Mortgage Terms and Definitions

ARM - adjustable rate mortgage A mortgage in which the interest changes periodically, according to corresponding fluctuations in an index. All ARMs are tied to indexes.

appraised value An opinion of a property's fair market value, based on an appraiser's knowledge, experience and analysis of the property. Since an appraisal is based primarily on comparable sales, and the most recent sale is the one on the property in question, the appraisal usually comes out at the purchase price.

balloon mortgage A mortgage loan that requires the remaining principal balance be paid at a specific point in time. (example: a loan may be amortized as if it would be paid over a 30 year period, but the requirement would be that by the end of the 10th year the entire balance must be paid)

cap ARMs have fluctuating interest rates, but those fluctuations are usually limited to a certain amount, limiting how much the loan may adjust over a 6 month period, an annual period, or life of loan.

closing costs Closing costs are separated into what are called "non-recurring closing costs" and "pre-paid items". Non-recurring, refers to any items which are paid just once as a result of buying the property or obtaining a loan. Pre-paids, refer to items which recur over time, such as property taxes and insurance.

conventional loans Any loan other than a government loan, such as VA or FHA.

convertible ARM An ARM that allows the borrower to change the ARM to a fixed-rate mortgage within a specific time.

earnest money deposit A deposit made by the potential home buyer to show serious intent about buying the house/property.

escrow An item of value, such as money or documents, deposited with a 3rd party to be given to the seller when the transaction is closed.

escrow account Once you close your purchase transaction, you may have an escrow account with your lender, which means that your monthly payments will include not only your principal and interest on the loan, but extra funds to cover items like property taxes and insurance when they come due. The lender then pays those items instead you paying them yourself.

Fannie Mae - Community Home Buyer's Program An income-based community lending model, under which mortgage insurers and Fannie Mae offer flexible underwriting guidelines to increase a low or moderate-income family's buying power and to decrease the total amount of cash needed to purchase a home.

FHA mortgage - Federal Housing Administration loan A mortgage that is a government loan and insured by the FHA

fixed rate mortgage A mortgage in which the interest rate does not change during the entire term of the loan

jumbo loan A 'non-conforming' loan that exceeds Fannie Mae's and Freddie Mac's loan limits, currently at $227,150.

lock-in A period of time (days) a lender guarantees a specified interest rate and points. Usually anywhere from 30 - 270 days.

no-cost loan Almost all lenders offer loans at "no points". You will find the interest rate on a "no points" loan is approximately a quarter percent higher than on a loan where you pay 1 point

point A "point" is 1 percent of the amount of the mortgage

prime rate This is the interest rate charged to 'preferred' customers. Changes are widely publicized in the news media and are used as indexes in some ARMs, especially home equity lines of credit. Changes in the prime rate do not directly affect other types of mortgages, but the factors that influence the prime rate also affect the rates of mortgage loans.

title insurance Insurance that protects the lender or the buyer against loss arising from disputes over ownership of a property.

two-step mortgage An ARM that has one interest rate for the first 5 or 7 years of its term than a different interest rate for the remainder of the amortization term.

VA mortgage A mortgage that is guaranteed by the Department of Veterans Affairs, which is a federal agency that guarantees residential mortgages made to eligible veterans of the military.