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STEP 3
Adjustable Rate Mortgage

With an adjustable rate mortgage (ARM), the interest rate may go up or down. Many ARMs will start at a lower interest rate than fixed rate mortgages. This initial rate may stay the same for months or years. When this introductory period is over, your interest rate will change and the amount of your payment will likely go up.

Annual Percentage Rate

An annual percentage rate (APR) is a broader measure of the cost to you of borrowing money. The APR reflects not only the interest rate but also the points, mortgage broker fees, and other charges that you have to pay to get the loan. For that reason, your APR is usually higher than your interest rate.

Balloon Loan

A balloon loan is a mortgage that requires a larger-than-usual one-time payment at the end of the term. This can mean your payments are lower in the years before the balloon payment comes due. Generally, this final payment is used to pay off the loan.

Conventional Loans

A conventional loan is any mortgage loan that is not insured or guaranteed by the government (such as under Federal Housing Administration, Department of Veterans Affairs, or Department of Agriculture loan programs). Conventional loans can be conforming or non-conforming.

Closing Costs

Generally, closing costs are fees and costs associated with obtaining the mortgage loan. You pay most of these expenses when signing the final loan documents, or when you “close” the deal. Some common closing costs include underwriting and/or processing fees, appraisal fees, pest inspection fees, title insurance, and title inspection/recording fees.

Credit Report

A credit report contains information about your credit - and some bill repayment history - and the status of your credit accounts. This information includes how often you make your payments on time, how much credit you have, how much credit you have available, how much credit you are using, and whether a debt or bill collector is collecting on money you owe. Lenders use these reports to help them decide if they will loan you money, what interest rates they will offer you, or to determine whether you continue to meet the terms of the account.

Credit Score

A credit score is a number that is used to predict how likely you are to pay back a loan on time. Your credit score starts with the information about you from your credit report. A mathematical formula – called a scoring model – is then used to create your credit score. Credit scores are used by companies to make decisions such as whether to approve a mortgage at a certain rate or issue a credit card. Usually a higher score makes it easier to qualify for a loan and may result in a better interest rate. Most scores range from 300-850.

Escrow Account

An escrow account is set up by your mortgage lender to pay certain property-related expenses on your behalf like property taxes and homeowner’s insurance. Because bills for taxes and insurance can be large and infrequent, many homeowners prefer to pay them in monthly installments along with their mortgage payment.

FHA Loan

The Federal Housing Administration administers a program of loan insurance to expand homeownership opportunities. FHA provides mortgage insurance to FHA-approved lenders to protect these lenders against losses if the homeowner defaults on the loan. The cost of the mortgage insurance is passed along to the homeowner.

Fixed Rate Mortgage

With a fixed rate mortgage, the interest rate is set when you take out the loan and will not change. An FHA fixed-rate loan often works well for first time home buyers because it allows up to 97% financing. This helps to keep down payments and closing costs at a minimum.

Good Faith Estimate

A good faith estimate is a form that lists basic information about the terms of a mortgage loan for which you've applied. It includes the estimated costs you'll have to pay for the home loan and provides you with basic information about the loan.

Interest Rate

The interest rate is the cost you will pay each year to borrow the money, expressed as a percentage rate. It does not reflect fees or any other charges you may have to pay for the loan.

Jumbo Loan

Each year Fannie Mae, Freddie Mac, and their regulator, the Federal Housing Finance Agency (FHFA), set a maximum amount for loans that they will buy from lenders. In general, the loan limits are $417,000, although they go higher in some states and US territories. Larger loans that are allowed to exceed these limits are called jumbo loans.

Loan Origination Fees

An origination fee is what the lender and any mortgage broker charges the borrower for making the mortgage loan. Origination services include taking and processing your loan application, underwriting and funding the loan, and other administrative services.

Lock-in

A rate lock or lock-in agreement is a written agreement that guarantees you a specific interest rate on your mortgage loan, as long as there are no major changes in your loan application and the loan closes within the agreed upon timeframe. This timeframe, which is usually 30-60 days, is referred to as the Rate Lock Period.

Mortgage

A mortgage is an agreement between you and a lender that gives the lender the right to take your property if you fail to repay the money you’ve borrowed plus interest. Mortgage loans are used to buy a home or to borrow money against the value of a home you already own.

Mortgage Insurance

Private mortgage insurance (PMI) protects the lender if you stop making payments on your loan. Lenders may require you to purchase PMI if your down payment is less than 20 percent of the sales price or the appraised value of the home. PMI premiums are added to your monthly mortgage payment. You may be able to cancel private mortgage insurance after a few years based on certain criteria, such as paying down your loan balance to a certain amount.

Points

One “point” equals one percent of the loan amount. For example, on a $100,000 loan, each point costs you $1,000. What is commonly referred to as a “discount point” in the mortgage industry is a point you pay the lender or broker to reduce the interest rate on a loan. In general, the more discount points you pay, the lower the rate. Other fees that do not lower your interest rate may also take the form of points, so be sure to clarify the type of point you are paying.

Qualified Mortgage

A Qualified Mortgage is a category of loans that have certain, more stable features that help make it more likely that you’ll be able to afford your loan. A lender must make a good-faith effort to determine that you have the ability to repay your mortgage before you take it out.

Reverse Mortgage

A reverse mortgage is a special type of loan that allows older homeowners to borrow against the equity (wealth) in their homes. The money you receive, and the interest charged on the loan, increase the balance of your loan each month. Over time, the loan amount grows. Since equity is the value of your home minus any loans, you have less and less equity in your home as your loan balance increases.

VA Loan

The Department of Veterans Affairs (VA) offers loan programs to help servicemembers, veterans, and their families buy homes. The VA does not make loans, but rather sets the rules for who may qualify, arranges the terms under which mortgages may be offered, and guarantees any loan made under the program. Some VA loans are available with no down payment.