Mortgage and HELOC glossary

A

Actual cash value

An insurance settlement method that pays the cost to replace damaged property minus depreciation. Compare replacement cost.

Adjustable-rate mortgage (ARM)

A loan whose rate is fixed for an opening period, such as five or seven years, then adjusts at set intervals based on an index plus a margin, within caps.

Adjustment period

How often an adjustable-rate mortgage can change after its fixed period ends, such as every six months or every year.

Amortization

Paying a loan down over time with scheduled payments that cover interest first and principal with the rest. See the amortization calculator.

Amortization schedule

A table showing each payment over the life of a loan and how much goes to interest and to principal. Build one with the amortization calculator.

Annual percentage rate (APR)

The yearly cost of a loan including the interest rate and certain lender fees, expressed as a percentage. It makes loans with different fees easier to compare.

Appraisal

A licensed appraiser’s estimate of a property’s market value, used by the lender to confirm the home supports the loan.

Appreciation

An increase in a home’s value over time. Appreciation builds equity, which a HELOC lets you borrow against.

Assumption

Taking over the seller’s existing mortgage, including its rate and balance, with the lender’s approval. FHA and VA loans can be assumable; most conventional loans are not.

Automated valuation model (AVM)

A computer-generated estimate of value based on recent sales and property data. Many HELOCs use an AVM instead of a full appraisal.

B

Balloon mortgage

A loan with payments figured over a long term that comes due in full, as one large balloon payment, after a shorter period such as five or seven years.

Bank statement loan

A non-QM loan that qualifies self-employed borrowers on 12 or 24 months of bank deposits instead of tax returns.

Buydown

Paying an upfront amount, often from the seller or builder, to lower the rate for the first years of the loan (a temporary buydown) or for its whole life (discount points).

C

Capacity

Your ability to repay a loan, judged from income, debts and employment history. It is one of the factors lenders weigh along with credit and collateral.

Cash-out refinance

A new first mortgage larger than the one it replaces, with the difference paid to you in cash. It resets the rate on the whole balance.

Closed-end second mortgage

A fixed-rate loan behind your first mortgage, paid out in one lump sum at closing. Also called a home equity loan.

Closing agent

The person who runs the signing and disburses the funds. In most of California this is the escrow officer.

Closing costs

Fees and prepaid items paid at closing, including lender charges, appraisal, title, escrow, recording and prepaid insurance, interest and taxes.

Closing Disclosure

The five-page form you receive at least three business days before closing showing the final loan terms and costs.

Collateral

The property that secures a loan. For a mortgage or HELOC, the collateral is your home.

Combined loan-to-value (CLTV)

All loans secured by a home divided by its value. A $500,000 first mortgage and a $200,000 HELOC on an $875,000 home is an 80% CLTV.

Condominium

A home where you own your unit and share ownership of common areas with other owners through a homeowners association. Lenders also review the condo project itself.

Conforming loan

A loan that meets Fannie Mae or Freddie Mac guidelines and is at or below the conforming limit for its county.

Conforming loan limit

The maximum loan Fannie Mae and Freddie Mac will buy, set yearly by county. Many California counties have higher, high-cost limits.

Credit report

A record of your borrowing and payment history from the credit bureaus, which lenders use along with your credit score.

Credit score

A number, usually 300 to 850, that summarizes your credit history. Higher scores earn better rates and terms.

Creditworthy

Showing, through credit history, income and assets, that you are likely to repay a loan as agreed.

D

Debt-to-income ratio (DTI)

Your monthly debt payments, including the new housing payment, divided by gross monthly income.

Deed

The legal document that transfers ownership of a property. In California, a deed of trust is the document that secures the mortgage.

Discount points

Upfront fees paid at closing to lower the interest rate. One point equals 1% of the loan amount.

Down payment

The part of the purchase price you pay in cash rather than borrow.

Draw period

The years, often ten, during which you can borrow from a HELOC. Payments are usually interest only on the amount drawn.

DSCR loan

An investor loan that qualifies on the property’s rent compared with its payment (the debt service coverage ratio) rather than personal income.

E

Earnest money

A deposit made with a purchase offer to show good faith, held in escrow and credited at closing.

Equity

The difference between what your home is worth and what you owe on it.

Escrow

In California, the neutral third party that holds funds and documents and closes the sale. Also the account your servicer uses to pay taxes and insurance.

F

FHA loan

A mortgage insured by the Federal Housing Administration, allowing as little as 3.5% down with flexible credit. See FHA loans.

Fixed-rate mortgage

A loan whose interest rate and principal and interest payment never change for the life of the loan.

G

Gift letter

A signed letter stating that money toward your down payment or closing costs is a gift, not a loan, usually from a family member.

