Terminology

Below you'll find frequently used mortgage terminology. It might be helpful for you to know these terms while you are going through the mortgage-seeking process.

Adjustable Rate Mortgage (ARM)

Also known as a variable rate mortgage. The interest rate on these mortgages changes periodically.

Adjustment Period

This is the length of time for which the interest rate is fixed on an adjustable. Therefore if the adjustment period is six months, then the interest rate will remain fixed for six months, after which time it will adjust.

Appraisal

An opinion or estimate of the value of a property at a given date.

Annual Percentage Rate - APR

The effective rate of interest for a loan per year. This rate is typically higher than the note rate because it takes into account closing costs. This is one way to compare loan programs offered by different lenders. Caution : the APR is sometimes computed differently by different lenders and can be misleading.

Closing Costs

Expenses incurred by the buyer and seller in a real estate or mortgage transaction. There are two types of costs : recurring and non recurring. Non-recurring costs are one time transactional costs which include:

• Discount and origination points
• Lender fees - underwriting, processing, document preparations, flood certificate, tax service, wire transfer, courier, etc
• Title insurance fees
• Escrow, attorney or closing agent fees
• Recording fees
• Inspection and appraisal fees
• Real estate brokerage commissions

Recurring fees are costs associated with owning the property and they recur month after month. These costs may include hazard insurance, interest, property taxes, mortgage insurance (PMI), and association fees. A pro-rated amount of these fees may have to be paid at closing including:

• Pre-paid interest - interest charges from the date of closing to the end of the month 
• Property taxes if due
• Hazard insurance, fire insurance or homeowners insurance has to be paid for one year
• Mortgage insurance (PMI) - may be required if the loan amount is more than 80% of the value of the property.

In the past a whole year of PMI had to be paid up front, however in recent years many PMI companies only require 1-2 months up front. Mortgage insurance premiums are normally paid every month with the loan payment

Fixed-rate loan

A type of mortgage that locks in a fixed interest rate over the life of the loan

Hazard Insurance (Fire Insurance, Homeowners insurance)

Insurance on a property against fire and other risks. A homeowners policy may have additional coverage for theft, liability, etc that a fire insurance policy may not cover.

Mortgage

A written instrument that creates a lien upon real estate as security for the payment of a specified debt.

Points

Fees paid to lenders. 1 point = 1% of the loan amount. On a $100,000 loan 1 point is $1000. Points may be further classified into origination points or discount points.

Private Mortgage Insurance (PMI)

In the event that you do not have a 20 percent down payment, lenders will allow a smaller down payment - as low as 2 percent in some cases. With the smaller down payment loans, however, borrowers are usually required to carry private mortgage insurance. Private mortgage insurance payments are normally made annual or monthly. An impound account may be required.

Processing time

The period of time between your mortgage application and the final closing

Title Insurance

An insurance policy which protects the insured against loss arising from defects in title. Title insurance policies are typically obtained for the buyer and the lender