Adjustable-Rate Mortgage (ARM)
A mortgage with an interest rate that fluctuates over time based on the performance of a specific financial index. It typically starts with a lower “teaser” rate before adjusting periodically.
Amortization
The process of paying off a debt over time through regular installments. A portion of each payment goes toward the loan principal, while the remainder covers interest.
Annual Percentage Rate (APR)
A broader measure of the cost of borrowing money than the interest rate alone. It includes the interest rate, mortgage insurance, and loan origination fees, expressed as a yearly percentage.
Appraisal
A professional assessment of a property’s fair market value conducted by a licensed appraiser. Lenders require this to ensure the loan amount does not exceed the value of the collateral.
Closing Costs
The fees and expenses paid at the end of a real estate transaction. These typically include loan origination fees, title insurance, taxes, and recording fees, usually totaling 2% to 5% of the purchase price.
Debt-to-Income Ratio (DTI)
A personal financial measure that compares an individual’s monthly debt payments to their monthly gross income. Lenders use this to evaluate a borrower’s ability to manage monthly payments.
Down Payment
The upfront cash payment made by a buyer toward the purchase price of a home. The mortgage loan covers the remaining balance.
Escrow
A financial arrangement where a third party holds funds (such as property taxes and homeowner’s insurance) on behalf of the borrower and lender, paying them out when they become due.
Fixed-Rate Mortgage
A loan where the interest rate remains the same for the entire life of the mortgage. This provides the borrower with predictable monthly principal and interest payments.
Loan-to-Value Ratio (LTV)
An assessment of lending risk that compares the amount of the mortgage to the appraised value of the property. A higher LTV usually indicates a higher risk for the lender.
Private Mortgage Insurance (PMI)
An insurance policy that protects the lender if the borrower defaults. It is typically required on conventional loans when the down payment is less than 20% of the home’s value.
Underwriting
The process a lender uses to determine the creditworthiness of a potential borrower. An underwriter reviews the applicant’s credit score, income, assets, and the property details before approving the loan.
