Here are some common mortgage terms that it helps to know when securing financing for your home. We’ll continue to add more to the list. There are two main reasons for knowing these terms:

  1. Knowing what you are talking about
  2. Looking like a savvy mortgage shopper (and not an easily ripped-off sucker)

Adjustable Rate Mortgage (ARM) – A general term for any mortgage in which the interest rate and generally the payments change over the life of the loan. ARM loans are usually fixed for a period of time (2, 3, 5, 7, 10 years) and then become adjustable after the fixed period. To your advantage, the initial rate of an ARM is usually low, giving you greater payment flexibility than a fixed rate mortgage. You risk higher payments after the fixed period expires.

Amortization – A plan for repaying the money you’ve borrowed in regular payments. Generally with each payment, you pay back part of the money originally borrowed (the principal) plus interest on the declining balance of the principal.

Annual Percentage Rate (APR) – The total cost of finance charge for a loan per year, expressed as a percentage. It is the total of interest and other fees, such as points, compared to the amount of the loan.

Buydown – Upfront points paid by you to reduce your long term interest rate. Usually used to reduce the interest rate on long term fixed loans to provide monthly savings over the life of the loan.

Closing Costs – Costs, in addition to the loan itself, that are due at closing. They normally include origination fees, discount points, costs for title insurance, recording documents and prepayments of taxes and insurance premiums.

Credit Rating – An evaluation of your ability to pay back a loan. It is based on your current financial situation and past performance as reported by the 3 major credit bureaus.

Deferred Interest – The interest left unpaid by a minimum payment loan that is deferred and added to your unpaid principal balance. Deferred interest occurs when you choose a flexible payment option loan. Also called “negative amortization.”

Endorsement – An addition made to a document, such as your title policy, in order to alter or clarify it.

Equity – Your interest in the property after all loans have been subtracted from the appraised value of your property. When you have paid off your mortgage, your equity in the property is 100%.

Escrow Account – A special bank account maintained by your lender or an escrow agent. Money is set aside in it so that the lender can pay the taxes, hazard and mortgage insurance, as they come due.

Fixed Rate Mortgage – Your interest rate doesn’t change for the life of the loan. If the interest on your 30-year mortgage is set at 7%, it will stay at 7% until the mortgage is paid off.

Fully Indexed Rate – A term used in adjustable rate mortgages. It reflects the true interest rate of your loan. It is calculated by adding the margin of your loan to the index.

Homeowners Policy – An insurance policy intended for owner occupied private dwellings. It covers the dwelling and its contents against common disasters, such as fire, wind damage and theft.

Interest – A charge for borrowing money. It is usually expressed as an annual rate, or percentage, of the money you still owe.

Loan-to-Value Ratio – The amount you’ve borrowed compared to the appraised value of your property.

Margin – The margin is the amount the lender adds to an index value to determine the interest rate of an adjustable rate mortgage. Margins do not change over the life of the loan.

Origination Fee – The fee that the lender charges you to cover the cost of the loan. The fee is usually computed as a percentage (e.g. 2%) of your loan. It does not include fees for appraisals, credit reports, inspections, etc.

PITI – This stands for the principal, interest, taxes and insurance: the four costs included in a monthly mortgage payment.

Point – It is a one-time charge due at closing. One point is one percent of your loan. By paying points you increase your initial costs in order to decrease your interest rate.

Private Mortgage Insurance (PMI) – Insurance that protects your lender against the chance of default. Generally, this insurance is required by your lender when your down payment is less than 20% of your property value.

Recording – Any legal document that affects the ownership of real property is recorded in public records at your county’s recorder office. This gives official, public notice of your ownership.

Rescission – Cancellation of a contract or a transaction. A rescission can occur if you elect to make the transaction invalid or when a law or technicality makes the transaction void.Â

Title Insurance Policy – Protects the lender up to a specified amount against losses arising from claims against your property including other liens, taxes, etc. This is insurance for the lender, not you.