As you shop for a mortgage, you need to understand the terminology used. The list below inlcudes some of the most common terms you'll need to know, but it isn't exhaustive. So if you come across a term that you don't understand, be sure to ask your broker or lender or your home-buying counselor to clarify what it means so your not caught off guard.
- Adjustable-rate loans, also known as variable-rate loans, usually offer a lower initial interest rate than fixed-rate loans. The interest rate changes over the life of the loan based on market conditions, but the loan agreement generally sets maximum and minimum rates. When interest rates rise, generally so do your loan payments; and when interest rates fall, your monthly payments may be lowered.
- Annual percentage rate (APR) is the cost of credit expressed as a yearly rate. The APR includes the interest rate, points, broker fees, and certain other credit charges that the borrower is required to pay.
- Conventional loans are mortgage loans other than those insured or guaranteed by a government agency such as the FHA (Federal Housing Administration), the VA (Veterans Administration), or the Rural Development Services (formerly know as Farmers Home Administration, or FmHA).
- Escrow is the holding of money or documents by a neutral third party prior to closing. It can also be an account held by the lender (or servicer) into which a homeowner pays money for taxes and insurance.
- Fixed-rate loans generally have repayment terms of 15, 20, or 30 years. Both the interest rate and the monthly payments (for principal and interest) stay the same during the life of the loan. The only change in your payment would result from changes in your taxes and insurance if you have an escrow account with your loan servicer.
- Hybrid adjustable-rate mortgages have fixed payments for a specified amount of time (could be a few months or a few years depending on the loan agreement), then turns into an adjustable rate mortgage. Hybrid ARMs are represented by two numbers and usually are one of two types:
o For one type, the first number refers to how many years the loan has a fixed rate and the second number refers to how many years the loan has an adjustable rate. For example, a 2/28 hybrid ARM means two years of a fixed rate and 28 years of an adjustable rate.
o For another type of hybrid ARM, the first number refers to how many years the loan has a fixed rate, and the second number refers to how often the rate changes. For example, a 5/1 hybrid ARM means the interest rate is fixed for five years, then adjusts every year thereafter.
- The interest rate is the cost of borrowing money expressed as a percentage rate. Interest rates can change because of market conditions. For example, if you borrow $200 with an interest rate of 10 percent, you need to repay $220 ($20 of which is interest).
- Loan origination fees are fees charged by the lender for processing the loan and are often expressed as a percentage of the loan amount.
- Lock-in refers to a written agreement guaranteeing a home buyer a specific interest rate on a home loan provided that the loan is closed within a certain period of time, such as 60 or 90 days. Often the agreement also specifies the number of points to be paid at closing.
- A mortgage is a document signed by a borrower when a home loan is made that gives the lender a right to take possession of the property if the borrower fails to pay off the loan.
- Overages are the difference between the lowest available price and any higher price that the home buyer agrees to pay for the loan. Loan officers and brokers are often allowed to keep some or all of this difference as extra compensation.
- Points are fees paid to the lender for the loan. One point equals one percent of the loan amount. Points are usually paid in cash at closing. In some cases, the money needed to pay points can be borrowed, but doing so will increase the loan amount and the total costs.
- Principal is the original amount of a debt or investment on which interest is calculated.
- Private mortgage insurance (PMI) protects the lender against a loss if a borrower defaults on the loan. It is usually required for loans in which the down payment is less than 20 percent of the sales price or, in a refinancing, when the amount financed is greater than 80 percent of the appraised value.
- The term of the loan refers to the number of payments and amount of time you need to repay the loan. A longer term loan may offer lower monthly payments, but over time, the total amount you repay is higher.
- Thrift institution is a general term for savings banks and savings and loan associations.
- Transaction, settlement, or closing costs may include:
o application fees
o title examination
o abstract of title, title insurance, and property survey fees
o fees for preparing deeds, mortgages, and settlement documents
o attorneys’ fees
o recording fees
o notary, appraisal, and credit report fees.
Under the Real Estate Settlement Procedures Act, the borrower receives a good faith estimate of closing costs at the time of application or within three days of application. The good faith estimate lists each expected cost, either as an amount or a range.