Useful Terms

Adjustable Rate Mortgage, or ARM :

Mortgage in which the rate of interest is adjusted based on a standard rate index. Most ARMs have caps on how much the interest rate may increase.

Adjustment Interval :

How often the loan’s rate can be changed.

Amortization Schedule :

A timetable for the gradual repayment of a mortgage loan. An amortization schedule indicates the amount of each payment applied to interest and principal, and also the remaining balance after each payment is made.

Amortization Term :

The amount of time required to amortize (repay) a mortgage loan. The amortization term is usually expressed in months. A 30-year fixed-rate mortgage, for example, has an amortization term of 360 months.

Annual Percentage Rate (APR) :

A standardized method of calculating the cost of a mortgage, stated as a yearly rate which includes such items as interest, mortgage insurance, and certain points or credit costs.

Balloon Mortgage :

A loan that has regular monthly payments which amortize over a stated term but call for a final lump sum (balloon payment) at the end of a specified term, or maturity date, such as 10 years.

Basis Points :

1/100th of 1 percent. If an interest rate changes 50 basis points, for example, it has moved 1/2 of 1 percent.

Bridge Loan :

A loan that “bridges” the gap between the purchase of a new home and the sale of the borrower’s current home. The borrower’s current home is used as collateral and the money is used to close on the new home before the current home is sold. Some are structured so they completely pay off the old home’s first mortgage at the bridge loan’s closing, while others pile the new debt on top of the old. They usually run for a term of six months.

Caps :

The maximum amount the interest rate can change annually or cumulatively over the life of an adjustable-rate mortgage. For example, if the caps are 2 percent annual and 6 percent life of loan, a mortgage with a first-year rate of 10 percent could rise to no more than 12 percent the second year, and no more than 16 percent over the entire loan term.

Commitment Letter :

A formal offer by a lender stating the approved terms for lending money to a home buyer.

Conventional Mortgage :

Usually refers to a fixed-rate, 30-year mortgage that is not insured by the FHA, Farmers Home Administration (FmHA) or Veterans Administration.

Discount Points :

A type of point (1 percent of a loan) paid by the borrower to reduce the interest rate.

Earnest Money Deposit :

A deposit made by potential home buyers during negotiations with the seller. The sum shows a seller that a buyer is serious about purchasing the property.

Equity :

The value of a homeowner’s unencumbered interest in real estate. Equity is the difference between the home’s fair market value and the unpaid balance of the mortgage and any outstanding liens. Equity increases as the mortgage is paid down or as the property enjoys appreciation.

Escrow Payment :

The portion of a homeowner’s monthly mortgage payment that is held by the loan servicer to pay for taxes and insurance. Also known as reserves. The loan servicer holds the escrow funds separately from money meant to pay off principal and interest.

Fixed-rate Mortgage :

A mortgage in which the interest rate does not change during the entire term of the loan, most often 15 years or 30 years.

Maturity :

The date on which the principal balance of a loan becomes due and payable.

Note :

The document giving evidence of mortgage indebtedness, including the amount and terms of repayment.

Points :

A point equals 1 percent of a mortgage loan. Lenders charge points as a way to make a profit. Borrowers may pay discount points to reduce the loan interest rate. Buyers are prohibited from paying points on HUD or VA guaranteed loans. On a conventional mortgage, points may be paid by either buyer or seller or split between them. Within limits, points are usually tax deductible.

Title :

A legal document proving a person’s right to claim entitlement to a property, including the history of the property’s ownership.