Common Mortgage Terms
Most businesses in today's world have industry-specific terminology. Here are some definitions for the most frequently used words in the mortgage business.
- Adjustable-Rate Mortgage (ARM) - A mortgage with an interest rate that changes periodically, according to an index that is selected when the mortgage is issued. The initial interest rate is lower than that for fixed-rate mortgages, but monthly payments can fluctuate when the rate is adjusted.
- Annual Percent Rate (APR) - A stated interest rate that reflects all the financing costs of a mortgage. The APR includes points, origination fees and other finance charges in addition to the interest on the mortgage, and includes them all in a yearly interest rate. The APR is usually higher than the rate alone and allows you to compare different types of mortgages based on the annual cost of each loan.
- Appraisal - An estimate of the value of the property made by a qualified appraiser.
- Caps - Consumer safeguards for adjustable-rate mortgages that limit the amount monthly payments can increase. An interest rate cap limits the amount the interest rate can change, while a payment cap limits the increase in monthly payment to a specific dollar amount.
- Closing - The meeting between the buyer, seller and Lender in which the property and funds legally change hands.
- Closing Costs - The costs and fees associated with the change in ownership of the property and with obtaining your mortgage. They are assessed at closing and include insurance, taxes and other fees.
- Credit Report - A report that documents a borrower's credit history and current status.
- Debt-To-Income Ratio - The ratio expressed as a percentage which results when a borrower's monthly payment obligation on long-term debts is divided by his or her net effective income (for FHA/VA loans) or gross monthly income (for conventional loans).
- Down Payment - The amount of money paid to the seller when a home is purchased; this amount is the difference between the purchase price and the mortgage amount.
- Escrow - A special account set up by the Lender in which money is held to pay for taxes and insurance. An escrow officer is the third party, who executes the instructions of both the buyer and seller to handle the paperwork at closing.
- Equity - The owner's interest in a property, which is the difference between the fair market value and current debt.
- Fixed-Rate Mortgage - A mortgage with an interest rate that remains constant for the life of the loan. The most common fixed-rate mortgage is for a term of 30 years, but there are also other term options available.
- Index - An economic indicator or interest rate which is the basis that determines changes in the interest rate of an adjustable-rate mortgage (ARM). ARM rates are adjusted to reflect changes in the index.
- Interest - The money paid for borrowing money, which is the Lender's income.
- Loan-To-Value Ratio (LTV) - A percentage that reflects the relation between the amount of the mortgage loan and the appraised value of the property.
- Margin - The amount a Lender adds to establish the actual interest rate on an ARM.
- Origination Fee - Loan fee charged by the Lender to prepare the documents associated with your mortgage.
- PITI (Principal, Interest, Taxes and Insurance) - The four components that are included in most homeowner's monthly mortgage payment. Principal and interest are the portions of the payment assigned to repay the mortgage itself; taxes and insurance are set up by your Lender into a special escrow account to pay for homeowners insurance and property taxes.
- Points (Loan Discount Points) - Prepaid interest on a mortgage that is usually paid at the time of closing. Each point is equal to one percent of the total amount of a mortgage. Most Lenders offer mortgages with several combinations of points and interest rates. Generally, the lower the interest rate, the more points you will pay at settlement.
- Principal - The amount of debt (not including interest) remaining on a loan. It is also the face amount of the mortgage.
- Private Mortgage Insurance (PMI) - An insurance paid by the borrower that protects the lender from non-payment of the loan. It is usually required if you make a down payment less than 20 percent of the appraised value of the home.
- Title Insurance - An insurance policy that insures against errors in the title search.
- Underwriting - The process of determining whether to make a loan based on credit, employment, assets, etc., to a loan applicant.
