Glossary of Banking Terms

A

Abstract of Title
A comprehensive written summary documenting all transactions and legal matters associated with the ownership of a specific piece of land, starting from the original transfer of ownership to the present day.

Acceptance
The formal agreement by a buyer or seller to the terms outlined in a contract, signaling their commitment to proceed with the transaction.

Account Termination Fee
A charge that may apply if a home equity line of credit is paid off and closed within the initial five years. Reducing the balance to zero does not trigger this fee.

Additional Principal Payment
A borrower’s payment that exceeds the scheduled principal, aiming to reduce the loan balance faster, cut interest costs, or complete repayment ahead of schedule.

Adjustable-Rate Mortgage (ARM)
A loan where the interest rate and monthly payments can fluctuate based on market conditions, usually with a capped limit on how much the rate can change in a set period or over the life of the loan. Often referred to as a variable-rate mortgage.

Adjustment Cap
A restriction on the amount by which an adjustable-rate mortgage’s interest rate can be increased or decreased during one adjustment period.

Adjustment Date
The scheduled day when the interest rate of an adjustable-rate mortgage is recalculated.

Adjustment Period
The time frame between interest rate adjustments for an adjustable-rate mortgage.

Affordability Analysis
An initial assessment of a buyer’s financial readiness to purchase a home, considering income, debts, available funds, and projected costs like loan terms, taxes, and insurance.

Amortization
The gradual repayment process for a loan’s principal. Early payments typically focus on interest, while later payments target the remaining principal balance.

Amortization Table or Schedule
A detailed plan showing the breakdown of each monthly mortgage payment into principal and interest, allowing borrowers to track their progress over the loan term.

Amortization Term
The time span over which a loan is scheduled to be fully repaid, expressed in months. For instance, a 15-year mortgage has an amortization term of 180 months.

Annual Adjustment Cap
The annual limit on the amount that a variable interest rate can change, preventing excessive fluctuations within a single year.

Annual Percentage Rate (APR)
The yearly cost of borrowing money, represented as a percentage, which includes not only interest but also fees such as mortgage insurance, closing costs, and discount points to offer a fuller view of loan expenses.

Application Fees
Nonrefundable costs paid when submitting a loan application, covering services like credit reports and property appraisals.

Appraisal or Appraised Value
A professional estimate of a property’s market value, often used to support loan decisions for home purchases.

Appraisal Contingency
A condition in a sales agreement that requires the property to be appraised at or above the offered price.

Appreciation
The rise in a property’s value over time, influenced by factors like location, property condition, and neighborhood trends, which can increase the owner’s equity.

Approved Term (After Approval)
The set period for full loan repayment, determining monthly payments, payment schedule, and total interest over the loan’s duration.

Approved Term (Before Approval)
The anticipated timeframe for loan repayment, which helps calculate payment amounts and schedule, as well as total interest for the loan.

Assessed Value
A property’s value determined by a tax assessor, which is used to calculate property taxes.

Assignment
The process of transferring rights or obligations under a contract, such as loan terms, from one party to another.

Assumable Loan
A loan that allows a new borrower to take over the existing loan terms, such as interest rate and payment schedule, typically with a fee, when the property is sold.

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B

Balance Sheet
A snapshot financial statement listing assets, liabilities, and net worth at a specific date, typically organized in a table format.

Balloon Loan
A loan structure offering lower monthly payments for an initial period, followed by a larger final payment at the end of the term. While it can reduce monthly costs, it may result in higher total interest paid.

Base Rate
An interest rate standard or benchmark used to set rates for variable loans, including adjustable-rate mortgages, auto loans, and credit cards.

Basis Point
A unit of measure equal to 0.01% of a percentage. For instance, a 50 basis point fee on $200,000 would equate to 0.50% or $1,000.

Bond
A debt security that pays interest and has a maturity date. In real estate, a bond often represents a secured debt obligation backed by a mortgage or trust deed.

Break-Even Point
The stage at which income matches expenses. Also used to determine the time needed to recover costs, such as discount points paid to reduce mortgage rates. For example, if $3,600 is paid for points to reduce monthly payments by $100, the break-even period would be 36 months.

Bridge Loan
A short-term financing option to bridge the period between two loans. For example, it allows a borrower to close on a new home purchase before the sale of the current home.

Broker
An intermediary who arranges financing or negotiates agreements between parties without directly providing the loan funds.

Broker Fees
Charges applied by a real estate or mortgage broker for their services in facilitating a real estate transaction.

Buydown
A one-time payment made by a lender or builder to reduce the mortgage interest rate temporarily, often for the first 1-3 years of the loan, resulting in lower monthly payments during that period.

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C

Call Option

A loan provision that allows the lender to demand full repayment of the outstanding balance after a specified period or for a designated reason.

