Mortgage terminology can be really confusing, and for first time homebuyers who are most likely overwhelmed and stressed, it can be almost too difficult to understand. Here are some of the mortgage terms that you are most likely to come across while getting ready to take out what’s likely to be your largest financial liability.
Adjustable Rate Mortgage (ARM)
A mortgage loan with regularly scheduled adjustments with interest rate and payments tied to changes to an index plus a margin. Adjustment features and terms vary from lender to lender.
A balloon mortgage is a short-term home loan where regular payments are made for a specified period, and at the end of the term, a larger payment is made to pay off the loan.
The act of signing all home loan documents required to transfer title of a property and, if necessary, to establish the lien and create the mortgage and disburse the funds. Also referred to as settlement.
The fees paid at closing to various parties, to transfer the title of a property and, if necessary, to establish the lien and create the mortgage.
A fee charged to increase the yield to an investor over and above the stated interest rate. A discount point generally lowers the interest rate. One point equals one percent of the loan amount.
A specific trust account used in a home loan, in which funds are held for disbursement based upon the agreement between the parties to the agreement. Accounts may be for the handling of taxes, insurance, or for funds held to complete repairs, or for the disbursement at closing.
Homeowner's insurance policy
A policy whereby an insurer agrees to compensate the insured in the event of loss to the property and its contents due to multiple perils including wind damage, theft, and liability for personal or property claims.
The ratio expressed as a percentage of the loan amount to the sales price or appraised value, whichever is less.
Most commonly used in referring to the guarantee issued by a lender for a specific period of time prior to closing a mortgage loan, guaranteeing the terms at which the home loan, if approved, will close.
The fee paid to a lender for originating the home loan, normally expressed as a percentage of the loan amount.
A prepayment penalty is a provision of some mortgages that require consumers to pay a penalty when paying off a mortgage in advance.
PITI is the abbreviation for principal, interest, taxes and insurance comprising a monthly mortgage payment.
Private Mortgage Insurance (PMI)
Private mortgage insurance is the insurance obtained on a conventional home loan to protect the lender in the event of default by a borrower.
Settlement is also known as closing, and is the act of signing all documents and payment of all fees necessary to affect the sale of real estate from one party to another and/or the establishment of a mortgage loan and the disbursement or proceeds of that loan.
Subordination is the act of acknowledging through a recorded document that one loan is inferior to another and that the inferior loan may only be collected in the event of foreclosure after the complete payment of the superior loan. Normally required by junior or second mortgages.