Annual Percentage Rate (APR)
APR tells you the annual cost of borrowing money based on the loan amount, interest rate, and other fees. This number is different from the interest rate because it allows you to compare the true costs from several lenders directly to help you find the best deal. Use our calculator to determine the effective APR of a mortgage.
Adjustable-Rate Mortgage (ARM)
An ARM rate is set using the value of an underlying financial index, like LIBOR (London Interbank Offered Rate), and adding an additional percentage, called a margin, to the index. ARM interest rates typically start lower than fixed-rates and stay at that introductory rate for three to 10 years before they adjust.
A construction loan is used to buy a land lot and finance the construction of a home, and works more like a line of credit than a mortgage. Instead of the seller getting all of the money at once, you only draw what you need, and may need to make interest-only payments.
Closing Disclosure (CD)
The CD describes, in detail, the critical aspects of your mortgage loan, including purchase price, loan fees, interest rate, estimated real estate taxes and insurance, closing costs and other expenses.
Your credit score predicts how likely you are to pay back a loan on time. Credit bureaus use a scoring model to calculate your credit score from the information in your credit report. Lenders use credit scores to make decisions such as whether to offer you a mortgage, credit card, auto loan, or other credit product and the interest rate you receive.
Debt-to-Income (DTI) Ratio
This is the percentage of your income that goes toward paying monthly debt — calculated by dividing your monthly debt obligations by your monthly gross income. Lenders typically require DTIs below a specified level for you to qualify for a mortgage. Higher DTIs could mean you’ll pay more interest or you may not qualify for the loan.
Earnest money, also called a good faith deposit, is money you put down to demonstrate your serious intent to buy a home. This money is paid when you’re signing the purchase agreement or sales contract.
Equity is the difference between what you owe on your mortgage and what your home is currently worth. If you owe $150,000 on your mortgage loan and your home is worth $200,000, you have $50,000 of equity in your home.
A fixed-rate mortgage has an interest rate that does not change during the term of your loan. This mortgage is popular with buyers who want stability in their monthly payments.
A home appraisal is a process through which a real estate appraiser determines the fair market value of a home. It can assure you and your lender that the price you’ve agreed to pay for a home is fair. Appraisals are ordered by the lender and paid for by the borrower.
A home inspection is an objective visual examination of the physical structure and systems of a house, from the roof to the foundation. The buyer normally schedules and pays for this inspection.
Homeowners insurance is a form of property insurance that covers losses and damages to an individual’s residence, along with furnishings and other assets in the home. It also provides liability coverage against accidents in the home or on the property.
Interest Rate Lock
An interest rate lock is a temporary guarantee that the interest rate a lender quotes you will not change. It protects you from the chance of an increase in your borrowing interest rate. Lenders may charge you a small fee to give you a lock. Although rate locks are usually for 30 days, a lender may be willing to offer a longer period in exchange for a larger fee.
This is a federally required document you should receive from a lender within three days of submitting a complete loan application. It provides the details of your loan, and the estimates of the costs you will pay at closing.
The term indicates how long you’ll be making payments on the loan. Two popular choices are 15- and 30-year mortgages.
Loan-to-Value (LTV) Ratio
This ratio is calculated by dividing the loan amount by the home’s purchase price if you are buying a home, or the current home value if you’re refinancing. So if you put 20% down when buying a home, your loan-to-value ratio or LTV would be 80%.
Principal, Interest, Taxes, and Insurance (PITI)
Your total mortgage payment each month will usually include principal, interest, taxes and insurance or PITI if you escrow your taxes and insurance.
Also called discount points, a point is equal to 1% of the loan amount. For example, one point on a loan of $150,000 is $1,500. Lenders consider mortgage points as interest that you pay in advance. The more points you pay when you close the loan, the lower your interest rate.
When you take out a loan, your payments are primarily broken up into two parts — principal and interest. The loan principal is the amount you borrow and goes down as you begin to pay it back, while interest is the cost of borrowing the money.
Private Mortgage Insurance (PMI)
PMI is an insurance that protects lenders from losses if you are unable to pay your mortgage. It is required for homebuyers using a conventional loan who make down payments less than 20% of the home’s purchase price.
Every homeowner pays property taxes. The cost varies from location to location, but generally the tax is based on a property’s value and is used to fund government services, schools, infrastructure and other projects.