Cap

A limit on the increase of a variable interest rate in an adjustable-rate mortgage (ARM). Caps may apply to each adjustment period and/or over the loan’s entire term.

Cash Available for Closing

The funds a borrower can use to pay the down payment and closing costs on a loan. It excludes funds required for reserves or from specific sources as outlined in lending guidelines.

Cash to Close

The total amount a borrower needs in liquid cash to complete the closing of a loan, typically covering down payment and closing costs.

Cash-Out Refinance

A refinancing transaction where the new loan amount exceeds the outstanding balance of existing mortgages plus closing costs, with the difference provided to the borrower as cash.

Ceiling Rate

The highest possible interest rate that can be charged on a variable-rate loan, such as an ARM.

Certificate of Eligibility

A document issued by the federal government certifying a veteran’s qualification for a Department of Veterans Affairs (VA) loan.

Certificate of Reasonable Value (CRV)

A VA-issued document that determines the maximum value and loan amount for a VA loan based on an appraisal.

Certificate of Title

A statement from an abstract or title company or attorney that verifies who holds the title to a property based on public records.

Chain of Title

A documented history of all records affecting a property’s title, tracing ownership back to the earliest record.

Clear Title

A title free from liens or disputed ownership claims, making it marketable.

Close

The process in which a borrower signs and executes all loan documents. In some cases, a three-day right of rescission period may apply, delaying fund availability.

Closed

Indicates that no further action is required for a particular item in a loan or real estate transaction.

Closing

The meeting where all loan documents are signed, dated, and notarized, and the property ownership is transferred. Also called settlement.

Closing Costs

Expenses incurred during the loan closing process, including fees for attorneys, title searches, appraisals, and credit reports. These costs are generally about 3% of the loan amount.

Closing Date

The specific date set for signing the loan documents.

Closing Disclosure (CD)

A document that provides key loan details, including interest rate, monthly payments, and total closing costs. Borrowers must receive this document three days before closing.

Closing Statement

A detailed account of funds exchanged between the buyer and seller before the sale of a property.

Co-Borrower

An additional person who is equally responsible for repaying a loan and has equal rights to loan proceeds.

COBRA (Consolidated Omnibus Budget Reconciliation Act)

A federal law requiring employers with more than 20 employees to offer continued health care coverage for 18 months to departing employees at their own expense.

Coinsurance

A risk-sharing arrangement in an insurance policy between the insurer and the insured, often based on the policy amount relative to the property’s value.

Collateral

An asset pledged as security for a loan, which may be claimed by the lender if the borrower defaults.

Collection

Efforts by a lender to bring a delinquent loan up to date, possibly leading to foreclosure if necessary.

Combination Loan

A loan that combines a first mortgage with a secondary mortgage, typically allowing up to 80% financing of the property’s value. It can help avoid higher rates associated with jumbo loans.

Combined Liens

The total outstanding balances of all mortgages on a property, used to assess total available equity.

Combined Loan-to-Value Ratio (CLTV)

A ratio representing the sum of a first mortgage balance plus any available home equity credit, divided by the home’s appraised value.

Commitment Letter

A formal offer by a lender stating the loan amount and terms for which a borrower qualifies.

Comparables (Comps)

Similar properties in size, location, and amenities that have recently sold and are used by appraisers to estimate a property’s market value.

Compound Interest

Interest calculated on the principal and previously accrued interest, leading to exponential growth of the balance.

Conforming Loan

A mortgage that meets standards set by Fannie Mae and Freddie Mac, making it eligible for purchase by these agencies.

Construction Loan

A short-term loan to cover home construction costs, with funds released in intervals as work progresses.

Contingency

A specified condition in a sales contract that must be met before completing the sale, commonly related to inspections or loan approval.

Contractual Payment: First Mortgage

The required monthly payment on a mortgage, which may include principal, interest, and potentially funds for insurance and property taxes.

Contractual Payment: Home Equity Line of Credit

The monthly payment for a home equity line, which may vary based on loan usage and terms, sometimes including interest-only payments.

Conventional Loan

A mortgage not insured or guaranteed by the federal government, which may be conforming or non-conforming.

Convertibility Clause

A provision allowing an adjustable-rate mortgage (ARM) to be converted to a fixed-rate mortgage at specified times.

Convertible ARM

An adjustable-rate mortgage that can be converted to a fixed-rate mortgage under defined conditions.

Convey

To transfer title to a property through a deed or contract.

Co-Signer

A secondary signer on a loan who shares payment responsibility without benefiting from the loan proceeds.

Cost of Funds Index (COFI)

An index reflecting the average cost of funds for 11th District Federal Home Loan Bank members, used to set adjustable-rate mortgage (ARM) rates.

Covenant

A condition in a mortgage or deed specifying property use, with potential penalties for violation.

Credit Bureau

An organization that collects financial data about individuals and provides this information to lenders. Major credit bureaus include Equifax, Experian, and TransUnion.

