Common Mortgage Terms and What They Mean
Adjustable Rate Mortgage (ARM): A mortgage having an interest rate which is usually initially lower than that of a mortgage with a fixed rate but is adjusted periodically according to the cost of funds to the lender.
Appraisal: A professional opinion of the market value of a property.
Amortization: The act of paying off (as a mortgage) gradually, usually by periodic payments of principal and interest or by payments to a sinking fund
Annual Percentage Rate (APR): The annual equivalent of a rate of interest when the rate is quoted more frequently than annually, usually monthly. APR allows homebuyers to compare different mortgages based on the annual cost for each loan. Not all lenders calculate APR the same way.
Buydown: A lump sum payment made to the creditor by the borrower or by a third party to reduce the amount of some or all of the consumer’s periodic payments, to repay the indebtedness. In the context of project financing, refers to a one-time payment out of liquidated damages to reflect cash flow losses from sustained underperformance.
Construction Loan: A short-term loan to finance the building phase of a real-estate project.
Credit approval: The lender has verified a borrower’s credit, bank references and employment, and approved a target mortgage loan amount and sales price prior to the borrower buying a home. Subject to other conditions (i.e., property appraisal) and is not binding on the lender.
Discount Point: One percentage point of the principal of a mortgage loan that some lenders require borrowers to pay immediately as a condition of making the loan. That is, if the lender makes a mortgage loan, it may require the borrower to pay a certain amount of discount points up front. The amount paid is deducted from the interest the borrower would otherwise owe on the loan. Discount points are tax deductible for the borrower because they qualify as prepaid interest.
Down Payment: The portion of the purchase price which the buyer pays in cash; is not financed with a mortgage.
Down Payment Assistance Program (DPA): Funds given to buyers to assist with the purchase of a home. Buyers do not have to repay these funds.
Earnest Money or Escrow Deposit: The holdings of documents and money by a neutral third party prior to closing.
FHA Loan: A loan insured by the Federal Housing Administration open to all qualified home purchasers. There are limits to the size of FHA loans, but they are usually generous enough to handle moderately-priced homes.
First Time Homebuyer Program: Mortgage loans with special qualifying terms for those who have never owned real estate or have not in the past few years. Although the programs and terms vary by state, they often offer down payment and closing cost assistance.
Fixed-Rate Mortgage: A mortgage in which the interest rate does not change during the loan term.
Index: The benchmark interest rate an adjustable-rate mortgage’s fully indexed interest rate is based on.
Lien: A legal claim against a property that must be paid when the property is sold.
Lock-in: A written agreement guaranteeing the homebuyer a specified interest rate provided the loan is closed within a set period of time.
Margin: The amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate.
Mortgage Insurance: Money paid to insure the mortgage when the down payment is less than 20%.
Prequalification: The process of determining how much money a prospective homebuyer will be eligible to borrow before a loan is applied for.
PITI: Acronym for total monthly housing expense: principal, interest, taxes, and insurance.
Title Insurance: Title insurance protects a real estate owner or lender against any loss or damage they might experience because of liens, encumbrances, or defects in the title to the property, or the incorrectness of the related search.
Underwriting: The process of evaluating a loan application to determine the risk involved for the lender.
USDA Rural Home Loan: A USDA Guaranteed Loan is government-insured 100% purchase loan. These loans are only offered in rural areas and serviced by direct lenders that meet federal guidelines.
VA Loans: Fixed-rate loans guaranteed by the U.S. Department of Veterans Affairs. They are designed to make housing affordable for eligible U.S. veterans.