The decisions you make when choosing your mortgage will impact your financial situation for years to come. Understanding the most common industry terms can help make sure you understand the ins and outs of your new loan. Here are some common terms.

Adjustable rate mortgage

An adjustable rate mortgage is a type of loan where your monthly interest will adjust up or down, according to the prime rate. Most ARMs will feature an introductory period of 2 to 5 years with a low fixed rate before the rate begins to fluctuate.

Amortization schedule

The amortization schedule for your loan is a document that shows how much you will pay in principal and interest every month for the life of your loan.

Appraisal

An appraisal is the professional valuation of a property, including a physical inspection and price analysis of comparable properties in the area that have sold recently.

Closing costs

Closing costs are all the fees and expenses a buyer or owner must pay during the mortgage or refinance process. Common closing costs include loan origination, points, inspection, insurance premiums, appraisal, credit report, property tax, deed recording, title insurance, and notary fees.

Debt-to-income ratio

The debt-to-income ratio is one of the numbers lenders use to determine a borrower’s ability to pay back their loan. It is calculated by adding together all the borrower’s outstanding debts (including the new mortgage) and dividing this number by income. Lenders prefer a low debt-to-income ratio.

Equity

Equity is the difference between the market value of your home and the balance owed on your mortgage.

Fixed rate mortgage

With a fixed rate mortgage, the buyer pays the same interest rate every year for the life of the loan.

Loan-to-value ratio

Another important ratio lenders use to determine risk is to compare the size of the loan to the value of the home. If you put down a larger down payment, your loan-to-value ratio will go down, making you more attractive to lenders.

Origination fee

The origination fee covers all the expenses that must be paid by the borrower to process and approve a new mortgage.

Points

Points are a percentage you can choose to pay on the total of your loan upfront in order to reduce down your interest rate.

Private mortgage insurance

Private mortgage insurance (PMI) protects a lender from a loan default. Buyers will almost always be required to purchase PMI if they do not have at least 20% equity in the home.

Settlement

Settlement is the fee paid to the escrow provider for processing the transaction.

Title insurance

Title insurance protects the lender from any liens or other issues with property ownership. Before a house can be sold, a title company will research the title to look for any problems and then issue an insurance policy to cover any potential hidden issues they were unable to find.

Underwriting

Underwriting is the process that a lender takes to research a borrower’s financial history and situation to determine their eligibility for a loan.

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