Credit Limit

The maximum borrowing amount available under a line of credit.

Credit Monitoring Service

A service that monitors credit activity for signs of identity theft to limit potential damage.

Credit Report

A document detailing an individual’s credit history, debts, and payment habits, used by lenders to assess creditworthiness.

Credit Risk

The likelihood that a borrower will meet their payment obligations.

Credit Score

A numerical score indicating a borrower’s creditworthiness, with higher scores typically qualifying for better loan terms.

Creditor

An individual or institution from whom a person borrows money.

Creditworthiness

An assessment of a borrower’s ability to repay debts.

Cumulative Interest

The total interest accrued over the term of a loan.

Curtailment

An extra payment applied to reduce a loan’s principal balance.

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D

Debt Consolidation
A single loan taken out to pay off multiple debts, typically over a longer term. This is often a popular use for a home equity line of credit.

Debt-to-Income Ratio
Your total monthly debt payments (such as loans, credit cards, and court-ordered payments) divided by your gross monthly income before taxes, expressed as a percentage. Federal Housing Administration (FHA) guidelines suggest that monthly mortgage payments should be no more than 31% of monthly income before taxes, and total monthly debt should be no greater than 43% of monthly income before taxes.

Deed (Warranty or Quit-Claim)
A legal document that transfers ownership of real estate from the seller to the buyer, delivered to the buyer at closing. Before making a loan, lenders usually require a title search or title report to ensure the borrower legally owns the real estate being used to secure the loan.

Deed of Trust
A document used in some states in place of a mortgage, where the title is vested in a trustee to secure repayment of the loan.

Default
Failure to make mortgage payments on time or to meet other terms of a loan agreement. Default can lead to foreclosure.

Delinquency
The failure to make payments on time.

Discount Points
See: Points

Down Payment
The amount of cash paid upfront toward the purchase of a home to cover the difference between the purchase price and the mortgage loan. Down payments often range from 5% to 20% of the sales price, depending on factors such as loan type, lender requirements, and credit history.

Draw
The act of obtaining an advance against your available line of credit.

Draw Period
The period during which a borrower can obtain advances (or draws) from an available line of credit. At the end of the draw period, the borrower may have the option to renew the credit line or may be required to pay the outstanding balance in full or in monthly installments.

Due-on-Sale Provision
A clause in a mortgage loan allowing the lender to demand full repayment if the borrower sells the property that serves as security for the loan.

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E

Earnest Money
A good-faith deposit put down by a buyer to show serious intent to purchase a property. This amount is typically provided at the signing of a purchase agreement.

Encumbrance
A financial or legal claim on a property, such as unpaid taxes, mortgages, or leases, which can limit the owner’s rights or title to the property.

Equal Credit Opportunity Act (ECOA)
A federal law that mandates lenders and creditors to offer credit without bias related to race, color, religion, national origin, age, gender, marital status, or income derived from public assistance.

Equity
The portion of your home’s current market value that you own outright, calculated by subtracting any remaining mortgage or loan balances from the home’s appraised value.

Escrow
Funds placed with a neutral third party to be held until specific terms are fulfilled or a certain date arrives, commonly used in property transactions.

Escrow Account
An account maintained by a lender where funds for homeowner’s insurance and property taxes are stored, allowing the lender to pay these expenses on the homeowner’s behalf, avoiding large, lump-sum payments.

Escrow Impound Account
A special type of escrow account managed by the lender to ensure that property taxes and insurance premiums are paid on time, with funds added as part of monthly mortgage payments.

Escrow Analysis
An annual (or event-based) review that checks the funds collected in an escrow account against the actual amounts required for taxes and insurance, helping to estimate the escrow payment needed for the upcoming year.

Escrow Overage
An excess balance in an escrow account, often resulting from reduced property taxes or insurance costs. When this occurs, the homeowner may receive a refund or have the surplus applied to future payments.

Escrow Shortage
A shortfall in the escrow account balance, typically due to increased property taxes or insurance premiums. Homeowners may be required to make up the deficit with additional payments or higher monthly contributions.

Extra Payment/Payment Overage
When a homeowner pays more than the required monthly amount, the additional funds can either be used toward the next month’s payment or applied to the principal balance, potentially reducing future interest costs.

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F

Fair Credit Reporting Act (FCRA)
This federal law grants borrowers specific rights when interacting with credit bureaus. It mandates that credit bureaus provide accurate credit histories to authorized parties evaluating applications for credit, insurance, employment, or loans.

Fair Market Value
The estimated price at which a property would likely sell, typically determined through a professional appraisal.

Fannie Mae
A government-backed organization, officially known as the Federal National Mortgage Association, that purchases and securitizes mortgages for resale in the secondary market.

Federal Housing Administration (FHA)
Part of the U.S. Department of Housing and Urban Development, the FHA insures specific residential mortgages and sets underwriting standards for these loans and housing construction.

