Mortgage Matters: Mortgage Terms to Know

Mortgage loans have their own language. Here are some terms to help you do your research and understand what you’re reading:

Adjustable Rate Mortgage (ARM) – A loan type that allows the lender to adjust the interest rate during the term of the loan.  Interest rates changes, up or down, are based on market conditions at the time of the change.  Most often these interest rate changes are limited by a rate change cap (maximum) and a lifetime cap. ARMs can help you lock in a low interest rate for a set period of time, often the length of time you plan to stay in the home.

Annual Percentage Rate – To make it easier for consumers to compare mortgage loan interest rates, the federal government developed a standard format called an “Annual Percentage Rate” or APR to provide an effective interest rate for comparison shopping purposes.  APR is the total annual interest cost to the borrower, including fees.

Closing Costs – The total of all the items that must be paid at closing related to your new mortgage. Closing costs include expenses like the title search fee, recording fee, underwriting fee, appraisal fee, etc. The amount of closing costs will vary, but are generally 2%-5% of the purchase price of the home.

Fixed-Rate Mortgage – A mortgage in which the monthly principal and interest payments remain the same throughout the life of the loan.  The most common mortgage terms are 30 and 15 years.  With a 30-year fixed rate mortgage, your monthly payments are lower than they would be on a 15-year fixed rate, but the 15-year loan allows you to repay your loan twice as fast and save more than half the total interest costs.

Equity – An owner’s financial position in a property.  Equity is the difference between the property’s value and the amount that is owed on a mortgage. Each monthly payment helps you build equity in your home.

Escrow Account – The account that funds are held in by the lender for the payment of real estate taxes and/or homeowner’s insurance.  It can also refer to the account that funds are held in for the completion of repairs or improvements to a property that cannot be completed prior to closing. If you have an escrow account, a portion of your monthly payment goes to this account.

Interest Rate – The annual cost of a loan to a borrower, not including any fees charged for the loan. The best way to shop for the best deal on a mortgage is to look at the APR.

Pre-Approval – When a lender approves you for a loan (up to a certain amount) before you find the home you want to buy. A pre-approval is beneficial in the home-buying process because it allows you to close on your home quicker, and shows sellers you’re serious. Sellers will sometimes accept a lower offer from a buyer who is pre-approved.

Still have questions? Find our full list of mortgage terms here.