Mortgage Terminology

Before you start researching your first mortgage, be sure to familiarize yourself with a few basic terms.

Adjustable Rate Mortgage (ARM)
A mortgage that has a changing interest rate as opposed to a fixed interest rate. The interest rate of an ARM is related to an index and changes according to the terms of the mortgage contract. Example: a 5/1 ARM is a mortgage that has the initial interest rate set for the first 5 years and thereafter has an adjustment interval of 1 year.

Adjustment Interval
The time between interest rate changes for an adjustable rate mortgages.

The process of paying down the balance of a loan by making equal payments that pay both the interest and the balance of a loan. Over the course of the loan the amount applied to interest decreases and the amount applied to the principle increases.

Annual Percentage Rate (APR)
This is the total cost of the mortgage as indicated by the actual rate of interest paid. The APR consists of the base rate, points, added fees, and PMI. The actual APR is always higher than the actual note rate of your loan.

An evaluation of the market value of a property. Lenders require a appraisal, usually by a licensed appraiser of their choosing, before underwriting a home loan.

Balloon Payment
A lump sum of the unpaid balance of a loan.

The highest amount of increase for either interest or payment that can be paid on an adjustable rate mortgage.

Closing Costs
Fees paid by the seller and/or buyer at the closing of a house sale. These fees can include attorney’s fees.

Fixed Rate Mortgage (FRM)
A mortgage in which the interest rate is fixed and does not adjust over the period of the loan. The most common terms for a fixed rate mortgage are 30 year and 15 year.

Private Mortgage Insurance (PMI)
Insurance that is purchased to protect the underwriter of a mortgage in the event of a default by the borrower. PMI is often a requirement for first-time borrowers.