Fee Simple
The highest form of property ownership, giving the owner full rights to use, lease, sell, or build on the land.

FHA Home Loan
A type of mortgage insured by the FHA, often providing options not available in traditional financing. FHA insurance protects the lender if a borrower defaults, not the borrower themselves.

FICO®
Developed by Fair Isaac Corporation, FICO scores are numerical credit risk assessments ranging from 300 to 850, with higher scores indicating lower risk.

Finance Charge
The total cost of consumer credit expressed in dollars, including interest, origination points, and some additional charges over the life of the loan.

First Mortgage
The primary lien on a property, giving it priority over any other claims on the home.

Fixed-Rate Mortgage
A home loan with a constant interest rate throughout the life of the loan.

Fixed-Rate Option (Fixed-Rate Loan Option)
A feature on certain home equity lines that allows borrowers to lock in the interest rate and payments on a portion of their balance for a specified period, often for a fee.

Floating Rate
An interest rate that has not been locked in, meaning it may vary until finalized based on market conditions when the rate is locked.

Flood Certification
An official evaluation indicating whether a property is located in a flood-prone area, often required by lenders.

Flood Insurance
Protection against flood-related damage, typically mandatory if the property lies in a designated flood zone.

Forbearance
A temporary pause or reduction in loan payments granted due to financial hardship, during which interest may continue to accrue.

Foreclosure
The legal process where a lender sells property secured by a loan that is in default to recover the owed amount. If the property sale does not cover the loan balance, the borrower may owe the difference.

Forfeiture
The loss of money, property, or rights due to a violation of legal terms.

Form 1098
A tax document used to report the total interest and points paid on a mortgage within a given tax year.

Freddie Mac
A government-backed entity, also known as the Federal Home Loan Mortgage Corporation, that buys and securitizes mortgages for resale in the secondary market.

Funding Date
The date when loan funds become available for the borrower or are disbursed as needed for the loan’s purpose.

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G

Good Faith Estimate (GFE)

A detailed, itemized outline of estimated costs associated with a home loan, which the lender must provide to the borrower within three business days of the loan application.

Government Loan
A loan backed by agencies like the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), or Rural Housing Service (RHS). These loans are insured or guaranteed by the government, which protects the lender if the borrower defaults, enabling lenders to offer unique options and benefits not typically available through standard financing.

Government National Mortgage Association (GNMA or Ginnie Mae)
A government-owned corporation under the U.S. Department of Housing and Urban Development (HUD), established by Congress in 1968. Ginnie Mae manages special assistance loan programs previously overseen by Fannie Mae.

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H

Hazard Insurance
Also known as Homeowners Insurance.

Home Equity Line of Credit (HELOC)
A revolving line of credit secured by your home, typically with a 30-year term divided into a 10-year draw period followed by a 20-year repayment period. It can be used for major expenses like home improvements or debt consolidation. During the draw period, funds can be accessed up to your credit limit via checks, debit cards, or online transfers.

Homeowners Insurance
Insurance coverage for damages to your home due to fire, natural disasters, theft, vandalism, and liability for injuries on your property. Lenders may require you to list them as a payee in case of claims.

HUD (Department of Housing and Urban Development)
A U.S. government agency focused on housing programs and urban development. HUD manages programs like the Federal Housing Administration, enforces RESPA, and supervises agencies such as Fannie Mae and Freddie Mac.

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I

Impound Account
Also referred to as an Escrow Impound Account.

Impounding
The process by which a lender collects funds from a borrower and places them into an account to cover property taxes and insurance premiums when they are due.

Income
Consistent earnings from wages, commissions, investments, rental income, or other sources.

Income Property
Real estate designed or improved to generate income.

Index
A financial benchmark used in a mortgage or credit agreement to determine rate adjustments at set periods. The new rate charged is generally calculated as the index rate plus or minus a margin, subject to any caps. Common indices include the Secured Overnight Financing Rate (SOFR) and Treasury-indexed ARMs (T-Bills).

Inflation Rate
The percentage increase in the cost of consumer goods over a specific time frame.

Initial Advance
The process of securing funds against available credit on a line of credit.

Initial Advance at Closing
When selecting a funds transfer option to lower your rate, maintaining a balance of $25,000 for the first three billing cycles can reduce your approved rate by .25% for the life of the line.

Initial Advance of $25,000 or More
A discount offered for an advance of $25,000 or greater, requiring the balance to remain for three full billing cycles.

Initial Draw Amount
The amount a borrower is permitted to request from a home equity or construction loan at closing.

Initial Rate
The introductory interest rate, often lower than the index plus margin, that may adjust after an initial period.

Inquiry
A request for a credit report made by either you or a company considering extending credit.

Installment Loan
A loan repaid in set, equal payments.

Insurance
A contract offering compensation for specific losses in return for regular payments, known as premiums.

