Mortgage Terms Explained

ARM's are loans where the interest rate is subject to change throughout the term of the loan. In many cases, the rate is fixed for a number of years and then can adjust thereafter with the market. Details on the terms of the ARM are located on the Loan Estimate. Many borrowers who are averse to risk and future payment increases opt for Fixed-Rate Mortgages.

This is also known as the term of your loan, and refers to how many payments you have to make. For fully-amortized loans, the loan balance will be paid to $0 over the term of the loan. So, if you have a 30-year fixed, fully-amortized loan, your mortgage balance will be paid in full in 360 months of equal payments.

APR refers to the cost of the loan as a percentage of the amount financed. Unlike your interest rate (which is the amount of interest you’re actually paying on your debt and what you should negotiate), the APR is the total cost of loan expressed in the form of an annual rate on the remaining balance of the loan (outstanding balance). It’s complicated, for sure.

 An unbiased professional opinion of a home's value and is used whenever a mortgage is involved in buying, refinancing, or selling that property.  A qualified appraiser creates a report based on an in-person inspection, using recent sales of similar properties, current market trends, and aspects of the home (for example, amenities, floor plan, square footage) to determine the property’s appraisal value. The borrower usually pays the appraisal fee.

These costs include all non-recurring charges relating to the closing of a mortgage. Closing costs generally include lender fees, title insurance-related fees, attorney fees, survey fees, credit reports, and other incidental expenses. Closing costs are estimated on your Loan Estimate.

A personal finance measure that compares an individual’s monthly debt payment to their monthly gross income.  A low debt-to-income (DTI) ratio demonstrates a good balance between debt and income.
 DTI= Gross Monthly Income / Total of Monthly Debt Payments

A legal document that transfers property ownership from a seller/grantor to a buyer/grantee. A deed contains a description of the property (including property lines) and denotes the seller/grantor and the buyer/grantee. Both parties must sign the document to make it official.

Also known as points, this is a type of origination fee that lowers your interest rate in exchange for paying for an upfront fee. One discount point costs 1% of your home loan amount. For example, if you take out a mortgage for $100,000, one point will cost you $1,000.

An anti-discrimination federal law that prohibits lenders and all other creditors from refusing to grant credit to an applicant on the basis of the applicant’s race, national origin, gender, age or marital status.

An account set up by your mortgage lender to pay certain property-related expenses such as taxes, homeowner’s insurance, and flood insurance. The money that goes into the account comes from a portion of your monthly mortgage payment. Your property taxes and insurance premiums can change from year to year, which affects your monthly payment.

Fannie Mae is a popularly used acronym for the Federal National Mortgage Association (FNMA). This is a government sponsored entity (GSE) that creates uniformity among mortgage lenders to provide for marketable Mortgage Backed Securities on the secondary market. Most lenders nationwide underwrite their loans to these standards, and Red Oak Mortgage is no exception.

FHA is a governmental agency that operates, oversees and monitors a wide variety of home-loan programs and initiatives. The FHA doesn’t lend money, but it does insure loans that meet the established criteria protecting lenders from potential losses.

Another GSE, like Fannie Mae, Freddie Mac establishes uniformity in underwriting with the intent of securities mortgages in bulk on the secondary market.

The index refers to the baseline for calculating future rate changes on Adjustable-Rate Mortgages. Some common examples are the 1-year LIBOR, or the 3-year Treasury. Indexes are publicly-reported financial metrics used by lenders.

Used with Adjustable-Rate Mortgages, the interest rate ceiling is the maximum rate that the mortgage can ever reach.

A type of mortgage that requires the borrower to repay only the interest that accrues on the loan balance at each payment period (usually a month). In this type of loan, the outstanding principal balance doesn’t change each month. This is the opposite of a fully-amortizing mortgage.

The fee imposed by the lender/servicer for failure to make timely payments. Generally, this is 4-5% of the mortgage payment.

A legal claim against property that can be used as collateral to repay a debt. Mortgages are attached to the real property (the house/land) on which the mortgage is owed.

Calculated by dividing the amount borrowed by the appraised value of the property, expressed as a percentage.

Used in Adjustable-Rate Mortgages, the margin refers to the premium over the Index that the lender will charge when the interest rate adjusts.

This is the total monthly payment including taxes and insurance. It may also include Mortgage Insurance and HOA Fees, when applicable.

A prequalification or preapproval letter is a document from a lender stating that the lender is tentatively willing to lend to you, up to a certain loan amount and purchase price. This document is based on certain assumptions and it is not a guaranteed loan offer. However, sellers frequently require a pre-qualification or pre-approval letter before accepting your offer on a house. A pre-approval letter is typically stronger and based on the review of a borrower’s income/asset/credit documentation, whereas a pre-qualification letter can be issued based on a review of credit and initial loan application data.

PMI is the insurance provided to the lender (and paid for by the borrower) to protect against default. Generally, it is included on loans with less than 20% down.

Rate Lock is the term used to define when the interest rate is confirmed for a particular mortgage transaction. All rate locks must be provided in writing and will include the rate the borrower is locked at and the expiration date of the lock.

Under U.S. federal law, the right of rescission is when a borrower has the right to cancel a home equity loan or line of credit with a new lender, or to cancel a refinance transaction done with another lender other than the current mortgagee, within three days of closing. The right of rescission applies only to the refinancing of certain types of mortgages and does not apply to the purchase of a new home.

A form of indemnity insurance that protects lenders and homebuyers from financial loss sustained from defects in a title to a property. The most common type of title insurance is lender's title insurance, which the borrower purchases to protect the lender. The other type is owner's title insurance, which protects the buyer's equity in the property.