Adjustable Rate Mortgage (a.k.a. ARM Loan): An Adjustable Rate Mortgage is a home loan where the interest rate adjusts throughout the term of the loan. ARM Loans usually have an initial interest rate that is lower than that of a Fixed-Rate Mortgage. This low interest rate is locked for a set length of time. Once that time has expired, the interest rate can go up based on market factors. The lower initial interest rate helps those who can’t afford a fixed-rate mortgage get financing for their home. However, the interest rate will most likely increase when the initial term of the low interest rate expires.
Annual Percentage Rate (APR): The measurement of the full cost of a loan including interest and loan fees expressed as a yearly percentage rate. Because all lenders apply the same rules in calculating the annual percentage rate, it provides consumers with a good basis for comparing the cost of different loans.
Appraisal: An estimate of the value of property made by a qualified professional called an “appraiser.”
Closing Costs: Closing costs are the expenses involved in finalizing a mortgage. Closing costs include lender/agency fees, loan origination costs, escrow payments, title insurance, attorney fees, etc. Closing costs are often shared between both the buyer and the seller.
Escrow: Escrow is at the end of the mortgage process where a neutral third party obtains the documentation and money involved in the transaction until the transaction is complete. An escrow account is also used to hold the property tax and insurance monies that are collected during payment of the loan.
Fixed-Rate Mortgage: A fixed-rate mortgage is a loan where the interest rate stays the same. It does not fluctuate while the loan is being paid off. Financing for fixed-rate mortgage loans are commonly spread out over 10, 15, 20, or 30 years. This type of loan is popular because there are typically no surprises. Since the interest rate remains the same, the monthly mortgage payments are static, and don’t change year to year.
Points: Points are a percentage of the principal of the loan used to lower the interest rate of a loan. There are two types of points: Discount Points and Origination Points. Discount Points reduce the interest rate of a loan by having the lender pay more at closing. One point equals one percent. So, if you want to lower your interest rate by one percent, the borrower needs to pay one percent of the principal at closing. However, this does not lower the principal amount. It merely lowers the interest rate. Origination Points are used in the same fashion and utilized to cover the loan processing expenses.
PMI: Private Mortgage Insurance. Mortgage insurance provided by non-government insurers that protects a lender against loss if the borrower defaults.
Principal: Principal is the original amount borrowed from the lender. It does not include interest or other fees. It’s the lump sum the borrower gets from the lender.
Title Insurance: Insurance to protect a lender or owner against loss in the event of a property ownership dispute.