First American Bank

Glossary of Terms

Amortization: Payment of debt in regular, periodic installments of principal and interest, as opposed to interest-only payments.

Application Fee: The fee charged by the lender to cover a portion of the costs of processing a loan application.

Appraisal: An opinion of real estate value based upon a factual analysis. Legally, an estimation of value by a disinterested person with suitable qualifications.

Balloon Loan: Amortized over a longer period than the term of the loan. (Example: A balloon loan has a term of 15 years, but is amortized over 30 years to keep monthly payments manageable. At the end of the 15 years, the borrower must repay the entire principal due on the loan in one lump sum, called a "balloon" payment.)

Closing: Usually the last step in buying a home. Documents are signed, the balance of the loan costs is calculated, funds are disbursed and the transaction is completed.

Closing Costs: Expenses incidental to a purchase of real estate, such as loan fees, title fees and appraisal fees.

Discount Points: Amount paid to the lender when the loan is originated to account for the difference between the current market-determined cost of interest and the actual lower interest rate of the loan. Points may be paid by either the buyer or seller. Each point is equal to one percent of the original loan amount.

Earnest Money: A deposit of money accompanying an offer to buy property to show good faith, generally credited to the buyer at closing.

Financial Index: A basis for making interest rate changes on an Adjustable Rate Mortgage. One example of a financial index could be the change in cost of U.S. Treasury Bonds.

Initial Interest Rate: The interest rate charged for the initial period of an Adjustable Rate Mortgage (before the first interest rate adjustment).

Interest Rate Cap: Limits the amount an Adjustable Rate Mortgage may increase or decrease during specific intervals and over the term of the loan. This safeguard protects the buyer from dramatic changes in monthly payments.

Loan-to-Value (LTV): The loan amount as a percentage of the purchase price or, in the case of a refinance, appraised value. For example, a 95% LTV is the same as putting 5% down, or having 5% equity.

Origination Fee: A fee charged by the lender for making a real estate loan—usually a percentage of the amount loaned, such as 1%. Not to be confused with an application fee.

PITI: The total amount of the borrower’s monthly home loan payment, including principal, interest, taxes and insurance(s).

Private Mortgage Insurance (PMI): Insures repayment of the loan balance to the lender in the event of default by the borrower. The insurance is similar to insurance issued by a government agency (such as FHA) except it is issued by a private company. Usually required for homes financed with less than a 20% down payment.

Refinance: Replacing an existing loan with a new one to get a lower rate, switch from one loan type to another or convert equity to cash. A refinance loan will involve various loan fees, just as with any other mortgage.

Term: The number of years before a loan is paid in full; 15-, 20-, 25- and 30-year terms are the most common for home mortgages.

Title: The evidence of ownership of a property.

Title Insurance: An insurance policy that insures the quality of the title and insures the lien priority of the mortgage.

Title Search: A review of all recorded documents affecting a specific piece of property to determine the present condition of the title.

Underwriting: The process by which credit and economic factors are used to determine whether a borrower qualifies for a loan.

Warranty Deed: A legal document used to convey title.