Adjustable Rate Mortgage (ARM): A loan with an interest rate that changes over time. It starts with a lower rate than a fixed-rate mortgage and adjusts based on market trends. Good for those who prefer potentially lower rates and payments during favorable market conditions.
Amortization: The process of paying off your mortgage in regular payments. An amortization schedule shows each payment's breakdown, helping you understand how much you're paying and how it affects your loan balance.
Annual Percentage Rate (APR): The total yearly cost of your mortgage, shown as a percentage. It includes the interest rate and other loan costs, providing a clearer picture of the total borrowing cost.
Appraisal: An evaluation to determine a home’s market value. Conducted by a professional appraiser, it assesses the home’s condition and compares it with similar properties in the area.
Closing Costs: Various fees and expenses you pay at the end of the mortgage process, like attorney fees, recording fees, and other mortgage-related costs.
Closing Disclosure: A document detailing the final terms of your mortgage, including loan terms, monthly payments, and closing costs. You receive this at least three business days before closing.
Construction Mortgage: A loan for building a home. Funds are released based on the construction progress and convert to a regular mortgage after construction is complete.
Debt-to-Income (DTI) Ratio: A measure comparing your total monthly debt payments to your gross monthly income, used to determine how much you can borrow.
Down Payment: The portion of the home's price you pay upfront. The required amount varies by loan type.
Equity: The portion of your home’s value that you own outright. It’s the difference between the home's value and the remaining loan balance.
Escrow: An account managed by your lender where money for property taxes, homeowners insurance, and possibly mortgage insurance is held and paid when due.
Fixed-Rate Mortgage: A mortgage with a constant interest rate and payment amount throughout the loan term, which can range from 10 to 30 years.
Home Inspection: An examination to assess a home’s condition, identifying damage or issues that may affect its value. Conducted by a professional inspector, usually before purchase.
Homeowners Insurance: Insurance covering losses or damages to your home and its contents. Required before closing, with the lender listed as the loss payee.
Loan Estimate: A document provided after you apply for a mortgage, outlining estimated interest rates, monthly payments, and closing costs to help you understand the loan terms.
Loan-to-Value (LTV) Ratio: A calculation used by lenders to compare the loan amount to the home's value. It helps assess risk; a higher ratio may affect interest rates or insurance requirements.
Origination Fee: A charge for processing your mortgage application, including application, underwriting, and processing fees, typically 0.5% to 1% of the loan amount.
Principal: The actual amount borrowed for the mortgage. This decreases as you make payments.
Private Mortgage Insurance (PMI): Insurance required when your down payment is less than 20%, protecting the lender if you default on the mortgage.
Settlement Costs: Also known as closing costs, these are various fees and expenses paid at mortgage closing, including appraisal fees, title searches, taxes, and more.
Title Insurance: Insurance protecting you and the lender from issues related to the property’s title. Ensures the property title is clear of liens that could affect ownership.
This glossary is designed to provide clear, concise definitions for common mortgage terms, making them accessible and understandable to a broad audience.
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