Mortgage Terms

Don't worry about memorizing all these terms, that's what mortgage specialists are for.

Adjustable-Rate Mortgage (ARM)

A home loan in which the interest rate changes periodically based on a standard financial index. Most ARMs have caps on how much an interest rate may increase.

Annual Percentage Rate (APR)

A standardized method of calculating the cost of a mortgage, stated as a yearly rate, which includes such items as interest, mortgage insurance and certain points or credit costs. Because it includes these other items, it is generally higher than the interest rate a lender will quote.

Appraisal

A written report by a qualified appraiser estimating the value of a property.

Closing Costs

Expenses over and above the price of the property that are incurred by buyers and sellers when transferring ownership of a property. Closing costs normally include an origination fee, property taxes, charges for title insurance and escrow costs, appraisal fees etc.

Collateral

Typically, the home you are purchasing or refinancing that is pledged as security to a debt. If the borrower fails to repay the loan, the lender may gain ownership of the collateral and sell it to recover the money.

Debt To Income Ratio (DTI)

Percentage of your monthly gross income that goes toward paying debts.

Down Payment

The amount of a property's purchase price that the buyer pays in cash and does not finance with a mortgage. You can often lower your mortgage payment or purchase a more expensive house by putting more money down. If you put down less than 20 percent of the purchase price, you may have to obtain private mortgage insurance, or PMI.

Escrow

An account in which a third party holds the documents and money in a real estate transfer until all conditions of a sale are met. Also, an account in which money for property taxes and insurance is held until paid; money is added to the account every time a mortgage payment is made.

Fixed Initial Rate Mortgage (FIRM)

A home loan that features a fixed rate and payment for an initial period, with a variable rate for the remainder of the loan term. For example, a FIRM 5/30 means the mortgage has a fixed rate for the first 5 years and the remaining 25 years are a variable rate.

Fixed-Rate Mortgage

A home loan in which the interest rate will remain the same through the life of the loan, most often 15 years or 30 years.

Foreclosure

The legal process by which a homeowner in default on a mortgage is deprived of interest in the property. 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 (GFE)

A written estimate of expected closing costs that a lender must provide a prospective home buyer within three days of the home buyer submitting a mortgage loan application.

Homeowners Insurance

An insurance policy that includes hazard coverage, covering loss or damage to property, as well as coverage for personal liability and theft.

Jumbo Mortgage

A mortgage that exceeds the conforming limit (currently, any loan over $417,000). The single-family limit changes annually. Rates on jumbo mortgages tend be one-eighth to one-quarter of a percentage point higher than comparable conforming mortgages.

Loan To Value (LTV)

When you buy a home, this term refers to the amount of financing you are getting in relationship to your new home's value. For example, an $80,000 mortgage on a $100,000 home has an LTV of 80 percent. A loan with LTV of more than 80 percent will require you to purchase private mortgage insurance (PMI). For example, a $90,000 mortgage on a $100,000 home is 90% LTV and will require PMI.

Margin

A fixed percentage rate that is added to an index to determine the interest rate of an adjustable rate mortgage. The index plus the margin determines your interest rate each time your rate adjusts.

Point

Factored into the loan's APR, a point equals one percent of a mortgage loan. Some lenders charge "origination points" to cover expenses of making a loan. Some borrowers pay "discount points" to reduce the loan's interest rate.

Prepayment Penalty

This is a fee charged to borrowers who pay a loan off faster than the prescribed payment schedule. FirstBank does not charge a prepayment penalty on consumer mortgage loans.

Principal

The amount of debt, excluding interest, left on a loan.

Private Mortgage Insurance (PMI)

An insurance policy that protects the lender against default on loans. PMI is usually required if the down payment is less than 20 percent of the sale price. Home buyers pay for the coverage in monthly installments. PMI should be terminated when the home buyer has built up 20 percent equity in the property.

Title Insurance

A policy that guarantees that an owner has proper title to a property and can legally transfer title to someone else. Should a problem arise, the title insurer pays any legal damages. A policy may protect the mortgage lender, the home buyer or both.