» Mortgage Terms and Definitions

Mortgage Terms and Definitions

Fixed-rate mortgage: A fixed-rate mortgage is a type of home loan where the interest rate remains the same throughout the entire term of the loan. This means that the borrower’s monthly payments will remain consistent, providing a sense of stability and predictability. Fixed-rate mortgages are popular among homebuyers who plan to stay in their homes for an extended period and want to avoid fluctuations in interest rates that could lead to higher monthly payments.

Adjustable-rate mortgage (ARM): An adjustable-rate mortgage is a type of home loan where the interest rate can fluctuate over the life of the loan. The interest rate is usually lower initially, making the monthly payments more affordable. However, after the initial fixed period, the interest rate can change periodically based on market conditions, potentially leading to higher monthly payments. ARMs are popular among homebuyers who expect to move or refinance within a few years.

Jumbo loan: A jumbo loan is a type of mortgage that exceeds the maximum loan limits set by Fannie Mae and Freddie Mac. Jumbo loans are typically used for high-end properties with prices that exceed the maximum conforming loan limit. Jumbo loans usually require higher down payments and have stricter credit requirements than conforming loans.

Conventional loan: A conventional loan is a type of mortgage that is not insured by the government. This means that lenders bear the risk of default and may have stricter credit and income requirements than government-insured loans. Conventional loans can be either conforming or non-conforming.

FHA loan: An FHA loan is a type of government-insured mortgage that is backed by the Federal Housing Administration (FHA). FHA loans are designed to help low- and moderate-income borrowers who may not be able to qualify for conventional loans. FHA loans require a lower down payment and have more relaxed credit score requirements than conventional loans.

VA loan: A VA loan is a type of government-insured mortgage that is available to eligible veterans, active-duty service members, and their spouses. VA loans are backed by the Department of Veterans Affairs (VA) and offer a range of benefits, including no down payment, no private mortgage insurance (PMI), and more relaxed credit requirements.

USDA loans: A USDA loan is a type of government-insured mortgage that is backed by the U.S. Department of Agriculture (USDA). USDA loans are designed to help low- and moderate-income borrowers in rural areas purchase homes. USDA loans require no down payment and have more relaxed credit requirements than conventional loans.

Interest rate: The interest rate is the percentage of the loan amount that the lender charges the borrower for the use of the money. Interest rates can be fixed or adjustable.

Annual Percentage Rate (APR): The APR is the total cost of the loan, including the interest rate and any fees or charges, expressed as a yearly rate.

Closing costs: Closing costs are the fees and expenses associated with finalizing a mortgage loan, including appraisal fees, title insurance, attorney fees, and more.

Down payment: The down payment is the amount of money that the borrower pays upfront towards the purchase price of the home.

Private Mortgage Insurance (PMI): PMI is a type of insurance that protects the lender in case the borrower defaults on the loan. PMI is typically required when the borrower’s down payment is less than 20% of the home’s purchase price.

Points: Points are fees paid by the borrower to the lender in exchange for a lower interest rate on the mortgage.

Pre-approval: Pre-approval is the process of getting approved for a mortgage loan before shopping for a home. Pre-approval shows the borrower how much they can afford to borrow and can make the homebuying process easier by helping them focus on homes within their price range.

Pre-qualification: Pre-qualification is an initial assessment of the borrower’s creditworthiness and ability to qualify for a mortgage. Pre-qualification can provide an estimate of the loan amount that the borrower may be able to qualify for based on their income and credit score.
Refinancing: Refinancing is the process of replacing an existing mortgage with a new one, typically with a lower interest rate or better loan terms. Refinancing can help borrowers save money on their monthly payments, reduce the total interest paid over the life of the loan, or even tap into their home’s equity for cash.
Equity: Equity is the difference between the current market value of the home and the outstanding balance on the mortgage. As the borrower pays down the mortgage, their equity in the home increases.
Mortgage insurance: Mortgage insurance is a type of insurance that protects the lender in case the borrower defaults on the loan. Mortgage insurance can be required for certain types of loans or for borrowers with a lower down payment or credit score.
Amortization: Amortization is the process of paying off a loan over time through regular payments that include both principal and interest. With each payment, a portion goes towards paying down the principal balance of the loan and a portion goes towards paying interest.
Mortgage broker: A mortgage broker is a licensed professional who helps borrowers find and apply for mortgage loans from multiple lenders. Mortgage brokers can provide a range of loan options and help borrowers navigate the mortgage process from pre-approval to closing. Mortgage brokers typically earn a commission from the lender for their services.

Adjustable-rate mortgage (ARM): An adjustable-rate mortgage (ARM) is a type of mortgage in which the interest rate can fluctuate over time based on market conditions. ARMs typically have lower initial interest rates than fixed-rate mortgages but can be riskier for borrowers because their payments can increase over time.
Closing costs: Closing costs are the fees and expenses associated with finalizing a mortgage loan and transferring ownership of the property. Closing costs can include appraisal fees, title insurance, attorney fees, and more. Closing costs can vary widely depending on the lender and the location of the property.
Down payment: A down payment is a portion of the purchase price of the property that the borrower pays upfront. The down payment is typically a percentage of the purchase price, with higher down payments leading to lower monthly payments and potentially better loan terms. Down payments can come from savings, gifts, or other sources.
Private mortgage insurance (PMI): Private mortgage insurance (PMI) is a type of insurance that protects the lender in case the borrower defaults on the loan. PMI is typically required for borrowers who make a down payment of less than 20% of the purchase price of the property.
Closing disclosure: A closing disclosure is a document that outlines the final terms and costs of the mortgage loan. The closing disclosure must be provided to the borrower at least three days before closing to give them time to review the terms and make any necessary changes.
Appraisal: An appraisal is an evaluation of the property’s value conducted by a professional appraiser. The appraisal is typically required by the lender to ensure that the property is worth the purchase price and to determine the loan amount.
Title insurance: Title insurance is a type of insurance that protects the lender and the borrower in case there are any defects or issues with the property’s title. Title insurance can provide peace of mind for borrowers and protect their investment in the property.

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