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Mortgage Terms You Should Know

Adjustable Rate Mortgage: A mortgage where the interest rate is not fixed, but changes during the life of the loan in line with movements in an index rate. You may also see ARMs referred to as AMLs (adjustable mortgage loans) or VRMs (variable-rate mortgages).

Annual Percentage Rate (APR): The cost of credit expressed as a yearly rate. The APR takes into account not only the interest rate but also points, broker/lender fees, and certain other credit charges that you may be required to pay.

Conventional Loans: Mortgage loans other than those insured or guaranteed by a government agency such as the Federal Housing Administration (FHA) or Veterans Administration (VA).

Debt Ratio: The percentage of monthly debt payments (house, car, credit cards, etc.) divided by your monthly gross income.

Escrow: A neutral third party that holds the money and/or the documents of a mortgage transaction. It can also be an account held by the lender or servicer into which a homeowner pays money for property taxes and insurance. In this instance, the lender is responsible for making the property tax and homeowner’s insurance payment, when due.

Good Faith Estimate: A list of the expected costs or fees for a mortgage loan.

Index: The index is the measure of interest rate changes that the lender uses to decide how much the interest rate on an ARM will change over time. No one can be sure when an index rate will go up or down. You should ask your lender how the index for any ARM you are considering has changed in recent years, and where it is reported.

Loan Origination Fees: Fees charged by a lender for processing the loan and are often expressed as a percentage of the loan amount.

Loan-To-Value (LTV ): The loan amount divided by the value of the home in percentage form.

Lock-In: Refers to a written agreement guaranteeing a home buyer a specific interest rate on a home loan provided that the loan is funded and closed within a certain period of time. The lock periods vary from lender to lender. You may have to pay points to receive a longer lock period.

Points: Points are fees paid to the lender or broker for the loan and are based on the loan amount. For example: One point on a $100,000 loan is 1% of $100,000, or $1,000. Points are linked to the interest rate – usually the more points you pay, the lower your interest rate will be. Points are usually paid at closing.

Private Mortgage Insurance (PMI ): Insurance that protects the lender in case the home buyer fails to pay, or defaults on the loan. Usually PMI is required on loan amounts greater then 80% of the LTV (loan to value). However, recent legislation declared that lenders must automatically remove PMI when the loan balance reaches 75% of the original appraised value.

Term: the length of the mortgage loan. Generally the repayment terms are 15, 20 or 30 years.

Trust Deed/ Mortgage: The security document signed by the borrower when a home loan is made that gives the lender the right to take possession of the property if the borrower fails to pay off the loan.