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Basic Mortgage Terminology

In order to get the best deal for your mortgage you need to do your homework and shop around. Part of doing your homework is learning the terminology of the mortgage industry. Here is a list of basic mortgage terms you should be familiar with.

Adjustable Rate Mortgage Loan (ARM) These are mortgages where the interest rate changes based on market conditions. The interest rate will be tied to some index such as the prime rate for example, and the lender will charge a premium on top of that index. These loans typically have an introductory period where the interest rate will be fixed at a lower rate; however, at the end of the introductory period the interest rate will go up to a much higher rate. When the interest rates change the amount of your monthly payments will change with it.

Annual Percentage Rate (APR) This is the interest rate that includes all finance expenses for the loan. The Annual Percentage rate factors in origination fees, points, and any other fees that come with the loan, including the interest paid on a yearly basis. This APR is higher than the advertised interest rate and will let you compare mortgages from different lenders and the fees associated with each.

Interest Rate and Payment Caps Caps on the amount interest rates can go up at any one time or over the life of the loan serve to protect the homeowner from rate hikes. Payment caps also protect the homeowner by limiting the amount the monthly payment can go up.

Closing Costs This is the sum of all fees and expenses you must pay when taking ownership of a property. These fees must be disclosed prior to closing and include any fees, insurances costs, and taxes.

Debt to Income Ratio This is the ratio a lender will use by taking the sum of your debt versus the amount of income your receive. This is used by the mortgage lender along with your payment history to determine your credit worthiness.

Down Payment The initial payment you make when purchasing your home. It is typically 20% of the property value and is the difference between that value and the amount of your mortgage loan.

Equity is the portion of the home owned by the homeowner; the mortgage is the portion of the home owned by the lender. Put another way Equity is the difference between the appraised value and the outstanding balance of the mortgage.

Escrow Account This is an account set up by the mortgage lender that is used to pay the homeowners insurance and property taxes for the home. Escrow accounts protect the lender’s interest in the property by ensuring taxes and insurance are paid

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