Glossary of Mortgage Terms

ADJUSTABLE RATE MORTGAGE (ARM) – An Adjustable Rate Mortgage, also known as an ARM, is a mortgage with an interest rate that can vary over the lifetime of the loan. Typically, the interest rate for the loan is indexed to the prime rate or to some other broader interest rate that fluctuates according to constantly changing market conditions.

ANNUAL PERCENTAGE RATE (APR) – Percentage rate which reflects, on a yearly basis, the true cost of a loan. As much as possible, APRs are figured the same so that they are directly comparable.

APPRIASAL – A professional, educated estimate of the value of a piece of property based on many factors, including what other properties of a similar size and style have sold for recently in the same neighborhood.

BALLOON MORTGAGE – A non-fully-amortized loan which still has a portion of the principal unpaid at the conclusion of the loan; this unpaid portion of the principal must be paid in one lump sum, concept also known as a balloon payment.

CAP – Limit on the amount which a variable rate loan can change during any one adjustment period. A cap protects the borrower against an unmanageable change in the monthly payment of an Adjustable Rate Mortgage.

CLOSING COSTS – Expenses over and above the purchase price of a property which are paid at the time of the closing of the loan. Typically, these costs include such things as title insurance, escrow fees, title preparation fees, prorated property taxes and other similar non-recurring fees.

DOWN PAYMENT – Money, typically paid by the buyer, which accounts for the difference between what amount provided by the lender and the actual selling price of the property.

EQUITY – Difference between what is owed on a property and what that property would currently sell for in the open market. Some of the ways that a property owner can turn equity into liquid cash include: a cash-out refinance of a property, a cash-out second mortgage or the sale of the property.

FIRST MORTGAGE – The primary loan secured to purchase a property.

REFINANCE – Measure taken to take out a new loan which pays off and replaces the original first mortgage. Typically, homeowner opts to do this when interest rates drop below the rate on the original first mortgage.