1. Adjustable-Rate Mortgage (ARM)
An Adjustable-Rate Mortgage (ARM) starts with a fixed interest rate for an initial period (usually 5, 7, or 10 years), after which the rate adjusts annually based on a set index, like the prime rate or LIBOR.
- Example: With a 5/1 ARM, you pay a fixed interest rate for the first five years. After that, the rate adjusts each year. If rates rise, your monthly payment could increase. A Comprehensive guide to ARMs.
2. Amortization
Amortization is the schedule by which you repay a mortgage. Early in the loan term, more of your payment goes toward interest. Over time, more goes toward paying off the loan principal.
- Example: In a 30-year fixed mortgage, during the first few years, most of your monthly payment covers interest. In the final years, more of the payment goes toward the principal.
3. Annual Percentage Rate (APR)
The APR includes the interest rate and other fees or costs to give you a more comprehensive look at the cost of borrowing.
- Example: If your mortgage has a 3.5% interest rate but fees such as closing costs or mortgage insurance raise the APR to 3.8%, this is the true cost of borrowing over the year.
4. Appraisal
An appraisal is an unbiased professional estimate of the property’s value. Lenders use this to ensure the home is worth the loan amount you’re requesting.
- Example: You’re purchasing a home for $300,000. An appraiser evaluates the home and determines it’s worth $290,000, so your lender may only approve a loan based on the appraised value.
5. Closing Costs
Closing costs are the fees you pay to finalize the home purchase. They typically range from 2-5% of the loan amount and include things like title insurance, appraisal fees, and property taxes.
- Example: If you’re purchasing a $200,000 home, your closing costs could range from $4,000 to $10,000. Closing Costs Explained.
6. Debt-to-Income (DTI) Ratio
The DTI ratio measures how much of your income is used to pay debts each month. Lenders use this to assess whether you can afford the mortgage payments.
- Example: If your monthly debts total $1,500 and your gross income is $5,000, your DTI ratio is 30%. What is DTI.
7. Down Payment
A down payment is a portion of the home’s purchase price that you pay upfront, reducing the loan amount you need. It’s often 3-20%, depending on the loan type and lender.
- Example: On a $300,000 home, a 20% down payment would be $60,000, and you’d finance the remaining $240,000.
8. Earnest Money
Earnest money is a good-faith deposit that shows you’re serious about buying the home. It’s held in escrow and credited toward your down payment or closing costs when the deal closes.
- Example: You might provide $5,000 in earnest money when making an offer on a home to demonstrate your commitment to the purchase.
9. Escrow
Escrow is a neutral third party that holds funds and documents during the homebuying process until the transaction is completed. Escrow also refers to the account used to hold homeowner’s insurance and property tax payments.
- Example: The buyer’s earnest money is held in escrow until closing, at which point it is applied toward the down payment.
10. Fixed-Rate Mortgage
A fixed-rate mortgage has an interest rate that remains the same throughout the life of the loan, providing predictable monthly payments. ARM vs Fixed Rate Mortgage.
- Example: A 30-year fixed-rate mortgage at 4% interest will have the same payment for the entire term of the loan.
11. Home Inspection
A home inspection is an evaluation of a property’s condition by a licensed inspector. It helps buyers identify any issues with the home before closing the sale. The Ultimate Guide to Home Inspections.
- Example: The inspector checks the roof, foundation, plumbing, and electrical systems and provides a report highlighting potential issues, such as water damage or faulty wiring.
12. Homeowners Insurance
Homeowners insurance protects your property and belongings from risks like fire, theft, and natural disasters. Lenders typically require it as a condition of the mortgage.
- Example: You might pay $1,000 annually for homeowners insurance that covers the home’s structure and personal belongings.
13. Loan-to-Value (LTV) Ratio
The Loan-to-Value (LTV) Ratio is a comparison of your loan amount to the value of the home. A higher LTV ratio can mean higher risk and may require private mortgage insurance (PMI).
- Example: If you’re buying a $400,000 home and have a $320,000 loan, your LTV is 80%.
14. Mortgage Insurance Premium (MIP)
MIP is a type of insurance required for FHA loans when the borrower puts down less than 20%. It protects the lender if the borrower defaults on the loan.
- Example: FHA borrowers with a 3.5% down payment will need to pay a monthly MIP, which is typically added to the mortgage payment.
15. Pre-Approval
Pre-approval is a lender’s preliminary commitment to lend you a certain amount based on a review of your credit, income, and financial situation.
- Example: A pre-approval letter for a $400,000 loan gives you an idea of your budget when shopping for homes and shows sellers you’re a serious buyer.
16. Principal
The principal is the amount you borrow to purchase the home. Your monthly mortgage payments are applied toward reducing the principal and paying the interest.
- Example: If you take out a $300,000 loan, the $300,000 is the principal, which you’ll pay down over time with interest.
17. Private Mortgage Insurance (PMI)
PMI is insurance that protects the lender if a borrower defaults on the loan. It’s required when your down payment is less than 20%.
