Mortgage Terminology

Adjustable Rate Mortgage (ARM): A mortgage that has a fixed rate of interest for only a set period of time, typically one, three or five years. During the initial period the interest rate is lower, and after that period it will adjust based on an index. The rate thereafter will adjust at set intervals.

Amortization: The systematic repayment of a loan. For example, a typical amortization schedule will include the amount borrowed, and the interest accrued over the set term. The result will be a monthly breakdown of how much interest you pay and how much is paid on the amount borrowed.

Annual Percentage Rate (APR): The APR for your home loan is an annual calculation that includes the interest rate quoted by your mortgage company plus additional home loan costs such as origination fees and points. Your loan’s APR is that it will be higher than advertised interest rates because of additional factors.

Appraisal: An estimated value based on physical inspection (conducted by a professional) and comparable houses that have been sold in recent times.

Bi-Weekly Mortgage: Bi-Weekly payment means you are paying every two weeks. In a typical Mortgage, you make one monthly payment or twelve payments over the course of a year. With a bi-weekly schedule, you pay half the monthly payment amount every two weeks. This is the equivalent of thirteen regular payments, which in turn will reduce the amount of interest you pay and pay off the loan earlier.

Closing Costs: With each real estate transaction, there are many expenses to pay and agencies to compensate. These fees, which are often shared by the buyer and the seller, are referred to as the closing costs. When you buy a home, the closing costs might include loan origination fees, escrow payments, title insurance, attorney fees and even discount points paid to lower your loan’s interest rate.

Debt-to-income Ratio: The lender compares the monthly payments, including the new mortgage, and compares it to monthly income. The income figure is divided into the expense figure, and the result is displayed as a percentage. The higher the percentage, the more riskier loan it is for the lender.

Default: When the debtor has not met his or her legal obligation according to the loan terms, whether it is failure to keep to the scheduled payments or a violation of the contract conditions.

Down Payment: The amount of the purchase price that the buyer is paying. Generally, lenders require a specific percentage of the purchase price in order to qualify for the mortgage.

Equity: The difference between the value of the home and the mortgage loan is called equity. Over time, as the value of the home increases and the amount of the loan decreases, the equity of the home increases.

Escrow: At the closing of the mortgage, the borrowers are sometimes required to set aside a percentage of the yearly taxes to be held by the lender. On a monthly basis, the lender will also collect additional money to be used to pay the hazard insurance on the home. This escrow account is maintained by the lender who is responsible for sending the tax bills on a regular basis.

Fixed Rate Mortgage (FRM): A mortgage loan where the interest rate and the term of the loan is negotiated and set for the life of the loan. The terms of fixed rate mortgages can range from 10 years to up to 40 years, but most commonly the terms are either 15 or 30 years.

Good Faith Estimate: An estimate by the lender of the closing costs that are from the mortgage. It is not an exact amount, however, it is a way for lenders to inform buyers of what is needed from them at the time of closing of the loan.

Homeowner’s Insurance: Prior to the mortgage closing date, the homeowners must secure property insurance on the new home. The policy must list the lender as loss payee in the event of a fire or other event. This must be in place prior to the loan going into effect.

Loan-to-value Ratio (LTV): Another typical financial calculation that is done by dividing the amount of the Mortgage by the value of the home. Lenders will generally require the LTV ratio to be at least 80% in order to qualify for a Mortgage.

Mortgage: An agreement under which a person borrows money to buy property, which is given as security to the creditor for payment of a debt. Mortgage lenders follow strict underwriting guidelines to limit the possibility of borrowers defaulting on their payments.

Origination Fee: When applying for a mortgage loan, borrowers are often required to pay an origination fee to the lender. This fee may include an application fee, appraisal fee, fees for all the follow-up work and other costs associated with the loan.

Points: A point is equal to 1% of the loan amount. In order to get a lower interest rate, lenders will allow borrowers to “buy down” the rate by paying points. Paying a percentage point up front in order to get a lower rate will eventually be a saving to borrowers in the long run, but the points paid do not go towards the principal of the loan.

Principal: The term used to describe the amount of money that is borrowed for the mortgage. The principal amount that is owed will go down when borrowers make regular monthly or bi-weekly payments.

Private Mortgage Insurance (PMI): When the LTV is higher than 80% lenders will generally not be able to do the transaction. In these cases, the borrowers can get Private Mortgage Insurance which is a guarantee to the lender that until the borrower reaches a 80% LTV, they are covered from default. To get this protection, borrowers pay a monthly PMI premium.

Title Insurance: Because the lender is using the home as collateral for the mortgage transaction, they need to be certain that the title of the property is clear of any liens which could jeopardize the mortgage. Therefore, lenders will require borrowers to get title insurance on the property, which will ensure that the homes are free and clear.

Truth in Lending: A federal mandate that all lenders must follow.  There are several important parts to the regulations including proper disclosure of rates, how to advertise mortgage loans and many other aspects of the lending process. These regulations were put into place to protect consumers from potential fraud.

For more mortgage terms go to US Department of Housing and Urban Development’s Website