Mortgage Terms 101

Whether you’re preparing to buy your first home, or your next one, it’s best to familiarize yourself with the lingo. Learn the most common terms you’ll likely hear to help you navigate the homebuying process with absolute ease.

• Adjustable Rate Mortgage (ARM): A mortgage with a variable interest rate that is usually initially lower than that of a mortgage with a fixed rate but is adjusted periodically according to the cost of funds to the lender.
• Appraisal: A professional opinion of the homes current market value.
• Amortization: The process of paying off a loan with regular installments of interest and principal over time, lowering the amount you owe with each payment over the full term of the loan.
• Annual Percentage Rate (APR): A broader measure of the cost of borrowing money than the interest rate. The APR reflects the interest rate plus additional fees and expenses associated with taking out your loan. APR allows homebuyers to compare different mortgages based on the annual cost for each loan.
• Buydown: When the seller, builder or buyer pays an amount upfront to lower monthly mortgage payments for a certain number of years or the whole term.

• Closing: The Closing, also called settlement, is the last step in buying and financing a home where the buyer signs the mortgage documents, and pays closing costs.
• Closing Costs: Fees and expenses incurred when finalizing a real estate transaction, beyond the down payment of the home. These costs may include loan origination fees, points, appraisal fee, credit report fee, mortgage tax, survey and other items.
• Closing Disclosure: A closing disclosure is the official form providing the final details about the mortgage loan you have selected. It includes the terms of the loan, projected monthly payments, and how much you will pay in fees and other costs to get your mortgage (closing costs).
• Contingency: A condition that must be met for a contract or a commitment to remain binding.
• Conventional Mortgage: A conventional loan is any mortgage loan that is not insured or guaranteed by the government (such as under Federal Housing Administration, Department of Veterans Affairs, or Department of Agriculture loan programs).
• Credit Report: A credit report is a statement containing information about your credit activity and current credit situation. Lenders use your credit scores and information on your credit report to determine whether you qualify for a loan and what interest rate to offer you.

• Discount Point: Discount points lower your interest rate in exchange for paying an upfront fee.  This is also referred to “buying down the rate.” Each point you buy costs 1 percent of your total loan amount.
• Down Payment: The percentage of your homes purchase price paid upfront when you close on your home loan. This amount is not financed with a mortgage and will vary depending on the type of loan you choose and the lender’s requirements. Generally, the larger the down payment you make, the lower the interest rate you will receive and the more likely you are to be approved for a loan.
• Down Payment Assistance Program (DPA): Financial assistance provided by an organization such as a government or non-profit agency, to a homebuyer to assist with the down payment for a home purchase.
• Earnest Money: The deposit a buyer pays to show good faith on a signed contract agreement to buy a home. If the offer is accepted, the money will become part of the down payment.
• Escrow: An escrow account is set up by your mortgage lender to pay various property-related expenses, like property tax and homeowners’ insurance. A portion of your monthly mortgage payment goes into the account. If your mortgage does not have an escrow account, you pay your property-related expenses directly.
• Equity: Equity is the difference between what you owe on your mortgage and the fair market value of the home.

• Federal Housing Administration (FHA) Loan: FHA loans are from private lenders that are regulated and insured by the Federal Housing Administration (FHA). FHA loans differ from conventional loans because they allow for lower credit scores and down payments as low as 3.5 percent of the total loan amount. The maximum loan amounts vary by county.
• First Time Home Buyer (FTHB) Loan Programs: Mortgage loans with special qualifying terms for those who have never owned real estate or have not in the past few years. Although the programs and terms vary by state, they often offer down payment and closing cost assistance.
• Fixed-Rate Mortgage: A mortgage in which the interest rate is set when you take out the loan and it does not change during the term of the loan.
• Homeowner’s Insurance: Homeowner’s insurance pays for losses and damage to your property if something unexpected happens, like a fire, theft, liability for property damage and personal liability. When you have a mortgage, your lender wants to make sure your property is protected by insurance. That’s why lenders generally require proof that you have homeowner’s insurance. Homeowner’s insurance is not the same as mortgage insurance.
• Lock in: A homebuyer can lock in a specified interest rate and points provided the loan is closed within a set period of time. This can help protect you against the interest rate changing during the time between applying for a loan and closing on it.

• Mortgage Insurance: Mortgage insurance protects the lender if you fall behind on your payments. Mortgage insurance is typically required if your down payment is less than 20% of the property value.
• Pre-qualification: The process of determining how much money a prospective homebuyer will be eligible to borrow before a loan is applied for.
• PITI: The four basic elements of a monthly mortgage payment: principal, interest, taxes, and insurance.
• Title Insurance: Title insurance protects a real estate owner or lender against any loss or damage they might experience because of liens, encumbrances, or defects in the title to the property, or the incorrectness of the related search.
• Underwriting: The process of evaluating a loan application to determine the risk involved for the lender. Underwriting involves an analysis of the borrower’s creditworthiness and the quality of the property itself.
• USDA Loan: The Rural Housing Service, part of the U.S. Department of Agriculture (USDA) offers mortgage programs with no down payment and generally favorable interest rates to rural homebuyers who meet the USDA’s income eligibility requirements.
• VA Loans: A VA loan is a loan program offered by the Department of Veterans Affairs (VA) to help service members, veterans, and eligible surviving spouses buy homes. The VA does not make the loans but sets the rules for who may qualify and the mortgage terms. The VA guarantees a portion of the loan to reduce the risk of loss to the lender. The loans generally are only available for a primary residence.

Explore our selection of homeowner resources to help you along at all stages of your homebuying journey, and the many benefits of working with our preferred lenders in Houston, Austin and San Antonio.