Adjustable-Rate-Mortgage (ARM)

A loan with an interest rate that changes with market conditions on pre-determined dates.
 

Amortization

The way in which a loan is repaid in installments of principal and interest, according to a regular schedule.
 

Annual Percentage Rate (APR)

A term used to represent the percentage relationship of the total finance charge to the amount of the loan, over the term of the loan. Do not confuse the APR with your quoted interest rate, which is used to determine your monthly principal and interest payment. The APR reflects the cost of your mortgage loan as a yearly rate. It will be higher than the interest rate stated on the note because it includes (in addition to the interest rate) loan points, fees, and mortgage insurance. See Notes and Points.
 

Appraisal

A report written by a qualified professional that states an opinion on the value of a property based on its characteristics and the selling prices of similar properties or comparable properties in the area.
 

Certificate of Occupancy

Written authorization given by a local municipality that allows a newly completed, or substantially renovated, structure to be inhabited.
 

Closing

The final step after a lender approves an application. The homebuyer and lender sign the security document for the mortgage loan, which states all the terms and conditions of the loan, and the funds for the loan are turned over to the homebuyer’s closing agent.
 

Closing Agent

Usually an attorney or title agency representative, who oversees the closing and witnesses sign- ing of the closing documents.
 

Closing Costs

The costs paid by the mortgage borrower (and sometimes the seller) in addition to the purchase price of the property. These include the lender’s fees, title fees and appraisal costs.
 

Commitment Letter

A written contract by the lender to a mortgage applicant to make a loan under certain stated conditions.
 

Debt-to-Income Ratio

A formula lenders use to determine the loan amount for which you may qualify. Guidelines may vary, depending on the loan program.
 

Equity

Your ownership interest, or that portion of the value of the property that exceeds the current amount of your home loan. For example, if the property is worth $100,000 and the loan is for $75,000, than you have $25,000 or 25% equity in your house.
 

Escrow Account

A holding account for the amount a borrower pays each month and which the lender uses to pay for the borrower’s taxes, other periodic debts against the property, homeowners insurance, and if applicable, mortgage insurance.
 

Fixed-Rate Mortgage

A loan with an interest rate that remains the same for the entire repayment term.
 

Float the Loan Pricing

This term is used when a mortgage applicant chooses not to secure loan pricing, but instead allows the loan pricing to fluctuate until the applicant decides to lock in, usually no later than 10 days prior to close.
 

Good Faith Estimate

A document that tells mortgage borrowers the approximate costs they will pay at or before closing based on common practice in the area.
 

Government Loan

A mortgage insured by a government agency, such as the Federal Housing Administration (FHA), U.S. Department of Veteran’s Affairs (VA), or the Farmers Home Administration, or a state bond program.
 

Homeowners Insurance (also called Hazard Insurance)

A real estate insurance policy required of the buyer protecting the property against loss caused by fire some natural causes, vandalism, etc. May also include added coverage such as a personal liability and theft away from the home.
 

HUD-1 Settlement Statement

A standard form used to disclose costs at closing.
 

Index

Interest-rate adjustments on adjustable-rate mortgage (ARM) loans are based on a specific “index” or treasury issue (bond) which is selected because it is a reliable, familiar financial indicator. Your monthly interest rate payment will be adjusted up or down in relation to this market indicator, plus the margin as specified in your note. ( See margin and note.)