Insurance Binder
Temporary documentation of insurance coverage, which expires on a set date unless a permanent policy is established.

Insured Mortgage
A loan protected by insurance in the event of default, which safeguards the lender.

Interest Accrual Rate
The rate at which interest builds on the mortgage, often also used to calculate monthly payments.

Interest-Only Loan
A loan in which only interest payments are made for a period, reducing monthly payments but not principal balance, resulting in larger payments later.

Interest Rate
The annual cost of borrowing, expressed as a percentage, excluding additional fees. See also: Annual Percentage Rate (APR).

Interest Rate Buydown
Refer to: Buydown.

Interest Rate Cap
A maximum limit on how much a variable interest rate can rise per adjustment period or over the life of a loan. Commonly, rate increases are capped between 2-5% during adjustment periods, with a lifetime cap of around 6%.

Investment Property
Real estate purchased to generate rental income or for future resale after value appreciation.

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J

Judgment
A formal ruling by a court declaring that one individual owes a specified amount to another. In some jurisdictions, this ruling may result in a lien being placed on the debtor’s real estate as security for the creditor’s payment.

Jumbo Loan
A type of nonconforming loan where the borrowed amount exceeds the limits set by Fannie Mae and Freddie Mac, making it ineligible for sale to these entities. Some regions may have temporarily elevated conforming loan limits. Due to the larger sums involved, lenders may impose additional fees and restrictions.

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L

Liabilities
The total debts or financial obligations of an individual, which encompass both long-term and short-term debts, as well as potential losses stemming from legal claims.

Liability Insurance
Refer to: Homeowners insurance.

Lien
A legal claim made by a creditor against a borrower’s property, serving as collateral for a debt.

Lien Holder
An individual or entity that has established a lien on a property.

Lifetime Adjustment Cap
A restriction on the maximum increase of a variable interest rate over the entire duration of a loan.

Line of Credit
An arrangement in which a lender agrees to extend credit up to a predetermined limit for a specific period. In the case of a home equity line of credit, this credit line is secured by the borrower’s home.

Loan Commitment
An official notice from a lender indicating that a borrower’s loan has received conditional approval, detailing the terms under which the lender agrees to provide the loan.

Loan Estimate (LE)
A document designed to aid consumers in understanding key loan terms and estimated costs associated with a mortgage prior to submitting a complete application. After providing six essential pieces of information (name, income, social security number, property address, estimated property value, and desired loan amount), the lender is mandated to furnish this form. All lenders are required to use a standardized loan estimate form, facilitating comparison and shopping for mortgages.

Loan Modification
Adjustments made to one or more terms of an existing loan.

Loan Origination
The procedure through which a mortgage lender provides a home loan and formally records a mortgage against the borrower’s property as security for repayment.

Loan Term
Refer to: Term.

Loan-to-Value Ratio (LTV)
The percentage ratio that compares the unpaid principal balance of a loan (or credit limit in the case of a line of credit) to the appraised value of the collateral. For instance, if a property appraises at $100,000 and has an $80,000 first mortgage, the LTV would be 80% (calculated as $80,000 / $100,000).

Lock Period
The timeframe before closing during which a borrower can secure an interest rate for their loan. Lock periods generally range from 30 to over 90 days; longer lock periods typically incur higher costs in points or interest.

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M

Manufactured Housing
A type of structure that is partially or fully built at a different location and subsequently transported to the property, typically placed on a permanent foundation. Manufactured homes may or may not be classified as mobile homes.

Margin
The fixed number of percentage points that a lender adds to or subtracts from the index rate to calculate interest rate adjustments. This margin remains constant throughout the life of the mortgage and is detailed in the promissory note.

Maturity Date
The date on which the total outstanding principal, interest, and any fees on a loan must be fully repaid.

Miscellaneous Payment
Payments that can be made through Online Banking and Mobile, which will be applied to the borrower’s account according to the loan’s terms and conditions. This may involve allocation to fees, principal, or other categories, such as unapplied funds if the amount is less than the current contractual payment due. For more details, see the FAQ on applying home loan payments in the Making Mortgage Payments section.

Mobile Home
A type of dwelling constructed on a wheeled chassis, allowing it to be moved from one location to another.

Modular Home
A home that is built in a factory and then assembled on-site, designed to have the appearance and features of a traditional site-built residence.

Mortgage
A legal document that grants a lender a lien on real estate to secure the repayment of a loan. Mortgage loans typically have terms ranging from 10 to 30 years, after which the loan must be fully paid off. Mortgages are also referred to as deeds of trust or security deeds.

Mortgage Insurance
Insurance that protects lenders in case a borrower defaults on a conventional loan. Most lenders will require mortgage insurance if the borrower’s down payment is less than 20%. This is commonly known as private mortgage insurance (PMI).

Mortgage Points
Refer to: Points.

