N, O, P Terms

Negative amortization: When the payment on a loan is less than the interest that accrues on the principal. The balance of interest owed is added to the total loan.

Origination: The process of preparing, submitting, and evaluating a loan application; generally includes a credit check, verification of employment, and a property appraisal.

Origination fee: The fee a lender charges for processing a loan. This includes the cost to prepare loan documents, check a borrower’s credit history, and inspect the property.

Par rate: A rate of interest on a loan for which the lender does not charge (nor pay) points. An interest rate lower than the par rate would cost the broker money; an interest rate higher than the par rate would pay the broker a commission. [The par rate can vary, depending on the qualifications of a particular borrower.]

Points: A point equals 1 percent of a mortgage. Lenders sometimes charge “origination points” to cover expenses of making a loan. Also, borrowers sometimes pay “discount points” to reduce the loan’s interest rate.

Pre-Approval: A commitment in writing from a lender that a borrower would qualify for a particular loan amount based on income and credit information.

Pre-Payment Penalty: A pre-payment penalty means that if you pay off your mortgage loan earlier than agreed, you will pay a penalty. However, if you agree to pay a pre-payment penalty, you will usually get a better interest rate.

Pre-qualify: When a lender informally evaluates a borrower’s finances to determine how much he or she can afford to borrow and on what terms.

Prime Rate: The published interest rate at which banks make short-term unsecured loans to their best customers. The rate generally is the same across all major banks, and adjusts at the same time.

Principal: The original amount of a debt; a sum of money agreed to by the borrower and the lender to be repaid on a schedule. Interest is calculated as a percentage of principal.

Principal, Interest, Taxes, and Insurance (PITI): The four elements that make up a monthly mortgage payment. The principal and interest payments go towards repaying the loan, while taxes and insurance (homeowner’s and mortgage, if applicable) goes into an escrow account to cover the fees when they are due.

Principal: The amount of money borrowed from a lender, not including interest or additional fees.