Financing 101

Whether or not you’re new to buying property, it helps to know the lingo. Boost your financing savvy (and your confidence) by getting familiar with these terms.^†

Adjustable Rate Mortgage (ARM)

A home loan with an interest rate that changes periodically. Its interest rate is fixed for a short period of time (usually 1, 3 or 5 years) and then changes based on a standard financial index. After that, the rate adjusts at regular intervals. Most ARMs will have a cap on interest rate increases.

Annual Percentage Rate (APR)

The amount paid back to the lender for the cost of the loan, stated as a yearly rate. It includes mortgage insurance, points and other costs in addition to the initial interest rate.

Amortization

A schedule that details how the loan is to be repaid with each monthly payment. It includes the amount borrowed, the breakdown the payment the goes to interest and to the principal and how much of the balance remains after each payment.

Appraisal

A report prepared by a professional appraiser that estimates the value of a property based on their physical inspection and comparable properties sold recently in the area.

Closing Costs

Expenses incurred in the transfer of property ownership that are paid by the buyer. They include a number of fees including appraisal origination, attorney, recording title fees and other costs. The lender is required to provide the buyer with a Loan Estimate of closing costs.

Debt-to-Income Ratio

A ratio lenders use to determine if a borrower is able to repay a loan. It compares monthly payments on existing debts, and on the presumed new loan, to monthly income. Income divided by expenses results in a percentage; the higher that percentage, the riskier the loan is considered to be for the lender.

Down Payment

A payment made in cash by the buyer toward the property’s purchase price as part of the terms of the mortgage. A higher down payment can help you lower your monthly payments or qualify for a more expensive home. If the down payment is less than 20% of the purchase price, the lender may require you to purchase private mortgage insurance (PMI).

Equity

The difference between the estimated value of the home and the amount of the mortgage loan. Equity generally increases over time as the home’s value appreciates and the loan gets paid off.

Escrow

An account maintained by the lender that holds funds set aside for taxes, insurance and other recurring charges the lender pays on a regular basis. Escrow is also a legal procedure conducted by a neutral third party in which money and documents in a real estate transfer are held until all conditions of the sale are met.

Fixed-Rate Mortgage

A mortgage with an interest rate that stays the same for the entire duration of the loan.

Loan Estimate

The lender’s estimate of the closing costs a buyer will pay when the property is transferred to them.

Homeowners Insurance

An insurance policy that covers loss or damage to property (hazard coverage) as well as personal liability and theft coverage.

Interest-Only Mortgage

A type of adjustable-rate mortgage that allows the borrower to make payments that are applied only to the interest on the loan, and not to the principal, for a specified period of time. This type of loan is considered high-risk.

Mortgage

The loan and all the related supporting documentation arranged by the lender for the buyer to purchase a home.

Origination Fee

A fee that the borrower pays the lender when applying for a mortgage. It often includes fees for the application and appraisal, as well as other costs associated with the loan.

Points

A point represents 1% of the loan amount, with the loan’s APR factored in. Lenders often use points to cover the costs of making the loan (origination points) or to allow the borrower to save on their interest rate by buying points (discount points).

Principal

The amount of money borrowed for the mortgage. Once payments are made, the principal is the amount of debt remaining (the balance left on the loan), excluding interest.

Settlement/Closing

When buyer and seller complete the transfer the property. During this meeting the title to the property is transferred to the buyer, the documents are signed and the sale is completed.

Title Insurance

An insurance policy that ensures the property is clear of any liens that could put the mortgage in jeopardy. The policy guarantees that the owner is properly titled and can legally transfer the title of the property to another person.