Credit & Lending Glossary

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Actual Cash Value

The replacement value of damaged property.

Adjustable Rate Mortgage

A mortgage with an interest rate that changes periodically based on changes in an index, also called an “ARM.”

Amortization

Loan payments typically consist of an interest payment and a principal payment. The principal payment is subtracted from the loan balance to pay off (amortize) the loan. Interest Only loans do not include principal payments and do not amortize.

Amortization Schedule

A table that shows the amount of principal and interest for every payment during the term of a loan.

Annual Percentage Rate

The Annual Percentage Rate (APR) is the cost of a loan shown as a yearly interest rate. The APR includes interest, points, mortgage insurance and other loan charges and is calculated based on the requirements of the federal Truth in Lending Act.

Application Fee

A fee charged for taking and processing a loan application.

Appraisal

A formal report that gives the lender an estimate of the value of a home.

Appraiser

A licensed professional that is hired to perform an appraisal.

Appreciation

An increase in the value of a home.

Assets

Valuables owned by an individual.

Assumption

A buyer agreeing to assume responsibility for a seller’s existing mortgage.

Balloon Mortgage

A mortgage that requires a lump-sum payment at maturity because the monthly payments are not enough to amortize (pay-off) the loan. A balloon mortgage may, for example, have monthly payments based on a 30 year loan, but requires full payment after 7 years.

Bankruptcy

A legal process that restructures an individual’s debts and liabilities if they are not able to meet their obligations.

Capacity

An individual’s ability to pay their debts.

Closing Costs

These are costs (expenses) needed to close (finish) a home loan. The lender will provide an estimate of these costs on the Good Faith Estimate. Closing costs may include points, taxes, title insurance, financing costs, and other costs.

Closing Date

The date a loan is scheduled to close.

Closing Agent

A person who organizes the loan closing.

Collateral

Property that secures a debt. In a mortgage, the home is the collateral for the loan.

Commitment Letter

A letter from the lender detailing the terms of your mortgage loan.

Concession

Something granted or conceded while negotiating the sale of a home.

Condominium

A property interest in one unit of a multi-unit building. The owner of a condominium owns the interior space of the condominium unit and has the right to use the common areas, structure and grounds outside of the unit. The common areas, structure and grounds are owned by a condominium association which charges each owner an association fee.

Contingency

Something that must happen before an agreement is binding. For example, a home purchase agreement may be contingent upon a home inspection.

Counter-offer

A second offer. If the seller believes that a buyer’s offer is too low, the seller may give the buyer a higher counter-offer.

Credit

An agreement by which a borrower receives money or goods in exchange for a promise to pay at a later date.

Credit Bureau

A company that compiles credit information about consumers.

Credit History

A report detailing a consumer’s debts and payment record. A home lender will review your credit history when considering your loan application.

Credit Report

The Credit Bureau will list a consumer’s credit history in a standardized report that the lender will use to evaluate your loan application.

Credit Score

A number, based on a formula that summarizes a consumer’s credit history and predicts their ability to repay a loan.

Debt

Money owed to another.

Debt-to-income-ratio

The percentage of monthly income that goes towards paying monthly expenses.

Deed

A legal document transferring title to a property.

Deed of Trust

An alternative to a mortgage that is used in several states.

Default

The failure to meet a term of the mortgage loan. A mortgage loan may be considered in default if a payment is not made within 30 days of when it is due.

Depreciation

A decrease in the value of a home.

Down Payment

The portion of the purchase price of a home that is paid in cash. For example, a home buyer may pay 20% of the purchase price with cash and borrow 80% with a mortgage loan.

Earnest Money Deposit

A deposit made by a buyer to show the seller the buyer is serious about purchasing the home.

Equity

The value of your ownership interest in your home. If your home has a fair market value of $100,000 and you owe $40,000 on an existing mortgage, your equity is $60,000.

Escrow

Money or documents held by a third party and released or paid according to the terms of a contract. Mortgage lenders use escrow accounts to reserve money that a homeowner pays for taxes and insurance.

Fixed Rate Mortgage

A mortgage with an interest rate that does not change after closing.

Foreclosure

If a borrower defaults on their mortgage loan, the lender can use a legal action called foreclosure to end the borrower’s ownership of the property. Events of default are detailed in the loan documents; the most common default is the failure to repay the loan on time.

Good Faith Estimate

A written estimate that details the closing costs and fees for a mortgage. This is provided by the lender before closing.

Gross Monthly Income

The income a borrower receives in a month before taxes and other deductions. This includes wages as well as any other regular income the borrower receives and wishes to include on their mortgage application.

