credit agency detailing a persons mortgage history, credit cards, bank loans, and public financial records.

D

Debt-to-Income Ratio
Total monthly debt in relation to your gross income, which is normally expressed as a percentage.
Here is an example:
To qualify for a FHA loan your debt-to-income ratio must be 41% or less. To calculate the debt-to-income ratio of a person with a pre-tax yearly income of $30,000, multiply $30,000 by .41 (41%) -- which results in 12,300 -- and then divide 12,300 by 12 (the number of months). The result is $1,025, which represents the maximum allowable debt-to-income ratio. This shows the maximum allowable amount of your gross income (pre-tax salary) that can go toward satisfying your debt obligations per month -- such as, mortgage payments, insurance premiums, car payments, etc.
Formula: (gross income x debt percentage)/12

Default
Failure to comply with the terms of a mortgage loan by, for example, not making a monthly payment.

Deferred interest
See Negative Amortization.

Delinquency
Failure to make payments on time, which can lead to foreclosure.

Discount Point
A Tax deductible fee that lowers the amount a borrower will pay in interest. Normally, this is payed at closing. A discount point equals 1% of the loan amount.

Down Payment
Money payed that reduces the principal.

E

Equal Credit Opportunity Act (ECOA)
A federal law that obligates lenders to make credit equally available no matter what the applicant's race, color, age, sex, religion, national origin, or marital status may be.

Equity
The fair market value of a home minus any debt against the home. For example, if a home that can be sold for $200,000 has $120,000 owed on the mortgage, the home has $80,000 worth of equity.

Escrow
Something of value -- for example, money or an important document -- left with a third party until a certain condition has been met. Money from a borrower to be used to pay taxes or insurance premiums are often held by a lender until they become due. Escrow accounts assure that money will always be available for these payments.