Mortgage Type
Generally categorized into three main mortgage programs: Federal Housing Administration (FHA) loans, Department of Veterans Affairs (VA) loans, and conventional mortgage loans. VA loans are exclusively available to qualifying veterans and surviving spouses, while FHA loans are open to all eligible borrowers. Both VA and FHA loans are backed by the federal government, providing insurance to the lender in case of borrower default. Conventional loans are also available to qualifying borrowers but do not have federal insurance or guarantees.

Multi-Family Residence (2 to 4 Units)
A residential property consisting of 2 to 4 separate housing units, such as a duplex, triplex, or quadplex.

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N

Negative Amortization
This occurs when monthly payments do not cover the total interest due on the loan. The unpaid interest is added to the remaining balance, resulting in the borrower owing more than the original loan amount over time.

New Line Amount
The total of the existing credit line plus any additional credit requested by the borrower.

No Closing Cost Loan
A type of loan where the borrower is not required to pay cash out-of-pocket for typical closing costs at the time of closing. Instead, the lender usually includes these costs in the principal balance of the loan or charges a higher interest rate to cover them.

Nonconforming Loan
Refer to: Jumbo loan.

Nonowner Occupied
Refers to properties where the owner does not reside.

Note
A written agreement in which the signer commits to pay a specified sum of money to a designated person or company at a defined date or upon demand.

Note Rate
The interest rate specified in a mortgage note.

Notice of Default
A formal written notification to a borrower indicating that a default has occurred, with a warning that legal action may follow.

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O

Option ARM
A type of adjustable-rate mortgage (ARM) that provides borrowers with a choice of four monthly payment options. This flexibility helps borrowers manage their payments in a rising interest rate environment while also allowing them to take advantage of falling interest rates.

Origination
The date when the proceeds of a loan are disbursed to the borrower.

Origination Date
The date on which a loan is funded or the funds are made available to the borrower.

Origination Fee
A fee charged by a lender to cover processing costs associated with originating a mortgage loan. This fee is usually a percentage of the loan amount, often around 1%, and is typically expressed in the form of points.

Owner Financing
A property transaction in which the seller provides all or part of the financing needed to purchase the property.

Owner-Occupied
Refers to a property that the owner resides in as their principal residence.

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P

Payment Cap
A limit on how much a monthly payment can increase at any one time on an adjustable-rate mortgage (ARM). While some ARMs have payment caps along with annual or lifetime interest rate caps, these caps do not limit the amount of interest charged and may lead to negative amortization.

Payment Change Date
The date when a new monthly payment amount becomes effective on an adjustable-rate mortgage (ARM), typically occurring the month after the interest rate adjustment date. Borrowers receive a notification 30 days prior to this change.

Payoff
The full payment of the outstanding balance of a loan, or the amount required to settle the remaining balance completely.

Per Diem Interest
The interest that accrues daily on a loan, calculated by multiplying the outstanding loan balance by the annual interest rate and dividing that figure by 365.

PITI
An acronym for Principal, Interest, Taxes, and Insurance, representing the total monthly housing expense.

Points
Amounts paid to a lender at closing to lower (or buy down) the interest rate on a loan. One discount point equals one percentage point of the loan amount. For instance, 2 points on a $100,000 mortgage would cost $2,000. Negative points indicate a credit at closing to help reduce closing costs.

Preapproval
A lender’s conditional agreement to provide a specific loan amount to a homebuyer under predetermined terms.

Prearranged Refinancing Agreement
An agreement, either formal or informal, between a lender and borrower where the lender commits to offer favorable refinancing terms in the future, incentivizing the borrower to accept the original mortgage.

Preforeclosure Sale
Also known as a short sale, this is a sale of a property that occurs when the owner is in default and the sale price is less than the outstanding mortgage balance.

Prepaid Expenses
Expenses paid in advance, such as escrows for taxes and insurance, which are typically settled at closing.

Prepaid Interest
Interest collected at the closing of a first mortgage, covering the period from the loan disbursement date to the start of the next payment period.

Prepayment
Any amount paid toward reducing the principal balance of a loan before the scheduled principal payment is due.

Prepayment Penalty
A fee charged by some lenders if a loan is paid off before the specified term, typically applicable in the early years of the mortgage. This penalty is a lump sum paid in addition to the loan balance.

Prequalification
The initial process where a prospective borrower provides financial and personal information to estimate how much they may qualify for when purchasing a home. Prequalification does not guarantee a loan commitment.

Prime Rate
The interest rate that banks charge their most creditworthy customers. The U.S. Prime Rate is based on a survey of the prime rates of the ten largest banks in the U.S. It influences other rates, including variable rates for credit cards and mortgage interest rates.

Principal & Interest
The principal refers to the original loan amount borrowed, while interest is the cost paid for borrowing that money. Together, they make up most of the mortgage payment, which may also include escrow payments for taxes and insurance.