Home Inspection

A formal inspection of a house performed by a professional. A home inspection can uncover structural defects as well as problems with the plumbing, heating and cooling systems.

Homeowners’ Insurance

A combined insurance policy that covers both hazard and liability insurance.

HUD-1 Settlement Statement

A closing statement that details the costs of a home loan. The HUD-1 is a standard form provided by the U.S. Department of Housing and Urban Development.

Index

The interest rate for an Adjustable Rate Mortgage will change based on changes in an index. The index for a mortgage loan will be a published rate that is set by an unbiased third party. Common indexes include the Prime rate or the rates paid on U.S. Treasury securities.

Inflation

A general increase in prices over time. Inflation is often measured as a change in the Consumer Price Index.

Inquiry

An inquiry is a request for a copy of a consumer’s credit report. Banks and other lenders routinely make inquiries as part of their loan approval process. Inquiries may also be made in connection with job applications.

Interest

The cost of borrowing money. Interest is calculated as a percentage of the loan amount.

Liabilities

Financial obligations owed to another. Liabilities can include loans as well as other obligations.

Loan Origination Fees

Mortgage lenders may charge a loan origination fee for processing a mortgage application.

Lock-in Rate

An agreement by the lender to guarantee a loan rate for a specific period of time.

Low Down Payment Feature

Traditional mortgage loans typically required a down payment of 10% to 20% of the loan amount. A mortgage loan with a low down payment feature enable a borrower to buy a house with a much smaller down payment.

Margin

The interest rate for an Adjustable Rate Mortgage (ARM) will be based upon an index plus a margin. The margin is shown as a percent, as an example, the rate for an ARM could be Prime plus 2.0%.

Market Value

An estimate of what a home would sell for, appraisals are used to establish a properties current market value.

Mortgage

A legal document that pledges a home to a lender to secure a loan. Some states use Deeds of Trust, however the terms mortgage and mortgage loan are used generically by the home lending industry.

Mortgage Broker

An individual or company that originates mortgage loans. Mortgage brokers are licensed by the states in which they do business.

Mortgage Insurance

Mortgage Insurance or Private Mortgage Insurance may be needed on a home loan that has less than a 20% down payment. Mortgage Insurance protects the lender against losses if a borrower defaults on the loan.

Mortgage Lender

The lender making a mortgage loan.

Mortgage Rate

The cost of a mortgage loan shown as a percentage.

Net Monthly Income

A borrower’s monthly income after taxes and other deductions.

Offer

A bid from the buyer to the seller to buy a house at a stated price. The seller may accept, decline, or give the buyer a counter-offer.

Open House

A real estate sales technique. The seller’s realtor opens the seller’s house to the public.

Points

One percent (1.0%) of the amount of a mortgage loan. On a $100,000 mortgage loan, one point is $1,000.

Preapproval Letter

A letter provided by a mortgage lender to a loan applicant indicating that the applicant is approved for a mortgage loan to a certain amount.

Prequalification Letter

A letter provided by a mortgage lender to a loan applicant indicating that the applicant is approved to by a home. In contrast to a preapproval letter, a prequalification letter does not indicate a specific loan amount.

Principal

The amount of money borrowed on a loan.

Principal Balance

The outstanding balance of the principal amount of a loan.

Private Mortgage Insurance

Mortgage Insurance or Private Mortgage Insurance may be needed on a home loan that has less than a 20% down payment. Mortgage Insurance protects the lender against losses if a borrower defaults on the loan.

Property Appreciation

An increase in the value of a home.

Rate Cap

A feature of an Adjustable Rate Mortgage. A rate cap is used to limit the amount the interest rate can change within a certain time period.

Ratified Sales Contract

A sales contract stating that the buyer and the seller have agreed to an offer. The contract may include other clauses or contingencies such as repairs, or that the house passes a home inspection.

Real Estate Professional

A real estate licensed individual whom provides services in buying and selling a home. The Real Estate Professional is paid a percentage of the sales price by the seller.

Refinance

A new mortgage loan that pays off the existing loan.

Replacement Cost

The cost to replace damaged property.

Title Insurance

An insurance policy that protects the lender and the homeowner against legal disputes over the title.

Truth in lending Act

A federal law that protects consumers by requiring lenders to make certain standard disclosures when making a loan.

Underwriting

A banking term that describes the process the lender goes through to approve a loan.

Uniform Residential Loan Application

A standard form of a loan application.

Warranties

A guaranty of the quality of a product or service.

Ameriprise Bank, FSB, Member FDIC, is an equal housing lender. Ameriprise Financial Services, Inc. and Ameriprise Bank, FSB are subsidiaries of Ameriprise Financial, Inc.