GLOSSARY OF TERMS
Applying for a mortgage means taking a large financial step.
You will hear many strange terms throughout the process. Becoming familiar with these terms will help you feel more in touch.
Adjustable Rate Mortgage (ARM) – is a mortgage in which the interest rate is adjusted periodically based on a preselected index.
Amortization – means loan payment by equal periodic payments calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance.
Annual Percentage Rate (APR) – is the cost of credit expressed as an annual rate. It must be calculated by using a formula set by federal law and disclosed to the Borrower to aid in comparing different credit plans. All finance charges imposed by Lender are included in this calculation, and an APR is always higher than the simple interest rate when such finance charges like points, origination fees or mortgage insurance are charged by a Lender.
Appraisal – an estimate of the value of property; made by a qualified professional called an “appraiser.”
Closing Costs – usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement. The cost of closing are usually about 2% to 4% of the mortgage amount.
Commitment – an agreement, often in writing, between a Lender and a Borrower to loan money at a future date subject to the completion of paperwork or compliance with stated conditions.
Conventional Loans – a mortgage not insured by FHA or guaranteed by the VA or Farmers Home Administration (FmHA).
Credit Report – a report documenting the credit history and current status of a Borrower’s monthly payment obligation on long-term debts.
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/her gross monthly income.
Down Payment – money paid to make up the difference between the purchase price and the mortgage amount. Down payments are usually 5% to 20% of the sale price on conventional loans.
Equity – the difference between the fair market value and current indebtedness; also referred to as the Owner’s interest.
Escrow – refers to a neutral third party who carries out the instructions of both you and the Seller to handle all the paperwork of settlement or “closing.” Escrow may also refer to an account held by the Investor into which you would pay money for tax or insurance payments.
Fixed-Rate Mortgage – a mortgage on which the interest rate is set for the term of the loan.
Gross Monthly Income – the total amount the Borrower earns per month, before any expenses are deducted.
Jumbo Loan – a loan amount which exceeds standard loan limits set by FannieMae/FreddieMac. The loans can be either fixed rate or adjustable rate.
Loan-To-Value Ratio – the relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage.
Market Value – the highest price that you would pay and the lowest price the Seller would accept on a property. Market value may be different from the price a property could actually be sold for at a given time.
Points (Loan Discount Points) – prepaid interest assessed at closing by the Lender. Each point is equal to 1% of the loan amount (e.g., two points on a $100,000 mortgage would cost $2,000).
Prepayment – a privilege in a mortgage permitting the Borrower to make payments in advance of their due date.
Private Mortgage Insurance (PMI) – may be required by your Lender if the loan you apply for cannot be granted because the loan does not meet the normal standards for the Lender. The most common reason this requirement is a smaller down payment, the Lender usually requires 20% down. This insurance protects the Lender from loss if the Borrower defaults. It does not protect the Borrower, though it may allow the Borrower to qualify for a loan he/she could not otherwise get. This insurance will require an initial premium payment of .5% to 2% of your mortgage amount plus an additional monthly fee, depending on your loan structure.
Title – a document that gives evidence of an individual’s ownership of property.
Title Insurance – a policy, usually issued by a title insurance company, which insures you against errors in the title search. The cost of the policy is usually a function of the value of the property and is often borne by the Purchaser and/or the Seller.
Title Search – an examination of municipal or country records to determine the legal ownership of property, usually performed by a title company.