Principal Balance
The remaining amount of the loan that has not yet been paid off, excluding interest and other charges.

Principal Payment
The portion of the monthly payment that reduces the principal balance of a home loan. This term also applies to any prepayments made toward the principal.

Private Mortgage Insurance (PMI)
Insurance required for conventional loans that protects the lender in case of default, typically needed when the down payment is less than 20%.

Processing Fee
A fee charged to cover the administrative costs involved in processing a loan application.

Promissory Note
A written agreement in which the signer promises to repay a specific amount of money within a designated timeframe.

Purchase Agreement
A formal contract between the buyer and seller outlining the terms and conditions of the property sale.

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Q

Qualifying Ratios
Calculations used to assess a borrower’s eligibility for a mortgage. These ratios consist of two main components: the housing expense ratio, which measures the housing costs (including mortgage payments, property taxes, and insurance) as a percentage of the borrower’s income, and the total debt ratio, which evaluates the borrower’s total monthly debt obligations (including housing costs, credit cards, and other loans) as a percentage of their income. These ratios help lenders determine the borrower’s ability to manage monthly payments effectively.

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R

Rate
The interest charged on a loan, expressed as a percentage.

Rate Cap
See: Interest Rate Cap.

Rate Lock
A lender’s commitment guaranteeing a specific interest rate for a defined period. This lock protects against rate fluctuations until the loan closes. If the lock expires, a new rate must be established.

Rate Lock Expiration
The end of the specified period for a rate lock, after which the loan’s interest rate may fluctuate with market conditions.

Rate Reduction Option
A feature in some fixed-rate mortgages that allows borrowers to lower their interest rate later without refinancing, typically without needing to requalify for the loan.

Real Estate Settlement Procedures Act (RESPA)
A consumer protection law that mandates disclosure of settlement costs, prohibits certain fees, regulates escrow accounts, and requires notification to borrowers regarding loan servicing transfers.

Reamortize
To establish a new amortization schedule for the remaining balance of a mortgage loan, usually after the interest-only period ends.

Recorder
A public official responsible for recording legal documents affecting property titles, such as deeds and mortgages.

Recording
The process of officially noting a legal document affecting property titles in public records.

Recording Fee
A fee charged for the official recording of documents related to property titles.

Reduced Documentation
A method of assessing a borrower’s income for loan qualification without requiring extensive verification documentation.

Refinance
The process of paying off an existing loan with a new one, usually to secure better terms such as lower interest rates or reduced payments.

Rehabilitation Loan
A first mortgage that allows borrowers to purchase or refinance homes while funding necessary repairs, based on the property’s improved value.

Repayment Period
The timeframe designated for fully repaying the outstanding balance of a loan, often seen in home equity lines of credit.

Rescission
The right to cancel a contract, particularly relevant in real estate transactions involving refinancing, where borrowers have three business days to do so.

Reserves
Savings set aside beyond the down payment, required by lenders to cover unexpected expenses, often equivalent to two monthly mortgage payments.

Right of First Refusal
A contractual provision granting one party the first opportunity to purchase or lease property before the owner offers it to others.

Rural Housing Loan
Loans provided by the Rural Housing Service (RHS) for qualified borrowers in rural areas who cannot secure financing elsewhere.

Rural Housing Service (RHS)
An agency within the Department of Agriculture that offers loans to farmers and other qualified individuals for purchasing property in rural areas.

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S

Second Home
A property used part-time by an individual in addition to their primary residence.

Secured Loans
Loans that require the borrower to pledge an asset (such as a car, boat, or real estate) as collateral, giving the lender a lien on the property.

Security
The collateral pledged for a loan. If the borrower defaults, the lender can sell the security to recover the debt.

Settlement
The finalization of a property sale or purchase, including all necessary steps to disburse loan proceeds and establish repayment obligations. See also: Closing.

Settlement Agent
An individual or entity (such as an attorney, title insurer, title agent, or escrow agent) responsible for conducting the settlement process and transferring property title.

Settlement Costs
See: Closing Costs.

Short Sale
A viable alternative to foreclosure where a homeowner sells their property for less than the outstanding mortgage balance, with lender approval, due to financial hardship.

Single-Family Residence
A standalone housing unit that does not share common walls or roofs with neighboring properties, though it may be part of a planned unit development (PUD).

SOFR (Secured Overnight Financing Rate)
A broad measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities.

Start Rate
The initial interest rate for an adjustable-rate mortgage (ARM) or variable-rate home equity line of credit. Also known as an intro rate, it typically offers lower payments initially but may adjust later.

Subordinate Financing
Any mortgage or lien that is subordinate to a first mortgage, meaning it has lower priority in the event of foreclosure and is paid only after the first mortgage is settled.

Swing Loan
See: Bridge Loan.

