A Glossary of Common Terms Used in Loans and Lending

by Ed Wachsman
This article is reprinted here with permission from Creative Real Estate Online at http://www.creonline.com

This is a glossary of common terms used in loans and lending. Please note that some of these terms may also have other meanings in other real estate related contexts.

Editor's Note: This Glossary is a great resource, especially for beginners. It is lengthy, so please feel free to print a copy for your own use.

1003 Application. A loan application that is thorough and required for conforming loans. It has become the standard application for most residential loans, even non-conforming loans. (see definition of "conforming" below)

Acceleration. The act of a lender declaring a note immediately due and payable before the maturity date. The right to take this action is triggered by some violation of the terms of the loan.

Adjustable Rate Mortgage (ARM). A mortgage loan having an interest rate that can be raised or lowered over time based on periodic changes in a monitored index . (See definition of "index" below.)

Amortized Loan. A loan that is repaid in a series of installments each of which contains a portion that is applied to reduce the principal amount of the loan and a portion that is applied to pay interest. As time goes on, each successive payment allocates a larger portion to principal reduction and a smaller portion to interest payment until the outstanding balance is ultimately reduced to zero. If the loan has a fixed rate of interest, each payment is the same dollar amount throughout the course of the loan. If the loan has an adjustable rate of interest, each payment at each particular interest rate is the same dollar amount. For example, while the interest is 8.0%, all of the payments on a $100,000 loan for 30 years will be $733.77. If the interest rate changes to 9.0%, all of the payments will be $804.62 while the rate remains at the 9.0% rate.

Annual Cap. The maximum amount the interest rate on an adjustable rate mortgage can be raised or lowered in the course of one twelve month period. If the interest rate at the start of the period is 8.0% and the Annual Cap is 2.0% the interest will be adjusted no higher than to 10.0% during that period even if the index rises over 2.0%. (see definition of "index" below)

Annual Percentage Rate (APR). A more precise description of the cost of money which reflects not only the actual interest rate but also the cost of certain expenses charged as part of the process of obtaining the loan. The actual items that must be calculated into the APR are determined by the Federal government. If the interest rate on a loan was 8.0%, the APR would typically be somewhere around 8.3% - 9.0% depending upon what fees were charged and the amount of each fee.

Appraised Value. There are several types of appraisal depending on the goal. Values determined for insurance purposes typically reflect replacement cost of the improvements. Values needed for multi-unit and commercial real estate are primarily based on the net operating income (or the potential net operating income) of the property. Values needed for residential real estate are usually determined on the basis of comparable sales. (See the definitions of comparable sales and net operating income below and see J. P. Vaughan's article "What Is Market Value" in the How-To section of this site.)

Assumable Mortgage. An existing mortgage which allows the next purchaser of a property to be liable for the payments and other obligations of the note and mortgage. Depending on the type of loan, the assumption of the obligation by this next purchaser may or may not require a qualification and approval process and may or may not release the original mortgagor (borrower) from further liability. A written release from the mortgagee (lender) is required to relieve the original mortgagor of responsibility. Without a release, the original mortgagor must make the payments (and suffer harm to a credit report if they are not made) if the person assuming the mortgage fails to do so.

Balance. The outstanding dollar amount owed on a loan. Also referred to as loan balance or mortgage balance.

Balloon Payment. An installment payment which is larger (most often much larger) than the other scheduled payments. It is usually the last payment. If a note is written for $50,000 at a fixed 9.0% rate of interest with payments based on an amortization schedule of 30 years and a balloon payment due in 5 years, the first 60 payments will each be $402.31 (the normal payment for a 30 year loan at 9.0% interest) and the last payment will be $47,940.15 which will be the outstanding balance remaining after the 60th payment.

Blanket Mortgage. A single mortgage which attaches to more than one property. (See definition of "mortgage" below.)

Broker. An individual who acts as an intermediary between two or more parties for the purpose of negotiating a transaction agreeable to all of the parties. In lending, the broker arranges and negotiates loan amounts, interest rates and loan terms between borrowers and lenders. Depending on the type of loan, the state wherein the transaction is occurring and contractual arrangements, the broker may represent the borrower, the lender or not have a fiduciary responsibility to either. (See definition of "fiduciary responsibility" below.)

Buy Down. A payment of discounts points in exchange for a lower rate of interest. It has the effect of providing the lender with a greater yield today in exchange for a lower yield in the future. (See definition of "discount points" below.)

Cash Flow. The net operating income minus the total of all debt service payments. (See definition of "net operating income" below.)

Cash Out. Cash given to the borrower from the proceeds of a loan. While relatively common as part of a refinance, it is uncommon, but not impossible, as a benefit of a small percentage of non-conforming loans used for a purchase.

Closing. The formal meeting where loan documents are signed and funds disbursed. Note, however, that Federal law requires that funds not be disbursed for three business days on certain loans where personal residences serve as the security. (See definition of "rescission" below.)

Closing Costs. The expenses which borrowers incur to complete the loan transaction. These costs may include title searches, title insurance, closing fees, recording fees, processing fees and other charges.

Combined Loan-to-Value (CLTV). The total of all loans relative to the value of the property. If a property has a value of $100,000 and three loans totaling $125,000, the CLTV is 125% ($125,000 / $100,000).

Commitment. The notification that a lender has approved a loan. Virtually all commitments are issued conditionally; that is, subject to some list of conditions that must be satisfied prior to funding actually taking place. Typical conditions include appraisals of a certain value, clean title, verification of representations by