Adjustable-rate-mortgage (ARM): A mortgage having an interest rate that can change at designated intervals, based on a financial index.
Annual percentage rate (APR): A rate that reflects the actual annual cost of a loan, incorporating the loan interest rate, private mortgage insurance, points, and fees.
Appraisal: A professional assessment of the market value of a property.
Cap: A limit set on an ARM as to how much the interest rate or monthly payments may increase.
Closing: The legal procedure in which the transfer of property becomes final. Also called settlement.
Closing costs: Costs incurred by the buyer and seller in transferring ownership of a property.
Contingency: A condition that must be met before a contract is legally binding.
Convertible ARM: An adjustable-rate mortgage that can be converted to a fixed-rate mortgage under specified conditions.
Down payment: The part of the purchase price of a home that the buyer pays in cash up front; not included in the loan.
Earnest money: A deposit given to the seller by the buyer when submitting an offer to show serious intent about buying a property.
Escrow: The holding of documents and money (such as a deposit) by a neutral third party prior to closing. Also an account held by the lender into which a homeowner pays money for taxes and insurance.
Equity: The difference between the market value of a property and the owner’s outstanding mortgage balance; measures the degree of ownership.
Fixed-rate mortgage: A mortgage in which the interest rate does not change during the entire life of the loan.
Flood insurance: Insurance that will be required if a property is in a federally designated flood hazard area.
Homeowner’s insurance: An insurance policy offers liability coverage and protects the homeowner against physical damage to the property.
Interest rate cap: A provision of an ARM that limits how much the interest rate can increase per adjustment period.
Lifetime cap: A provision of an ARM limiting the total increase in the interest rate over the life of the loan.
Lock-in rate: An interest rate the lender guarantees to the borrower provided the mortgage is closed within a certain time period. The borrower pays a fee for this guarantee.
Margin: The set percentage rate the lender adds to the index rate to determine the interest rate on an ARM.
Mortgage: A legal document that pledges a property to the lender as security for the payment of a debt.
Offer to purchase: A formal document in which a buyer proposes to buy a property for a specified amount and under certain conditions. Acceptance by the seller creates a contract binding on both parties, subject to any contingencies.
PITI: Stands for principal, interest, taxes, and insurance—the components of a monthly mortgage payment.
Points: A one-time charge by the lender to increase the yield of a loan. Equal to one percent of the loan amount and paid at closing.
Prequalification: The process of determining how large a loan a prospective home buyer can qualify for; this procedure is done before actually applying for the loan.
Principal: The amount originally borrowed. Also that amount of the monthly mortgage payment that reduces the outstanding balance of a mortgage.
Private mortgage insurance (PMI): Insurance provided by a nongovernment insurer to protect a lender against loss if a borrower defaults. Usually required if down payment is less than 20 percent of the purchase price.
Real estate agent: A person licensed to negotiate and transact the sale of real estate; works on behalf of the seller, unless designated as a buyer’s broker.
Title: A legal document establishing the right of ownership.
Title insurance: Insurance to protect the lender (lender’s policy) or the buyer (buyer’s policy) against loss arising from disputes over property ownership.
Title search: A detailed examination of the title records to ensure that the seller of a property is the legal owner and that there are no liens or other claims outstanding.
Anytime Adviser—Home Buying Coach
© 2003 Credit Union National Association Inc.