Mortgage Terms

ADJUSTABLE RATE MORTGAGE-Adjustable Rate Mortgage is also referred to as a mortgage with an interest rate that adjusts periodically to reflect changes in market conditions. Your mortgage payments are adjusted up or down (usually on an annual basis) as the interest rate changes. To protect you in a rising interest market, rate increases are limited (usually 2 percentage points annually; 6 percentage points over the life of a loan).

AMORTIZATION SCHEDULE-A timetable for payment of a home loan. An amortization schedule shows the amount of each payment applied to interest and principal and the remaining balance after each payment is made.

ANNUAL PERCENTAGE RATE (APR)-This refers to the interest rate that reflects the actual cost of a mortgage as a yearly rate. Because APR includes points and other costs associated with the mortgage, it's usually higher than the advertised simple interest rate. The APR more accurately reflects what you'll be paying and allows you to compare different mortgages based on actual costs.

BALLOON LOAN-A loan that has level monthly payments that will amortize it over a stated term (e.g., 30 years) but that requires a lump sum payment of the entire principal balance at the end of a shorter term (e.g., 10 years).

CLOSING-The conclusion of a transaction. In real estate, closing includes the delivery of a deed, the signing of notes and security instruments, and the disbursement of funds necessary to the sale or loan transaction.

CONTINGENCY-A condition that must be met before a contract is legally binding. For example, home purchasers often include a contingency that specifies that the contract is not binging until the purchaser obtains a satisfactory home inspection report from a qualified home inspector.

EQUITY-The value of your home after the outstanding balances of any loans are subtracted. If you make a 5 percent down payment, you have 5 percent of the price of your home in equity. As you make payments toward principal over time, the equity in your home grows.

ESCROW-Can serve two purposes. 1) As a special third-party account set up by the lender in which a portion of your monthly payment funds are held to pay for taxes and insurance and other items. 2) Escrow is most commonly known as a third party who carries out he instructions of both the buyer and seller to handle the paperwork at the settlement of a real estate purchase.

FIXED RATE MORTGAGE-A mortgage with an interest rate that stays the same (fixed) over the life of the mortgage. Monthly payments for a fixed rate mortgage are very stable and will not change.

FORECLOSURE-The legal process by which a borrower's interest in mortgaged property is taken because of a default on the loan. This usually involves a forced sale of the property at public auction with the proceeds of the sale being applied to the mortgage debt.

GOOD FAITH ESTIMATE-A document provided when you apply for a loan. It provides estimates on all costs associated with obtaining and closing a mortgage loan.

LIEN-A legal claim against a property that must be paid off when the property is sold. A lien is created when you borrow money to purchase or refinance a home loan.

LOCK-IN-PERIOD-The time period during which the lender has guaranteed an interest rate to a borrower.

POINTS-Points are prepaid interest on your mortgage. A one-time fee charged by the lender at the time of closing for originating a loan. Each point is 1% of the loan amount.

PRINCIPAL PAYMENT-Portion of your monthly payment that reduces the balance of a home loan.

TITLE-A legal document evidencing a person's right to, or ownership of a property.

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