Adjustable Rate Mortgage - an adjustable rate mortgage, known as an ARM, is a mortgage that has a fixed rate of interest for only a set period of time, typically one, three or five years. During the initial period the interest rate is lower, and after that period it will adjust based on an index. The rate thereafter will adjust at set intervals.

 

Amortization - the amortization of the loan is a schedule on how the loan is intended to be repaid. For example, a typical amortization schedule for a 15 year loan will include the amount borrowed, interest rate paid and term. The result will be a month breakdown of how much interest you pay and how much is paid on the amount borrowed.

 

Appraisal - is conducted by a professional appraiser who will look at a property and give an estimated value based on physical inspection and comparable houses that have been sold in recent times.

 

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.

 

Credit Report 
A report detailing an individual's credit history that is prepared by a credit bureau and used by a lender to determine a loan applicant's creditworthiness.

 

Debt-to-income Ratio - lenders look at a number of ratios and financial data to determine if the borrowers are able to repay the loan . One such ratio is the debt-to-income ratio. In this calculation, the lender compares the monthly installment or revolving payments,) including the new mortgage (this does not include utilities, car insurance, or other common household expenses), and compares it to the gross monthly income . The income figure is divided into the expense figure, and the result is displayed as a percentage. The higher the percentage, the more risky the loan is for the lender.

Down Payment - is the amount of the purchase price that the buyer is paying out of pocket. Generally, lenders require a specific down payment in order to qualify for the mortgage.

Equity - the difference between the value of the home and the mortgage loan is called equity. Over time, as the value of the home increases and the amount of the loan decreases, the equity of the home generally increases.

Escrow - at the closing of the mortgage, the borrowers are generally required to set aside a percentage of the yearly taxes and insurance to be held by the lender. On a monthly basis, the lender will also collect additional money to be used to pay the taxes and insurance on the home. This escrow account is maintained by the lender who is responsible for paying the tax and insurance bills on a regular basis.

 

Homeowner's Insurance - prior to the mortgage closing date, the homeowners must secure property insurance on the new home. The policy must list the lender as loss payee in the event of a fire or other event. This must be in place prior to the loan going into effect.

 

Loan-to-value Ratio - This calculation is done by dividing the amount of the mortgage by the value of the home. Any value over 80% typically requires outside PMI insurance.

 

Private Mortgage Insurance - When the loan to value (LTV) is higher than 80% lenders will generally require outside insurance in order to complete the transaction. In these cases, the borrowers can get private mortgage insurance (PMI) which is a guarantee to the lender that until the borrower reaches a 80% LTV, they are covered from default. To get this protection, borrowers pay a monthly PMI premium. One popular option to get around paying PMI is to take a second mortgage and use it as a down payment on the first.

 

Title Insurance - the lender is using the home as collateral for the mortgage transaction. Because of this, they need to be certain that the title of the property is clear of any liens which could jeopardize the Mortgage. So, lenders will require borrowers to get title insurance on the property, which will ensure that the homes are free and clear.