Adjustable-Rate Mortgage (ARM)A mortgage loan with an interest rate that can change periodically. The rate is typically fixed for an initial period, after which it adjusts based on a specified index, such as the U.S. Prime Rate or the London Interbank Offered Rate (LIBOR).
AmortizationThe process of gradually paying off a mortgage through regular payments, which include both principal and interest. The payment is structured so that the loan is fully repaid by the end of the term, typically over a fixed number of years.
Annual Percentage Rate (APR)The annual cost of borrowing, expressed as a percentage. It includes both the interest rate and any additional fees or costs associated with the mortgage. APR provides a more comprehensive picture of the loan’s total cost compared to the interest rate alone.
AppraisalAn assessment performed by a professional appraiser to determine the estimated value of a property. The appraisal helps lenders determine the maximum amount they are willing to lend for a mortgage and assists buyers in understanding the property’s worth.
Closing CostsThe expenses incurred by the buyer and seller during the real estate transaction. Closing costs may include fees for the appraisal, home inspection, title search, attorney services, loan origination, recording fees, and prepaid expenses such as property taxes and homeowner’s insurance. These costs are typically due at the closing of the mortgage and are in addition to the down payment.
CollateralAn asset, such as a property, that is used as security for a loan. In the context of a mortgage, the property being financed is considered collateral. If the borrower defaults on the loan, the lender may seize the collateral to recover their investment.
Credit ScoreA numerical representation of a person’s creditworthiness. Credit scores are based on factors such as payment history, credit utilization, length of credit history, types of credit, and recent credit inquiries. Lenders use credit scores to assess the borrower’s ability to repay the mortgage and determine the interest rate and loan terms.
Down PaymentThe initial payment made by the buyer toward the purchase price of a property. It is usually a percentage of the total price. A larger down payment reduces the loan amount, lowers the monthly mortgage payments, and may result in more favorable loan terms.
EquityThe difference between the market value of a property and the outstanding balance of the mortgage. As the mortgage is paid down and the property value appreciates, equity increases. Homeowners can access their equity through refinancing, a home equity loan, or a home equity line of credit (HELOC).
EscrowAn account held by a third party, typically the lender, to hold funds for paying property taxes, homeowner’s insurance, and other related expenses. Each month, a portion of the mortgage payment is deposited into the escrow account, and the funds are disbursed when the bills are due. Escrow ensures that these costs are paid on time and protects the lender’s investment in the property.
Fixed-Rate MortgageA mortgage loan with an interest rate that remains constant throughout the entire term. This provides predictable monthly payments, allowing borrowers to budget effectively.
ForeclosureThe legal process through which a lender seizes and sells a property due to the borrower’s failure to make mortgage payments. Foreclosure typically occurs when the borrower is in default for an extended period.
Homeowners Association (HOA)An organization in a residential community, such as a condominium or planned development, that establishes rules and regulations and collects fees from homeowners to manage common areas and provide services. HOA fees are in addition to mortgage payments and can vary in amount depending on the community.
InterestThe cost of borrowing money, expressed as a percentage of the loan amount. It is paid to the lender in addition to the principal amount.
Loan-to-Value Ratio (LTV)The ratio of the loan amount to the appraised value or purchase price of a property, expressed as a percentage. LTV is used by lenders to assess the risk associated with a mortgage. A higher LTV indicates a higher loan amount compared to the property value, which may result in stricter lending requirements or the need for private mortgage insurance (PMI).
Mortgage InsuranceInsurance that protects the lender in case the borrower defaults on the loan. Mortgage insurance is typically required when the down payment is less than 20% of the property’s value. It allows borrowers with a smaller down payment to obtain a mortgage, but it adds an additional cost to the monthly payments.
PreapprovalThe process of getting preliminary approval for a mortgage before finding a property. It involves submitting financial information to a lender, who assesses the borrower’s creditworthiness and provides an estimate of the loan amount for which they qualify. Preapproval strengthens the buyer’s position during negotiations and demonstrates their seriousness to sellers.
PrincipalThe original amount of money borrowed in a mortgage, excluding interest and other fees. Principal is gradually repaid over the term of the loan through regular mortgage payments.
RefinancingThe process of replacing an existing mortgage with a new loan, often to obtain better loan terms, lower interest rates, or access equity. Refinancing can help borrowers reduce monthly payments, shorten the loan term, or consolidate debt.
Title InsuranceInsurance that protects the buyer and lender against any legal claims or disputes regarding ownership of the property. It ensures that the title is clear and that there are no outstanding liens or encumbrances. Title insurance is typically required by the lender to protect their investment in the property.
UnderwritingThe process of evaluating a borrower’s financial information, creditworthiness, and the property being financed to determine whether to approve a mortgage application. Underwriters assess the risk associated with the loan and make a decision based on guidelines set by the lender and relevant regulations. They verify the borrower’s income, employment, credit history, and other factors to ensure that they meet the lender’s criteria.