Assumption: An agreement permitting the buyer to take responsibility for a mortgage owed by the seller. A credit review of the buyer is usually required, often for a fee.

Attorney Fees: Charges incurred by the lender and passed on to the buyer for the preparation and review of legal documents.

Balloon Mortgage: (Also called step rate loans.) Home loans in which the first 5 or 7 years are financed at an interest rate which is lower than the fixed rate when the loan is originated. After 5 or 7 years, depending on the contract, the buyer is required to pay the total balance of the loan in a single large payment. Some hybrid balloon loans include an option which allows the borrower to extend the term of the loan provided some conditions are met. The fixed interest rate applied is usually slightly higher than the fixed interest rate available at the time of extension.

Cap: The maximum increase or decrease allowed at each adjustment of an ARM.

Commitment: A document that states the lender agrees to lend a certain amount of money for a certain period of time, provided the applicant complies with certain conditions.

Convertible: A feature associated with some mortgage loan programs which allows them to become fixed-rate loans after a period of time specified in the contract.

Escrow: An account to hold tax and insurance money collected by your lender from your mortgage payments until those expenses must be paid.

Financed In: Closing costs are “financed in” when a buyer chooses to add them into the amount of the mortgage instead of paying them separately at closing.

Fixed-Rate Mortgage: This form of home loan guarantees the same interest rate over the full term of the loan, regardless of fluctuation of interest rates in the market.

Index: A figure used by lenders to set the rate on adjustable-rate mortgages. In calculating mortgage rates, a lender must use an index over which it has no influence. The Treasury Security Index is one example.

Lien: The legal right that one individual has to the property of another. A mortgage or deed of trust is a lien upon one’s property.

Lock-In Period: A time guaranteed by the lender during which you are promised a specified interest rate while your loan is processing.

Mortgage Insurance: A premium homeowners pay on loans to protect the lender against default.

Origination Fee: Generally 1 percent of your total loan amount. The buyer pays this fee to initiate processing of the mortgage. Unlike points, the origination fee will not lower the interest rate.

Points: A term used to describe a major cost of the loan to a borrower. One point equals 1 percent of the principal amount of your mortgage.

Property Valuation: An amount or estimate of value, determined by an appraisal or alternate methods.

Recording Fees: Covers the expense the lender incurs to record a properly executed legal document (e.g., deed or mortgage) with the county registrar's office.

Refinance: To take out another loan on your home at a lower rate than that of the original mortgage interest rate. The first loan is then paid in full with funds from the second loan.

Right Of Recision: A 3-day period immediately following a refinance closing on a home, during which the buyer can change his mind and invalidate the mortgage contract.

Second Mortgage: A mortgage lien that has rights subordinate to the first mortgage.

Step Rate Loan: See balloon mortgage.

Title Insurance: Protects you and your lender against legal errors in your title.

Updated Wednesday, March 23, 2005