Adjustable Rate Mortgage ARM

An ARM mortgage is subject to changes in its rate. Typically determined by an associated index, when the index rate changes the ARM monthly payments increase or decrease accordingly. Changes in monthly payment amount are typically subject to a cap.

Annual Percentage Rate APR

The APR shows the annual cost of a loan including the interest, points, mortgage insurance, and other fees associated with the loan.

Buydown

A mortgage program that allows a home buyer to qualify for a loan based on an initial rate below the current 30-year fixed rate. The interest rate will then increase on a yearly basis for a pre-determined number of years, depending on the type of buydown. After the pre-determined adjustment periods end, the rate remains the same for the duration of the 30-year term.

Cap

A limit, typically used on an adjustable-rate mortgage, on how much a monthly payment or interest rate can increase or decrease.

Closing

Also known as settlement, this is the time at which the property is formally sold and transferred from the seller to the buyer. It is also when the borrower takes on the loan obligation, pays all closing costs, and receives title from the seller.

Closing Costs

These are costs in addition to the sale price of the property that are associated with the transfer of ownership at closing. They vary by location and will be detailed to the borrower after the submission of a loan application.

Covenants Conditions and Restrictions CC&R

These are the guidelines that determine how a homeowners association operates and what rules the homeowners must follow. They can include design or structural changes, rules for using the common areas or amenities, pets restrictions or other rules. CC&Rs are legally enforceable by the homeowners association, unless a specific provision conflicts with federal, state or local laws. CC&Rs help maintain the value of both individual homes and the community as a whole by establishing common standards.

Debt to Income Ratio

This ratio compares gross income to housing and non-housing expenses. With the FHA, the monthly mortgage payment should be no more than 29% of monthly gross income (before taxes) and the mortgage payment combined with non-housing debts should not exceed 41% of income.

Down Payment

The part of a home's purchase price that is paid upfront by the buyer and is not part of the mortgage loan.

Earnest Money

This is money put down by a potential buyer to show they are serious about purchasing the home. This deposit becomes part of the down payment if the offer is accepted or returned if the offer is rejected. This money can be forfeited if the buyer backs out of the deal without the appropriate reason.

Escrow

This is when a neutral third party holds the documents and money in a real-estate transfer until all conditions of a sale are met. An account in which money for property taxes and insurance is held until due is also referred to as an escrow account, which usually has a monthly payment tied to a mortgage payment.

Fixed Rate Mortgage

A mortgage with a rate and payments that remain the same throughout the life of the loan.

Homeowners Association

An organization that governs the regulations and expenditures within a home community. The HOA is responsible for the annual budget, the collection of dues that homeowners pay to maintain and repair common areas, and the creation of rules and guidelines for living in the community. Most Homeowners Associations have an elected Board of Directors, though each homeowner within the community is a member of the Association with voting rights.

Homeowner’s Insurance

This policy insures against damage to a home and its contents with protection against claims of negligence or inappropriate action that results in someone's injury or property damage.

Loan to Value Ratio

A percentage calculated by dividing the amount borrowed by the price or appraised value of the home to be purchased. The higher the LTV, the less cash a borrower is required to pay as down payment.

Mortgage

A lien on the property that secures the promise to repay a loan.

Mortgage Banker

A company that originates loans and resells them to secondary mortgage lenders like Fannie Mae or Freddie Mac.

Mortgage Broker

A firm or representative that originates and processes loans for a number of lenders.

Pre-Approve

This is when a mortgage lender commits to lend to a potential borrower. The commitment to lend remains as long as the borrower still meets the qualification requirements at the time of purchase.

Pre-Qualify

When a lender informally determines the maximum amount a person is eligible to borrow, based on a short application.

Prinicipal, Interest, Taxes, and Insurance PITI

The four costs that make up a monthly mortgage payment. They include payments of principal and interest that go directly toward repaying the loan, and property taxes and insurance, which typically go into an escrow account to cover the fees when they are due.

Private Mortgage Insurance PMI

Mortgage insurance programs for qualified borrowers with down payments of less than 20% of a purchase price.

RESPA

The Real Estate Settlement Procedures Act is a law protecting consumers from abuses during the residential real estate purchase and loan process. It requires lenders to disclose all settlement costs, practices and relationships.

Truth in Lending

This is a federal law obligating a lender to provide a full written disclosure of all fees, terms, and conditions associated with the mortgage loan.