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T

Term
The duration, typically expressed in years, required to fully repay a loan. The loan term influences payment amounts, repayment schedules, and total interest paid over the loan’s life.

Third-Party Fees
Charges for services provided by individuals or entities other than the borrower or lender, including fees for appraisals, credit reports, title searches, and flood certifications.

Title
Official documentation that proves ownership of a property.

Title Company
An agency that investigates property titles for discrepancies or undisclosed liens and issues title insurance to lenders once the title is verified as clear.

Title Insurance
Insurance that safeguards either the property owner or the lender against potential legal issues affecting ownership of the property.

Title Search
A review of public records to ascertain legal ownership of a property and identify any liens or encumbrances, typically conducted by a title company or attorney.

Total Expense Ratio
See: Debt-to-Income Ratio.

Transaction Fee
A charge applied each time you access funds from your credit line.

Treasury Index
An index used to gauge interest rate fluctuations for certain adjustable-rate mortgages (ARMs), based on U.S. Treasury bill auction results or daily yield curves from actively traded Treasury securities. See also: Prime Rate.

Trustee
A fiduciary responsible for managing or holding property for the benefit of another party.

Truth in Lending Act
A federal law mandating the disclosure of credit terms in a standardized format, aimed at enabling borrowers to compare lending terms across different financial institutions.

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U

Unapplied Funds
A situation where a portion or the entirety of your payment received by Bank of America is placed into a suspense account. For more details, see the FAQ section on how a suspense account works.

Underwriter
The individual responsible for approving or denying home loans based on the lender’s underwriting and approval criteria.

Underwriting
The lender’s evaluation process for determining whether to approve a loan for a potential borrower, assessing factors such as credit, employment, and assets, and aligning this risk with an appropriate rate, term, and loan amount.

Uniform Residential Loan Application (1003)
The standardized loan application form published by the Federal National Mortgage Association (Fannie Mae) and commonly used by lenders.

Unpaid Principal Balance
The total amount borrowed that has not yet been repaid, which may include amounts added to the principal due to loan modifications. Interest may be charged monthly on this balance according to the loan terms.

Unsecured Lines of Credit
Loans or lines of credit that are not backed by collateral, typically offering flexibility in borrowing without requiring an asset as security.

Unsecured Loan
A type of loan that does not require collateral for approval, allowing borrowers to access funds based solely on creditworthiness.

Upfront Costs
The expenses incurred when applying for a loan, which may include application fees and, in some cases, a portion of closing costs required by the lender at the application stage.

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V

VA Loan
A mortgage backed by the Department of Veterans Affairs (VA) for eligible veterans of the U.S. military forces. Also referred to as a government loan.

Vacation Home
A single-family property occupied by the borrower in addition to their primary residence. This property cannot generate income and must not be part of a mandatory rental pool, though it may be rented occasionally to friends and family. Rental income cannot be considered for qualifying the applicant. Properties with 2 to 4 units are not eligible for this classification, which is also known as a second home.

Variable Rate
An interest rate that fluctuates periodically based on an index, such as the prime rate. Payments may increase or decrease as a result of these changes.

Variable-Rate Monthly Minimum Payment
The minimum monthly payment required on a home equity line of credit (HELOC), which includes both principal and interest (minimum of $100). This payment amount can vary each month, depending on the outstanding loan balance and the fluctuating interest rate. The structure is designed to repay the loan balance in substantially equal principal and interest installments over the remaining loan term, based on the balance and rate information calculated monthly.

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W

W-2
An annual wage and tax statement from your employer, detailing your income and the federal and local taxes withheld. This form is submitted to the IRS with your tax return.

Walk-Through
A final inspection conducted shortly before settlement to ensure the property is in the same condition as when the purchase offer was made.

What-If Analysis
An affordability analysis that explores hypothetical scenarios. It helps evaluate the impact of potential changes in income, liabilities, or funds on qualifying ratios and down payment expenses, especially when complete data is lacking.

Where is This Found?
Your application number is located in your Welcome Letter or other bank communications about your application. If you haven’t received your Welcome Letter or need assistance, contact 1.800.269.3084.

Why Do We Ask for This?
When creating online credentials, we prioritize protecting your information and verifying your identity. Your Social Security number is used for this identity confirmation.

Windstorm Insurance
Insurance coverage typically required in coastal regions, covering property damage caused by windstorms. Similar to flood and earthquake insurance, it protects the dwelling and, in some cases, personal property and living expenses if the home becomes uninhabitable. Some states provide market assistance programs to help homeowners obtain coverage in areas with limited options.

Wire Transfer
A method of transferring money between bank accounts, either within the same country or internationally.

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Y

Year-End Statement
A report detailing the total interest paid during the year and the remaining mortgage loan balance as of year-end. If an impound account for property taxes exists, the statement will also show the amounts paid and reserved for property taxes. However, if there is no property tax impound account, tax details will not be included.

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