Glossary
Adjustable Rate Mortgage (ARM) Mortgage whose interest rate and monthly payments vary throughout its term. ARMs typically start with a low rate that can gradually rise over time. If the overall level of interest rate drops, as measured by a variety of different indexes, the rate of an ARM generally follows suit. Similarly, if interest rates rise, so does a mortgage’s rate and monthly payment. The amount that the rate can rise or fall is limited by caps.
Appraisal Professional opinion about the market value of the house you want to buy (or already own if you are refinancing your mortgage).
Cap One of two types of limits for the interest rate on an ARM. The life cap limits the highest or lowest interest rate that is allowed overthe life of a mortgage. The periodic cap limits the amount that an interest rate can change in an adjustment period, such as a year.
Credit Report Report that documents your history of repaying debt. It’s the main report lenders use to determine your creditworthiness.
Down Payment The part of the purchase price that the buyer pays in cash, up front, and does not finance with a mortgage. Generally, the larger the down payment, the better the deal that you can get on a mortgage.
Equity The difference between the market value of a home and the amount the borrower owes on it. Example- If your home is worth $160,000 and you have an outstanding mortgage of $130,000, your equity is $30,000.
purchase/sale of real estate by a neutral third party prior to the close of the
transaction.
Fixed Rate Mortgage Mortgage that allows you to lock in an interest rate for the entire term (usually 15 or 30 years) of the mortgage. Your mortgage payment will typically be the same every month
Homeowners Insurance Insurance that protects your home and it’s contents. Lenders will always require that you have this coverage before funding your mortgage.
Index Measure of the overall level of market interest rates that the lender uses as a reference to calculate the interest rate on an ARM. The index plus the margin determines the rate on an ARM. One example used on some mortgages is the 6 month treasury bill. If the going rate for these bills is 5.0% and the margin is 2%, your interest rate would be 7%.
Lock-in A mortgage lender’s written commitment to guarantee a specified interest rate to a borrower provided that the loan is closed within a set period of time.
Pre-Approval Process that lenders use to determine how much money they can lend you based on a thorough review of your financial situation. Getting a pre-approval letter strengthens your negotiating power when you’re buying a home, because it shows a seller your seriousness and your creditworthiness.
Pre-Payment The payment of extra principal on a mortgage. In otherwords, paying more than the minimum required payment in order to pay off a mortgage faster than required by the lender.
Pre-qualification Informal process where a lender, based entirely upon the information you provide about your financial situation, provides an opinion about the amount of money you may be able to borrow. This is not binding nor necessarily accurate because the lender has not verified any of your financial information.
Private Mortgage Insurance (PMI) Insurance that protects the lender in case a borrower defaults on a mortgage. The smaller the down payment, the more likely the home buyer is to default on a loan. If your down payment is less than 20% of the home’s purchase price, PMI is usually required.
Property Tax Yearly tax (paid by the homeowner) assessed on a home. Property tax annually averages 1 to 2 percent of a home’s value, but tax rates vary from county to county.