Principal is the amount of money borrowed on a loan.
Lender is an individual or business entity making a loan.
Interest is a fee charged for borrowing money. Also refers to money that a financial institution may pay individuals for keeping their money in an account there (such as an interest-bearing savings account).
Payment shock is a significant rise in a homeowner’s monthly home payment, usually as the result of rising interest rates (in the case of an adjustable-rate loan) or the end of an interest-only introductory period.
Closing costs are Fees paid at or prior to the closing of your loan. They may include attorneys’ fees, as well as fees for preparing and filing a mortgage, and for taxes, title search, and insurance. They include the expenses incurred in obtaining the loan and in transferring the ownership of any collateral property from the seller to the buyer. Generally, closing costs are typically about 3% of the total loan amount. Also called settlement costs.
Term is the number of years it will take to pay off a loan. The loan term is used to determine the payment amount, repayment schedule and total interest paid over the life of the loan.
Adjustment cap is a limit to how much a variable interest rate can go up or down in a single adjustment period.
Interest rate is the Cost for the use of a loan, usually expressed as a percentage of the loan, paid over a specific period of time. The interest rate does not include fees charged for the loan. See also: annual percentage rate (APR).
Rate cap is a limit on how much the interest rate can change, either per adjustment period or over the term of the loan.
Fixed-rate mortgage is a home loan with a predetermined fixed interest rate for the entire term of the loan.
Property tax is the fixed percentage based on the appraised value of your home that you pay to the county in which the home is located. The specific percent varies dramatically from county to county in every part of the country. You pay this tax annually, semiannually or as part of your monthly mortgage payments. Depending on when you actually close your loan, some of this property tax may be due at the time of closing. The local county assessor’s office can give you the rate for your county.
Homeowners insurance is the Insurance to protect your home against damage from fire, hurricanes and other catastrophes. Usually, hazard insurance also covers you against theft and vandalism, as well as personal liability in case someone is hurt or injured on your property. A lender will likely require you to name it as a payee under the insurance if you need to make a claim. Also called Hazard Insurance.
Credit Score is a number that rates the quality of an individual’s credit. Credit reporting agencies calculate this number, often with the assistance of computer systems, as part of the process of assigning rates and terms to the loans they make. The number helps predict the relative likelihood that a person will repay a credit obligation, such as a mortgage loan. In general, the higher your credit score, the more likely you are to be approved for and to pay a lower interest rate on a loan.
FHA home loan is a mortgage home loan that is insured by the Federal Housing Administration (FHA). Also known as a government loan. FHA mortgage insurance protects the lender (not the borrower) if a borrower defaults on the FHA loan. This insurance enables a lender to provide loan options and benefits often not available through conventional financing.
Down payment is the amount of cash you pay toward the purchase of your home to make up the difference between the purchase price and your mortgage loan. Down payments often range between 5% and 20% of the sales price depending on many factors, including your loan, your lender, your credit history, and so forth.
Lifetime adjustment cap is a limit on how much the variable interest rate can increase during the term of a loan.
Adjustable-rate mortgage (ARM) is a mortgage or home equity loan in which your interest rate and monthly payments may change periodically during the life of the loan, based on the fluctuation of an index. Lenders may charge a lower interest rate for the initial period of the loan. Most ARMs have a rate cap that limits the amount the interest rate can change, both in an adjustment period, and over the life of the loan. Also called a variable-rate mortgage.
Refinance is Paying off your existing loan with the proceeds from a new loan, generally using the same property as collateral, in order to take advantage of lower monthly payments, lower interest rates, or save on financing costs.
Equity is the difference between the fair market value (appraised value) of your home and your outstanding mortgage balances and other liens.
Budget is a detailed plan of income and expenses expected over a certain period of time. A budget can provide guidelines for managing future investments and expenses.
Commission is the fee charged by a broker or agent for negotiating a real estate or loan transaction. A broker commission is generally a percentage of the price of the property or loan.
Index is the basis used in a mortgage note or credit agreement, a financial index is the measurement used to decide how much the annual percentage rate will change at the beginning of each adjustment period. Generally, the index plus or minus margin equals the new rate that will be charged, subject to any caps. Lenders use various financial index rates: London Interbank Offered Rate [(LIBOR and Treasury-Indexed ARMs (T-Bills)]
Interest-only payments is when a lender permits you to pay only the interest due on a loan for a portion of the loan term, which lowers your periodic payment during that period, but does not decrease your principal balance on the loan. Making interest-only payments will result in larger payments being due (“payment shock”) at the end of the interest-only payment period. See also: balloon loan and balloon payment.
VA loan is a mortgage that is guaranteed by the Department of Veterans Affairs (VA) for qualified veterans of U.S. military forces. Also known as a government loan.
Mortgage is a legal document giving a lender a lien on real estate to secure repayment of a loan. Mortgage loans generally run from 10 to 30 years, after which the loan is required to be paid off. Also called deed of trust and/or security deed.
Credit is an arrangement in which a borrower receives something of value in exchange for a promise to repay the lender at a later date.