What Mortgage Terms Mean
Adjustable-Rate Mortgage — An adjustable rate mortgage, commonly referred to as an ARM, is a loan type that allows the lender to adjust the interest rate during the term of the loan. Generally, these changes are determined by a margin and an index so that the interest rate changes, up or down, are based on market conditions at the time of the change. Most often these interest rate changes are limited by a rate change cap and a lifetime cap. If you apply for an adjustable rate mortgage, the lender is required to provide you with an ARM Program Disclosure which spells out the terms of the loan.
Annual Percentage Rate (APR) — To make it easier for consumers to compare mortgage loan interest rates, the federal government developed a standard format called an "Annual Percentage Rate" or APR to provide an effective interest rate for comparison shopping purposes. Some of the costs that you pay at closing are factored into the APR for ease of comparison. Your actual monthly payments are based on the periodic interest rate, not the APR.
Conventional Mortgage — A mortgage loan that is not insured or guaranteed by a government agency, such as the FHA (Federal Housing Administration), VA (Veterans Administration) or Rural Development Services (formerly known as Farmers Home Administration or FMHA).
Escrow — Funds paid by one party to another to hold until a specific date when the funds are released to a designated individual. Generally, an escrow account refers to the funds a mortgagor pays to the lender along with their monthly principal and interest payments for the payment of real estate taxes and hazard insurance. This is also referred to as impounds. The money is held by the lender to make payments when they are due.
Fixed-Rate Mortgage — A mortgage in which the monthly principal and interest payments remain the same throughout the life of the loan. The most common mortgage terms are 30 and 15 years. With a 30-year fixed rate mortgage your monthly payments are lower than they would be on a 15 year fixed rate, but the 15 year loan allows you to repay your loan twice as fast and save more than half the total interest costs.
Interest Rate — The cost of borrowing a lender's money. Interest takes into account the risk and cost to the lender for a loan. The interest rate on a fixed rate mortgage depends on the going market rate and how many discount points you pay up-front. An adjustable rate mortgage's interest is a variable rate made up of the index and the lender's margin.
Lock-ins — Written agreement in which a lender guarantees a specific interest rate if a loan closes within a set period of time. The lock-in may also specify the number of points to be paid at closing.
Mortgage — The legal document used by a borrower to pledge their property as security in order to obtain a loan. In some areas of the country, the mortgage is called a "deed of trust".
Origination Fee — A fee charged by a lender as a way to cover processing expenses or to increase their profitability for originating a mortgage loan. Most commonly, the origination fee is expressed as a percent of the loan amount. For our comparison purposes, the origination fee is considered to be a lender fee.
Points — Fees that are collected by the lender in exchange for a lower interest rate. Commonly called discount points, each point is equal to 1% of the loan amount. For our comparison purposes, a discount point is considered to be a lender fee. To determine if it is wise to pay discount points to obtain a lower rate, you must compare the up front cost of the points to the monthly savings that result from obtaining the lower rate.
Private Mortgage Insurance (PMI) — Insurance provided by a private company to protect the mortgage lender against losses that might be incurred if a loan defaults. The cost of the insurance is usually paid by the borrower and is most often required if the loan amount is more than 80% of the home's value. Sometimes referred to as mortgage insurance.
Transaction, Settlement, or Closing Costs — This may include application fees; title examination, abstract of title, title insurance and property survey fees; fees for preparing deeds, mortgages and settlement documents; attorney fees; recording fees; and notary, appraisal and credit report fees. Under the Real Estate Settlement Procedures Act, the borrower receives a good faith estimate of closing costs at the time of application or within three business days of application. The good faith estimate lists each expected cost for the borrower.
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