Use this glossary of mortgage terms to better understand the overall mortgage process as well as any specific mortgage terms that may be unfamiliar to you.
Adjustable-rate mortgage (ARM)
A mortgage 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.
The gradual reduction in the principal amount owed on a debt. During the earlier years of the loan, most of each payment is applied toward the interest owed. During the final years of the loan, payment amounts are applied almost exclusively to the remaining principal.
Amortization table or schedule
A timetable or schedule that gives you a breakdown of your monthly payments into principal and interest. You can use this schedule to figure out the amount of principal you’ll be repaying during your mortgage term.
The amount of time required to amortize (pay off) the loan, expressed in months. For example, for a 15-year fixed-rate mortgage, the amortization term is 180 months.
Annual percentage rate (APR)
The annual cost of a loan to a borrower. Like an interest rate, the APR is expressed as a percentage. Unlike an interest rate, however, it includes other charges or fees (such as mortgage insurance, most closing costs, discounts points and loan origination fees) to reflect the total cost of the loan. The Federal Truth in Lending Act requires that every consumer loan agreement disclose the APR. Since all lenders must follow the same rules to ensure the accuracy of the APR, borrowers can use the APR as a good basis for comparing the costs of similar credit transactions.
The value of a property, established by a public tax assessor. The assessed value is used to determine property taxes.
A loan that may be transferred to someone else while maintaining the same terms. For example, if you have an assumable loan (not all loans are assumable) and you sell your home, you may be able to transfer that loan to the new owner with no change in the interest rate and repayment schedule, though you may need to pay a fee in order to do so.
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