Good Faith Estimate (GFE)

The older disclosure of estimated loan costs. Since October 2015 it has been replaced by the Loan Estimate.

H

Hazard insurance

The part of a homeowners policy that covers damage to the structure from events such as fire or windstorm. Lenders require it.

Home equity line of credit (HELOC)

A revolving line of credit secured by your home, recorded behind your first mortgage. See California HELOC.

Home inspection

A buyer’s inspection of a home’s condition, systems and structure before closing. It is separate from the lender’s appraisal.

Homeowners insurance

A policy covering the home against damage and liability. Lenders require it, and it is usually paid through escrow.

HUD-1 settlement statement

The older form that itemized closing costs. For most loans it has been replaced by the Closing Disclosure; reverse mortgages still use it.

I

Index

The benchmark rate an adjustable loan or HELOC follows, such as SOFR for ARMs or the prime rate for most HELOCs.

Interest-only payment

A payment that covers interest but no principal, common in a HELOC draw period.

J

Jumbo loan

A loan above the conforming limit for its county, with its own credit, down payment and reserve requirements.

L

Lender credit

Money from the lender toward your closing costs in exchange for a slightly higher rate.

Liabilities

Debts and obligations such as car loans, credit cards, student loans and other mortgages. Lenders count the monthly payments in your debt-to-income ratio.

Lien

A legal claim against a property that secures a debt. A mortgage is a lien; a HELOC is usually a second lien.

Loan-to-value (LTV)

The loan amount divided by the home’s value or price, whichever is lower.

Loan Estimate

The standard three-page form showing your rate, payment and closing costs, provided within three business days of applying.

Lock

A lender’s commitment to hold a rate and price for a set period, such as 30 days, while your loan closes.

M

Margin

The fixed amount added to the index to set an adjustable or HELOC rate. A HELOC at prime plus 0.5% has a 0.5% margin.

Mortgage broker

A licensed professional who shops your loan with several wholesale lenders rather than offering one bank’s programs.

Mortgage insurance premium (MIP)

FHA mortgage insurance: an upfront premium plus an annual premium paid monthly.

N

Non-QM loan

A loan outside the standard qualified mortgage rules, such as bank statement, DSCR or asset-based loans. See non-QM loans.

P

Pre-approval

A lender’s conditional commitment after reviewing your credit, income and assets, documented in a letter for your offer.

Prime rate

The base rate banks charge their best customers, which moves with Federal Reserve policy. Most HELOC rates are prime plus a margin.

Principal

The amount you borrowed, or the part of the balance still owed, not counting interest.

Private mortgage insurance (PMI)

Insurance on a conventional loan with less than 20% down. It can be removed once you reach 20% equity.

Property tax

Tax on real estate. In California, Proposition 13 sets the base at 1% of assessed value, plus local bonds and assessments.

R

Rate-and-term refinance

A refinance that changes the rate, the term or both without taking cash out.

Rate cap

The limit on how much an adjustable rate can rise at each adjustment and over the life of the loan. HELOCs carry a lifetime maximum rate.

Recast

Re-figuring a lower monthly payment after a large principal paydown, keeping the same rate and term.

Repayment period

The years after a HELOC draw period ends, when the balance is paid down with principal and interest.

Replacement cost

An insurance settlement method that pays to rebuild or replace damaged property without subtracting depreciation. Compare actual cash value.

Reverse mortgage

A loan for homeowners 62 and older that converts equity into cash with no required monthly payment. See reverse mortgages.

Right of rescission

Your right under federal law to cancel a refinance or HELOC on your primary home within three business days of signing.

S

Second lien

A loan recorded behind the first mortgage, such as a HELOC or closed-end second. It is repaid after the first in a sale or foreclosure.

Seller credit

Money the seller agrees to put toward your closing costs, within limits set by the loan type.

Servicer

The company that collects your payments and manages your escrow account. It may differ from the lender that funded the loan.

Short sale

A sale where the lender agrees to accept less than the amount owed on the mortgage. It affects credit and the waiting period for a new loan.

T

Title insurance

Insurance that protects the lender, and optionally you, against problems with the property’s ownership history.

Truth in Lending Act (TILA)

The federal law that requires clear disclosure of loan costs, including the APR, and gives you the right to cancel certain refinances and HELOCs.

U

Underwriting

The lender’s review of your credit, income, assets and the property to approve the loan.

USDA loan

A zero-down loan backed by the U.S. Department of Agriculture for eligible rural and suburban areas and income levels.

V

VA funding fee

A one-time VA charge, usually financed, that varies with down payment and first or later use. Many disabled veterans are exempt.

VA loan

A zero-down loan guaranteed by the Department of Veterans Affairs for eligible veterans, service members and surviving spouses.