Common Mortgage Words You Should Know
Aug.30, 2010 in
Mortgages
If you are buying a home you have plenty of research to do. But most mortgage information reads and sounds like military code: ARM, APR, PMI. It’s hard to tell if you’re buying a house or intercepting submarine messages. Below are some common mortgage words and their meaning:
- Adjustable-rate mortgage (ARM) — A home loan in which the interest rate is changed periodically based on a standard financial index. Most ARMs have caps on how much an interest rate may increase.
- Annual Percentage Rate (APR) — A standardized method of calculating the cost of a mortgage, stated as a yearly rate, which includes such items as interest, mortgage insurance, and certain points or credit costs. Because it includes these other items, it is higher than the interest rate a lender will quote.
- 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 an origination fee, attorney’s fee, taxes, escrow payments, title insurance and sometimes discount points. Lenders must provide good-faith estimates of closing costs to prospective home buyers.
- Down payment — The amount of a property’s purchase price that the buyer pays in cash and does not finance with a mortgage.
- Escrow — An account in which a neutral third party holds the documents and money 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 the same through the life of the loan, most often 15 years or 30 years.
- Foreclosure — The legal process by which a homeowner in default on a mortgage is deprived of interest in the property. This usually involves a forced sale of the property at public auction with the proceeds of the sale being applied to the mortgage debt.
- Private mortgage insurance (PMI) — An insurance policy that protects the lender against default on loans by providing a way for mortgage companies to recoup the costs of foreclosure. PMI is usually required if the down payment is less than 20 percent of the sale price. Home buyers pay for the coverage in monthly installments. PMI should be terminated when the home buyer has built up 20 percent equity in the property.
- Title insurance — A policy that guarantees that an owner properly has 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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