Adjustable Rate  With an adjustable rate mortgage, the interest rates fluctuate. ARMs are tied to a number of indexes, usually published interest rates. The lender then adds an amount to the index, called a margin, which is customarily two percentage points or four percentage points. This number is the actual interest rate of the ARM. In general, the interest rates on an ARM changes every year, though, with some ARMs, there is a fixed rate mortgage for the first few years before the interest rate changes on a yearly basis. Most ARMs also have built in caps to reduce the risks of large increases in payments. A lifetime cap limits how much the interest rate can rise over the life of the loan, while periodic rate cap limits the amount your payments can raise at one time.

Amortization The gradual elimination of a liability, such as a mortgage, in regular payments over a specified period of time. Such payments must be sufficient to cover both principal and interest.

Annual Membership  An amount that may be charged annually for having a line of credit available. Often charged regardless of whether or not you use the line.

Annual Percentage Rate (APR)  a defined rate that shows the yearly cost of a mortgage. APR will most likely be a higher interest rate than the stated interest rate as it will reflect the annual cost of borrowing money.

Application  An initial statement of personal and financial information which is required to approve your loan.

Application Fee  Fees that are paid upon application. An application fee may frequently include charges for property appraisal and a credit report.

Appraisal  A fee charged by an appraiser to render an opinion of market value as of a specific date. Required by most lenders to obtain a loan.

Balloon Payment  A lump sum payment for the unpaid balance of the loan.

Cash Out  Receiving money back when refinancing your present mortgage.

Closing Costs  Any fees paid by the borrowers or sellers during the closing of the mortgage loan.

Conforming Loan  A home loan for $359,650 or less will be counted as a conforming mortgage throughout 2004. "Conforming" home loans are those that conform to rules that Fannie and Freddie issue. These agencies then bundle and sell the loans in the secondary market, a process that creates an efficient mortgage market in the United States and holds mortgage rates down on those loans.

Contract of Sale  An agreement entered into for the sale and purchase of property.

Credit Limit  The maximum amount that you can borrow.

Debt Service  The total amount of credit card, auto, mortgage or other debt upon which you must pay.

Down Payment  The difference between the purchase price and that portion of the purchase price being financed.

Effective Interest Rate  The cost of credit on a yearly basis as a percentage. Includes costs paid to get the loan, so it is a higher amount than the interest rate stated in the mortgage. Can help compare loan programs with different rates and points.

Equity  The difference between the appraised value of your home and your outstanding mortgage balance.

First Mortgage  A mortgage which is in first lien position, taking priority over all other liens.

Fixed Rate  An interest rate which is fixed for the term of the loan. Payments as well are fixed at one amount.

Good Faith Estimate  A written estimate of closing costs which a lender must provide you within three days of submitting an application.

Gross Income  The income of the borrower before taxes or expenses are deducted.

Home Equity Line of Credit or Loan A home equity loan is a loan secured by a home or second home. This loan can be up to the amount of home equity the homeowner has invested in their home. Home equity is calculated by subtracting the amount of debt left in the mortgage loan from the fair market value of the home. Home equity loans are often used to consolidate other debt with higher interest rates such as credit card debt, or to finance costly expenses such as a wedding or educational expense. Two main types of home equity loans exist. The first type is the traditional second mortgage, and the second is a home equity line of credit.

Hazard Insurance  Insurance that combines liability insurance and hazard insurance. Required by most mortgage lenders.

HUD I Settlement Statement  A form used at the loan closing to itemize the costs associated with purchasing the home. Used as mandated by HUD, the Department of Housing and Urban Development.

Index  A number, usually a percentage, which future interest rates for adjustable rate mortgages are calculated

Interest Rate  The periodic charge, expressed as a percentage, for use of credit.

Jumbo Loan  A loan with an amount greater than the "conforming" loan limit, currently $359,650 for a single family home.

Loan to Value Ratio (LTV) The mortgage amount divided by the value or purchase price.

Mortgage Banker  A banker who originates, sells, and services mortgages in the secondary mortgage market.

Mortgage Broker  A mortgage broker assists a borrower to find the appropriate mortgage for their needs. A mortgage broker does not actually make the loan or write the mortgage, but they show a consumer a full array of options that are available in the mortgage market.

Mortgage Insurance (PMI) When the downpayment (or remaining equity in a property) is less than 20% of the value, the lender feels "exposed". You are required to get private mortgage insurance that protects the lender against your default on the mortgage. The lender obtains this coverage at your expense. Please remember, the bank does not want to own your property and statistically, the lower the downpayment, the more likely a borrower under financial stress will walk away from the property.

Mortgage Loan  Secured in most cases by a mortgage, a mortgage loan is a loan on real estate in which a lien is placed on the property by the mortgage holder until the mortgage is paid in full.

Mortgagee  The lender in a mortgage loan transaction.

Mortgagor  The borrower in a mortgage loan transaction.

Negative Amortization  Occurs when your monthly payments are not large enough to pay all the interest due on the loan. This unpaid interest is added to the unpaid balance of the loan. The potential danger of negative amortization is that the home buyer ends up owing more than the original amount of the loan in the short term. These loans usually have a payment adjustment that eventually is sufficient to amortize the loan over the original term.

PITI  Principal, Interest, Taxes and Insurance. Also called monthly housing expense.

Points A percentage of the loan amount which the borrower pays in order to reduce the rate/payment on the loan. Points can be called by a variety of names such as oringination fee, discount points, warehouse fees and broker fees. We consider "points" as points and consider any other description as confusing to the borrower. On purchases, these fees are "deductible" in the year that you pay them, but on a refinance, the deduction must be spread out over the life of the loan.

Prepayment Penalty  Money charged for an early repayment of debt (Usually the entire loan or an amount in excess of a set percentage of the loan balance). Prepayment penalties are allowed in some form (but not necessarily imposed) in many states.

Servicing a Loan  The Collection of monthly payments and penalties, record keeping, payment of Insurance and taxes, and possible Settlement of Default , involved with a Mortgage loan.

Title  The written evidence that proves the right of ownership of a specific piece of property.

Title Insurance  Protection for lenders or homeowners against financial loss resulting from legal errors in the title.

Transaction Fee  A fee which may be charged every time you withdrawl on a home equity credit line.

Underwriting  The process of checking data and approving a loan.

Variable Rate  An interest rate that changes periodically in relation to an index. Payments may increase or decrease as a result.