|Adjustable rate mortgage (ARM)||An adjustable rate mortgage, or ARM, begins with a low interest rate for an initial period of time (generally somewhere between 1 and 10 years). After that period, the rate typically adjusts annually for the life of the loan. Read our post about choosing between a fixed rate mortgage and an ARM.|
|Annual percentage rate (APR)||While the interest rate for your mortgage dictates how much interest you’ll pay and what your monthly payment will be, the annual percentage rate (or APR) reflects the total cost of the mortgage. APR includes fees and costs associated with obtaining the loan in addition to the interest rate, all expressed as a yearly rate. Read our post all about APR.|
|Appraisal||An appraisal is a third-party assessment of the value of your home.Mortgage lenders provide a loan based off of the lower of the appraisal value or the purchase price of the home. Read our post all about appraisals.|
|Cash-out refinance|| With a cash-out refinance, you apply for and close on a new mortgage loan with a new rate that you’ll pay back over a new term. A cash-out refinance requires a minimum of 20% equity in your home. It increases the balance you owe, providing you with additional cash that you can spend.|
Note that a cash-out refinance is different from a home equity loan and a HELOC.
Read our post all about cash-out refinancing.
|Closing disclosure||A closing disclosure is an official mortgage document that provides final details about your loan, including the terms, projected monthly payment details, and any fees due at closing. Read our post all about closing.|
|Conforming loan||The most common type of home loan, a conforming loan is a conventional loan that meet guidelines set by the Federal Housing Finance Agency for loans to be acquired by government-sponsored enterprises Fannie Mae and Freddie Mac, including a maximum loan limit. Read our post comparing four common loan types.|
|Credits (or lender credits)||A credit is cash at closing that you receive from your mortgage lender. By taking a lender credit, you’re accepting a higher interest rate over the life of your loan in exchange for receiving this money at closing. Read our post about choosing between points and credits.|
|Down payment||Your down payment is the amount of money you pay out of pocket for your home. If you’re using a mortgage loan to pay for the rest of the home, your loan amount will make up the difference between your down payment and the price of the home. Read our post about what types of funds you can use for a down payment.|
|Earnest money|| Earnest money is a sign of good faith to the seller. Your purchase contract lists the amount, payment method, and due date. The deposit goes to the escrow company, a neutral third party that handles funds between you and the seller. |
On your closing date, the deposit will be credited towards your total purchase price of the home. Read our post all about closing.
|Equity||Home equity is the difference between the value of your home and the outstanding principal owed on your mortgage. Read our post about how to unlock equity.|
|Escrow account||An escrow account is designated primarily for payment of your property taxes and homeowners insurance plus any other required insurance. You pay into the account, which is managed by your mortgage lender, as you make your mortgage payment. Read our post all about escrow accounts.|
|FHA loan||FHA loans are insured by the Federal Housing Administration, part of the US Department of Housing and Urban Development (HUD). Because the government is insuring the loan, which offers security to the lender, borrowers with smaller down payments and lower credit scores may qualify most easily for this type of loan. However, the borrower will pay private mortgage insurance (PMI) for the life of the loan. In addition, FHA loans require a funding fee equal to 1.75% of your loan amount—this fee can either be paid out of pocket or added to your loan amount. Read our post comparing four common loan types.|
|Fixed rate mortgage||A fixed rate mortgage is a loan with an interest rate that doesn’t change over the life of the loan (also called the term). While a 30 year term is the most popular, you can choose a 20 year, 15 year, or 10 year term. Some lenders will even let you pick something in between, like a 23 year term. Read our post on choosing between a fixed rate mortgage and an ARM.|
|Home equity line of credit (HELOC)||A home equity line of credit enables you to use the equity you have in your home. You’ll determine a maximum amount that you can borrow, then pull money from that amount as you need it. Read our post comparing home equity loans and home equity lines of credit (HELOCs).|
|Home equity loan||A home equity loan enables you to use the equity you have in your home. You’ll receive the amount in a single lump sum payment and pay it back, with interest, in monthly increments. Most home equity loans are fixed rate loans (the interest rate won’t change over time). Read our post comparing home equity loans and home equity lines of credit (HELOCs).|
|Interest rate||Interest is the cost of borrowing money, paid for delaying the repayment of the debt. The interest rate is the amount that a borrower is responsible for paying, expressed as a percentage of the principal loan amount. Read our post about why interest rate isn’t always the most important number when choosing a loan.|
|Jumbo loan||Jumbo loans are conventional loans that exceed the conforming loan limit, making them “non-conforming.” Therefore, they’re often used when the price of the home is more than the average median home price in the region. These loans are not backed by Fannie Mae and Freddie Mac. Because there is a higher risk for the lender due to the larger loan amount, jumbo loans are more difficult to qualify for than conforming loans. Read our post comparing four common loan types and our post that goes deeper on jumbo loans.|
|Points (or discount points)||A point is a percentage point of your loan (1 point = 1% of your loan amount). When you pay points, you pay a portion of your mortgage’s interest up front as a one-time fee at closing in exchange for a lower interest rate, hence the name discount points. Read our post all about points and our post about choosing between points and credits.|
|Pre-qualification||A pre-qualification tells you roughly how much you can afford based on what you report about your down payment, assets, credit, and income. It involves assumptions and is only a guesstimate.|
|Pre-underwriting|| Pre-underwriting is a written commitment from a mortgage lender confirming the loan amount and program you’re qualified for.|
All home loans involve underwriting, but typically not until there’s a specific property to consider. With pre-underwriting, the lender carefully reviews your ability to pay back the loan before a property is involved. Once you’ve found a home, the property title and appraisal will be underwritten.
The process of being pre-underwritten starts with you giving a loan officer documents pertaining to your credit, assets, and debt-to-income ratio. The loan officer shares the information with an underwriter, who carries out pre-underwriting.
Read our post all about pre-underwriting.
|Principal||The principal is the outstanding balance of your mortgage loan, excluding the interest owed for borrowing.|
|Private mortgage insurance (PMI)||Private Mortgage Insurance (PMI) is insurance required by lenders in most scenarios when the borrower makes a down payment of less than 20% on their home purchase. It protects your lender if you default on your mortgage and allows them to recoup losses related to the lower amount of equity in the home. PMI is usually paid as a monthly premium tacked on to your mortgage payment. Read our post all about PMI.|
|Rate-and-term refinance||A rate-and-term refinance allows you to take advantage of a lower interest rate and/or a different loan program than you currently have. This is most commonly done to take advantage of lower market rates or to change your loan program from an adjustable rate to a fixed rate loan. Read our beginner’s guide to refinancing.|
|Refinance||When you refinance your mortgage, you apply for a new mortgage loan and use it to pay off your current mortgage(s). Two common types of refinancing are a rate-and-term refinance and a cash-out refinance. Read our beginner’s guide to refinancing.|
|VA loan||VA loans help active-duty service members, veterans, and eligible surviving spouses buy homes. They’re available through a program of the US Department of Veterans Affairs and can be either VA-funded (where the VA is your lender) or guaranteed by the VA when your lender is a private company. These loans can fund the entire purchase price of the home and don’t require private mortgage insurance (PMI). Similarly to FHA, the VA requires a funding fee of 1.25% – 3.3% of your loan amount, depending on your level of down payment, the type of your service, and whether or not this is your first VA loan. Read our post comparing four common loan types.|