- Example: If you make a 10% down payment on a $300,000 home, PMI might add $100 to $150 to your monthly payment until you reach 20% equity.
18. Property Taxes
Property taxes are annual taxes levied by local governments based on the assessed value of your home. They are often included in your monthly mortgage payment and held in escrow.
- Example: If your home’s assessed value is $300,000 and the property tax rate is 1.5%, you’ll owe $4,500 per year in property taxes.
19. Title Insurance
Title insurance protects against legal claims to the property’s ownership. It ensures that there are no disputes or liens on the property’s title.
- Example: Title insurance protects you if someone claims ownership over your property, which could happen if there’s an unresolved lien or legal issue.
20. Underwriting
Underwriting is the process lenders use to assess the risk of lending you money. It involves reviewing your credit, income, assets, and other financial details to determine loan eligibility.
- Example: The underwriter checks your credit score, bank statements, and employment history before approving the loan.
21. Closing Disclosure (CD)
The Closing Disclosure is a detailed document provided by your lender three days before closing. It outlines your loan terms, including your monthly payment, interest rate, and closing costs.
- Example: The CD will show you the exact amount you need to bring to closing and breaks down the fees associated with the purchase.
22. Cash-to-Close
Cash-to-Close is the total amount of money the buyer needs to bring to the closing table. It includes the down payment, closing costs, and any prepaid expenses like insurance and property taxes.
- Example: If your down payment is $40,000 and closing costs are $8,000, your cash-to-close is $48,000.
23. Home Equity Line of Credit (HELOC)
A HELOC is a line of credit secured by your home’s equity. You can borrow money as needed, up to a certain limit, and repay it over time. Check out our sister site HELOC Learning Center.
- Example: If you have $100,000 in home equity, you might be able to access a HELOC for $50,000 to cover home renovations.
24. Interest-Only Loan
An Interest-Only Loan allows the borrower to pay only the interest on the loan for a set period (usually 5-10 years), after which they start paying the principal.
- Example: You may have a lower monthly payment for the first five years, but after that, you’ll need to start paying both the principal and interest.
25. Jumbo Loan
A Jumbo Loan is a mortgage that exceeds the conforming loan limits set by the Federal Housing Finance Agency (FHFA). These loans are used to finance luxury properties or homes in high-cost areas.
- Example: If the conforming loan limit in your area is $726,200 and you’re buying a home for $1.2 million, you’d need a jumbo loan.
26. Mortgage Rate Lock
A Mortgage Rate Lock allows you to secure an interest rate for a specific period, protecting you from rate fluctuations while your loan is processed.
- Example: If you lock in a 4% rate for 60 days and interest rates rise to 4.5%, your rate will remain at 4% through closing.
27. Pre-Qualification
Pre-Qualification is an informal process where a lender estimates how much you can borrow based on your income, debt, and credit score. It’s less comprehensive than pre-approval but gives you an initial idea of your budget.
- Example: After providing some basic financial information, you might get pre-qualified for a $300,000 mortgage.
28. Principal, Interest, Taxes, and Insurance (PITI)
PITI refers to the four components of a typical mortgage payment: Principal, Interest, Taxes, and Insurance. These are bundled into your monthly payment to cover both your loan and ongoing property costs.
- Example: On a $1,500 mortgage payment, $700 could go toward principal and interest, while $300 covers property taxes, and $500 is for insurance.
29. Real Estate Agent vs. Realtor
A Real Estate Agent is a licensed professional who helps buyers and sellers with property transactions. A Realtor is a real estate agent who is a member of the National Association of Realtors (NAR) and follows a strict code of ethics.
- Example: All Realtors are real estate agents, but not all real estate agents are Realtors.
30. Title Search
A Title Search is the process of reviewing public records to confirm legal ownership of a property and ensure there are no outstanding claims, liens, or disputes on the title.
- Example: Before closing, a title search ensures that no one else can claim ownership or contest the sale of the property.
31. Walkthrough
A Walkthrough is a final inspection of the property, conducted by the buyer and their agent, before the closing to ensure the home is in the agreed-upon condition.
- Example: During the walkthrough, the buyer checks that repairs have been completed and no new issues have arisen since the initial inspection.
32. Balloon Mortgage
A Balloon Mortgage is a loan where you make small monthly payments for a set period, with a large payment (balloon payment) due at the end of the loan term.
- Example: You may pay low monthly amounts for five years, but at the end of the term, the remaining loan balance is due in a single lump sum.
33. Bridge Loan
A Bridge Loan is a short-term loan that helps a buyer purchase a new home before selling their current one. It provides temporary funding for the down payment or mortgage until the sale of the previous home is finalized.
- Example: If you’re purchasing a home but haven’t sold your current one, a bridge loan can help you cover the down payment.
34. Escrow Holdback
An Escrow Holdback occurs when a portion of the seller’s proceeds is held in escrow until certain conditions or repairs are met.
- Example: If a home needs repairs but the seller wants to close quickly, the buyer may agree to an escrow holdback until the repairs are completed.
