Important Mortgage Terms You Should Know (Part 1 of 5)

ARM? APR? MIP vs. PMI? USDA does mortgages? WTH? Here are some definitions of mortgage terms to help clear up the confusion.

As Your Mortgage Experts we feel it's important for our clients to familiarize themselves with terminology that is used throughout the loan process. Reading over your loan documents or speaking to someone who works in the mortgage industry might make you feel like you're in a foreign country, but getting to know these terms will help you feel more comfortable.


Adjustable Rate Mortgage (ARM)
A mortgage in which the interest rate is adjusted periodically based on a pre-selected index and margin. Two very common indices are the COFI Index & LIBOR. The margin is the fixed rate that is added to the index rate.

Amortization
Means of loan payment by equal periodic payments calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance.

Annual Percentage Rate (APR)
The interest rate that reflects the cost of a mortgage as a yearly rate. This rate is likely to be higher than the stated note rate or advertised rate on the mortgage, because it takes into account points and other credit costs. The APR allows home buyers to compare different types of mortgages based on the annual cost for each loan, however not all lenders calculate APR the same way.

Buydown
This is when a borrower pays fees (called points) upfront so that the lender and/or home builder subsidizes the mortgage by lowering the interest rate during the first few years of the loan. The borrower is "buying down" the rate, for that period. While the payments are initially low, they increase when the subsidy expires.

Construction Loan
This is a short-term interim loan for financing the cost of construction. The lender advances funds to the builder at periodic intervals as the work progresses.