Definitions of Common Mortgage Terminology

Adjustable-rate mortgage or ARM — A home loan in which the interest rate changes periodically based on a standard financial   index. Most ARMs have caps on how much an interest rate may increase.

Annual percentage rate or APR — A standardized method of calculating the cost of a mortgage, stated as a yearly rate, which includes interest and all nonrecurring  closing costs such as: mortgage insurance and   certain points or credit costs.

Appraisal — A written report by a qualified appraiser estimating the value of a property.

Closing Costs –Expenses incurred by buyers and sellers when transferring ownership of property. Closing costs normally include appraisal fee, attorney’s fee, registry recording fee, taxes, escrow payments, title insurance and sometimes origination fees and/or discount points.

Down payment — The amount of a property’s purchase price that the buyer pays in cash and doesn’t finance with a mortgage.

Debt-to-Income Ratio or DTI— The percentage of a persons earnings used to pay all monthly debts.

Escrow — An account in which a neutral third party holds the buyers deposit in a  real estate transfer until all conditions of a sale are met. Also, an account in which money for property taxes and insurance is held until paid; money is added to the account every time a mortgage payment is made.

Fixed-rate mortgage — A home loan in which the interest rate will remain constant throughout the life of the loan,

Homeowners insurance — An insurance policy that includes hazard coverage, covering loss or damage to the property, as well as   coverage for personal liability and theft.

Loan to Value Ratio or LTV— The ratio of the mortgage loan amount to the property’s appraised value or purchase price, whichever is less. For example, if a home is sold for $100,000– and the mortgage amount is $75,000– the LTV would be 75%.

P.I.T.I. – Stands for Principal, Interest, Taxes, and Insurance, the typical components of a mortgage payment.

Points — A point equals 1% of a mortgage loan. There are two types of points: origination points and discount points used to buy down the interest rate.

Principal — The amount of debt, excluding interest, owed on a loan.

Private mortgage insurance or PMI — An insurance policy that    protects the lender against default on loans by providing coverage  for mortgage companies to recoup the costs of foreclosure.

Title insurance — A policy that guarantees that an owner has clear title to a property and can legally transfer title to someone else. Should a problem arise, the title insurer pays any legal damages. A policy may protect the mortgage lender, the home buyer or both.

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