Glossary of Mortgage Terms
Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage (ARM) is a loan that offers an initial period of fixed interest that then adjusts at a specified interval. An ARM tends to have a lower initial interest rate than a fixed-rate mortgage. However, it does come with a certain amount of unpredictability because when an ARM enters its adjustable period, its interest rate may trend up or down depending on the current market rates. For example, a 5/1 ARM has a fixed interest rate for the first 5 years but then adjusts based on market rates every year after that. Visit this page for a list of repayment terms.
Amortization is the process of paying for the principal and interest on your loan. You may see it expressed as an amortization schedule, which is essentially an outlook of every payment you need to make until you’ve paid off the balance of the loan in full. Some loans use compound interest, which is applied to the principal and to the accumulated interest of previous periods (also known as a negative amortization loan).
Annual Percentage Rate (APR)
The annual percentage rate (APR) is your interest rate plus ancillary charges and fees, such as closing costs and discount points, combined as a yearly rate. By law, a loan's APR is always expressed as a percentage next to the mortgage interest rate. The APR gives the best indication of the total cost of your home loan.
An appraisal is an unbiased estimate of your property's fair market value by a licensed professional. It is typically required by all lenders during the mortgage process to ensure that the loan amount does not exceed the value of the home. A property's appraisal is based on several factors, including location, condition and sales of similar homes in the area.
In mortgage terms, an asset is anything that you own that has value. As part of the mortgage application process, you will be asked to provide a list of assets or items that you own that hold substantial value. A list of common assets includes, but is not limited to, cash in your bank accounts, stocks bonds, mutual bonds, 401(K), life insurance cash value and other real estate or property.
Closing, also referred to a Consummation, is the final step of the homebuying transaction. All outstanding fees listed in the closing disclosure are paid, the escrow funds are cleared to be delivered to the seller while the buyer and seller sign documents to transfer ownership of the property. The buyer signs the mortgage loan, and the title company registers the title deed to the property in the buyer's name.
A Closing Disclosure, also referred to as a Consummation Disclosure, is a five-page form that provides final details about the mortgage loan you have selected. It includes the loan terms, your projected monthly payments and how much you will pay in fees and other costs to close your loan (closing costs).
Debt-to-Income (DTI) Ratio
Your debt-to-income ratio (DTI) is a measure of your monthly debt compared to your monthly income, calculated by your monthly debt divided by your monthly gross (pre-tax) income. DTI is one of the factors used to determine how much you can afford in a monthly mortgage payment. Simply put, it represents how much of your gross monthly income goes to creditors and how much of it is left over as disposable income.
A deed is used to transfer any interest in real property that the grantor may have.
Points represent a percentage of your loan amount (1 point = 1%). You might choose to pay points at closing to secure a lower interest rate. In other words, by pre-paying some interest, you are “buying down” your rate. Alternatively, you may choose to receive a credit (or rebate) at closing to help cover costs and fees. This would correspond to a higher interest rate on the loan.
A down payment on a house is a sum of money that the buyer pays upfront in a real estate transaction. The amount paid is usually a required percentage of the purchase price and can range from as little as 3% to as much as 20%.
Escrow is a legal arrangement in which a third party temporarily holds money or property until a particular condition has been met, such as the fulfillment of a purchase agreement. Close of escrow is the point in the homebuying process when the funds held in escrow and the loan amount are transferred to the seller and all outstanding third-party costs, such as taxes and HOA fees, are settled.
A fixed-rate mortgage is a home loan that has a constant interest rate for the lifetime of the loan. They are typically offered in 10-, 15-, 20-, 25- and 30-year terms, giving homebuyers the security of a predictable monthly payment. Shorter-term fixed-rate loans typically have the lowest interest rates but have larger monthly payments. Visit this page for a list of repayment terms.
A home inspection is an examination of a home's physical condition in connection with its sale. The homebuyer organizes and pays for a home inspection after the offer has been accepted but before they sign a final purchase agreement. The purpose of a home inspection is to uncover any potential issues before finalizing the purchase. There are no federal regulations governing home inspectors, and licensing requirements vary by state.
Homeowners insurance is a form of property insurance that covers losses and damages to the residence as well as furnishings and other assets in the home. Homeowners insurance also provides liability coverage against accidents in the home or on the property. It generally does not include earthquake or flood damage (typically separate policies). It usually includes tornado or hurricane damage.
Pre-approval helps confirm your creditworthiness before having a purchase contract in place. A pre-approval letter gives you the power to shop for a home while confirming with a seller that your lender has already agreed to fund your offer.
The principal is the amount of money you borrowed from a lender and are required to pay back.
Private Mortgage Insurance (PMI)
Private Mortgage Insurance (PMI) is insurance required on a conventional loan by lenders when a borrower’s down payment is less than 20% of the purchase price. It is meant to protect the lender in case the borrower defaults on the loan. PMI can be cancelled once the borrower has at least 20% equity in the property. Like your interest rate, the PMI amount is determined by many different factors, including credit score, loan-to-value ratio, debt-to-income ratio, property type and occupancy.
Local governments levy property taxes on property owners within their locality. Governments use taxes to provide taxpayers with various services, including schools, police, fire and garbage collection. Property taxes are calculated by applying an assessment ratio to the property’s fair market value.
When you refinance the mortgage on your property, you’re essentially trading in your current mortgage for a newer one, often with a new principal amount and a different interest rate. Your lender then uses the newer mortgage to pay off the old one, so you’re left with just one loan and one monthly payment. By refinancing your existing loan, your total finance charges may be higher over the life of the loan.
The term of your mortgage loan is the maximum amount of time given for you to repay the loan. For most types of homes, mortgage terms are typically 15, 20 or 30 years.
A house title is the ownership record of a property. The title shows who has owned the property in the past and contains a physical description of the property as well as identifies any liens on it. If you just bought the home, your mortgage will be on the title as a lien.
Title insurance is a policy meant to protect home buyers and mortgage lenders from damages or financial losses caused by a bad title due to title defects. Most title insurance policies cover all the common claims filed against a title, including outstanding liens, back taxes or conflicting wills.