Reference this glossary of mortgage terms to guide you through the mortgage process.

Adjustable Rate Mortgage (ARM) - An ARM Loan allows the lender to adjust the interest rate during the term of the loan. Generally, these changes are determined by a margin and an index so that the interest rate changes, up or down, are based on the market conditions at the time of the rate change.

Amortization - The breakdown of a mortgage (including principal and interest) into equal payments over a specified period of time.

Annual Percentage Rate (APR) - The federal government developed APR to make it easier for consumers to compare mortgage loan rates for comparison shopping purposes. Some of the costs you pay at closing are factored into the APR for ease of comparison. Your actual monthly payments are based on the periodic interest rate, NOT on the APR.

Appraisal - An estimated value of the property. As part of the loan approval process, the lender will hire an appraiser to assess the property and determine whether the loan amount is appropriate to its value. The appraiser uses several factors to determine the property’s value, including location, condition, and the sales price of recently sold comparable properties in the area.

Closing - The point at which the property’s sale becomes final. The borrower signs the mortgage papers and in return receives the deed to the property. It is at this point that the down payment and closing costs are paid to the lender.

Closing Disclosure - A 5 page document that provides diclosures that will be helpful in understanding the costs of the loan.

Commitment Letter - A formal offer by a lender stating the terms under which it agrees to lend money to a homebuyer.

Construction Loan - A short-term loan used for financing the construction cost of a home, in which the lender makes payments to the builder at periodic intervals as the work progresses.

Credit History/Report - A record of a person’s debts, both open and paid, and their payments toward those debts.

Earnest Money - A deposit paid by a potential homebuyer to a REALTOR upon bid acceptance that indicates their intention to purchase the house.

Escrow - A “forced” savings account, in which a portion of the monthly mortgage payment is set aside by the lender for payment of such expenses as property taxes or hazard insurance. This assures the lender that adequate funds will be available to pay these.

Equity - The amount of a property that is “owned” by the homeowner, versus the amount still owed on the mortgage.

Equity Loan - A loan taken against a home’s equity. In essence, the homeowner is taking out a loan against him or herself, and is repaying into their own mortgage.

Fixed Rate Mortgage - A loan that carries a guaranteed fixed interest rate and payments for the life of the loan.

Flood Insurance - Insurance that compensates for physical property damage resulting from flooding. It is required for properties located in federally designated flood areas.

Government Loan - A loan that is insured by the federal government, through agencies such as the FHA or VA.

Inspection - A thorough review of the home’s structural and mechanical condition performed by a qualified home inspector that has been hired by the buyer.

Interest - Fee charged by the lending institution for borrowing money.

Jumbo Loan - A loan that exceeds the purchase limits established by Fannie Mae and Freddie Mac. Also called a non-conforming loan.

Line of Credit - An agreement by a financial institution to extend credit up to a certain amount for a certain time to a specified borrower; often taken against a home’s equity.

Loan Estimate - 3 page document provided by the lender which includes a full set of government regulated loan disclosures, including the primary disclosure. Signed at time of application.

Loan-to-Value (LTV) - The relationship between the principal balance on the mortgage and the appraised value of the property. For example: A $100k home with $80k remaining on the mortgage has an LTV of 80%.

Lock - Also called a rate lock. A commitment by the lender to guarantee a specific interest rate if a mortgage closes within a set period of time (usually 30, 45, or 60 days).

Mortgage Insurance - Insurance for the lender in the event that the borrower defaults on the loan. Typically required when the loan has an LTV of 80% or greater.

Offer to Purchase - Also called an “offer”. When potential buyers are interested in purchasing a house, they will place a bid offering to pay the seller a certain price.

Origination Fee - A fee paid to a lender for processing a loan application. The origination fee is stated in the form of points, and is paid at the time of closing.

PITI - An acronym for Principal, Interest, Taxes, and Insurance - factors that comprise a monthly mortgage payment.

Points - The borrower can purchase points in exchange for a lower interest rate. One point is equal to one percent of the loan amount and can decrease the interest rate by 1/8 to 1/4 percent. Before purchasing points, it is important to determine if the up-front cost will justify the long-term savings.

Principal - The portion of your mortgage loan that represents the actual amount borrowed, not including interest.

Refinance - The process of paying off one loan with the proceeds from a new loan (usually for a lower interest rate) using the same property as security.

Reserves - A cash amount that a homebuyer must have on hand after making a down payment and paying all closing costs.

Title - The legal document guaranteeing ownership of a property.

Title Insurance - Insurance that protects the lender or buyer against a loss arising from a dispute of a piece of property. The cost is paid once, at the closing of the loan.

Underwriting - The process of reviewing, analyzing, and verifying your submitted loan for approval.