Mortgage Glossary

Adjustable Rate Mortgage (ARM): A mortgage in which the interest changes periodically, according to corresponding fluctuations in an index. All ARMs are tied to indexes.

Amortization:  Repayment of a mortgage loan with periodic payments of principal and interest. The payments are calculated so that the debt is paid off at the end of a fixed period.

Annual Percentage Rate (APR):  This is not the note rate on your loan. It is a value created according to a formula intended to reflect the true annual cost of borrowing, expressed as a percentage.

Appraisal: A report prepared by a qualified real estate appraiser which creates an estimate of the fair market value of a property.

Balloon Mortgage:  A mortgage loan that requires the remaining principal balance be paid at a specific point in time. For example, a loan may be amortized as if it would be paid over a thirty year period, but requires that at the end of the tenth year the entire remaining balance must be paid.

Base Rate:  An Interest Rate that is charged by Banks in Bermuda.   

Bridge Loan: A loan obtained by those who have not yet sold their previous property, but must close on a purchase property. The bridge loan becomes the source of their funds for the down payment.

Certificate of Occupancy:  A certificate issued by a governmental department stating that the property complies with all codes, ordinances and regulations and may be occupied.

Closing:  The "closing" is a meeting where all of the real estate and mortgage documents are signed and money changes hands.

Closing Costs:  Fees paid at a mortgage closing. Some examples of closing costs are title insurance, attorney fees, appraisal fees, recording fees and taxes.

Closing Date:  In most cases, the date which the sale of a property becomes final and the new owner takes possession.

Collateral:  In a home loan, the property is usually pledged as collateral. The borrower risks losing the property if the loan is not repaid according to the terms of the mortgage or deed of trust.

Conveyance:  The transfer of property from one owner to another.

Credit Score:  A numerical rating provided on a credit report that establishes creditworthiness based upon a person's past credit/payment history and their current credit standing.

Debt-to-Income Ratio:  Relationship of a borrower’s monthly payment obligation on long-term debts divided by gross monthly income, expressed as a percentage.

Deed: The legal document conveying title to a property.

Default: Failure to make a mortgage payment within the time frame specified in mortgage loan agreement.  

Earnest Money Deposit:  A deposit made by the home buyer to show that he or she is serious about buying the house.

Equity:  A homeowner's financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on its mortgage and other liens.

Escrow:  An item of value, money, or documents deposited with a third party to be delivered upon the fulfilment of a condition. For example, the earnest money deposit is put into escrow until delivered to the seller when the transaction is closed.

Escrow Account:  Once you close your purchase transaction, you may have an escrow account or impound account with your lender. This means the amount you pay each month includes an amount above what would be required if you were only paying your principal and interest. The extra money is held in your impound account (escrow account) for the payment of items like property taxes and homeowner’s insurance when they come due. The lender pays them with your money instead of you paying them yourself.

First Mortgage:  A mortgage whose lien is superior to the lien of any other mortgage on the same property. This lien is superior either because it was recorded prior to all other mortgages or because the mortgagee of another mortgage which had been recorded ahead of this mortgage has agreed to have a lien subordinated to the lien of this mortgage.

Fixed Rate Mortgage:  A mortgage in which the interest rate does not change during the entire term of the loan.

Foreclosure:  The legal process by which a borrower in default under a mortgage is deprived of his or her interest in the mortgaged 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.

Home Equity Line of Credit:  A mortgage loan, usually in second position, that allows the borrower to obtain cash drawn against the equity of his home, up to a predetermined amount.

Interim Interest: Interest owned by the borrower to the lender on the mortgage loan from the day of the closing to the date covered by the first payment.

LIBOR:  The London Interbank Offered Rate Index is the average yield of interbank offered rates for one-year U.S. dollar denominated deposits in the London Market.

Lien:  A legal claim against a property that must be paid off when the property is sold. A mortgage or first trust deed is considered a lien.

Loan-to-Value Ratio:  The mortgage amount divided by the lower of the purchase price or the appraised value of the property. This ratio is expressed as a percentage. A lender will use this ratio to determine the maximum it will lend against a property.

Margin:  The difference between the interest rate and the index on an adjustable rate mortgage. The margin remains stable over the life of the loan. It is the index which moves up and down.

Mortgage:  A legal document that pledges a property to the lender as security for payment of a debt. The mortgage may also include the terms of repayment of the debt.

Mortgagee:  The lender in a mortgage agreement.

Mortgagor:  The borrower in a mortgage agreement.

Offer Letter:  A written offer by the lender to the applicant, which states the terms under which the lender agree to make a mortgage loan.

Origination Fee:  On many loans, the loan origination fee is one percent of the loan amount, but additional points may be charged which are called "discount points." One point equals one percent of the loan amount. On a conventional loan, the loan origination fee refers to the total number of points a borrower pays.

Pre-Approval:  A loosely used term which is generally taken to mean that a borrower has completed a loan application and provided debt, income, and savings documentation which an underwriter has reviewed and approved. A pre-approval is usually done at a certain loan amount and making assumptions about what the interest rate will actually be at the time the loan is actually made, as well as estimates for the amount that will be paid for property taxes, insurance and others. A pre-approval applies only to the borrower. Once a property is chosen, it must also meet the underwriting guidelines of the lender. Contrast with pre-qualification.

Pre-payment:  Any amount paid to reduce the principal balance of a loan before the due date. Payment in full on a mortgage that may result from a sale of the property, the owner's decision to pay off the loan in full, or a foreclosure. In each case, prepayment means payment occurs before the loan has been fully amortized.