Twenty Mortgage Interest Terms any Home Loan Consumer Should Know

Before you sign your John Hancock on each and every single mortgage document in the package, don’t you at least want what all those terms used throughout the agreement mean, how the overall financial process works and, finally, how interest rate fluctuations may come into play?

Adjustable Rate Mortgage (ARM,) also known as Variable Rate Mortgage, is a mortgage loan where the interest rate adjusts periodically contingent upon the pre-selected index.

Annual Percentage Rate (APR) is an interest rate that represents the entire cost of a mortgage based on a yearly rate. In additional, the Annual Percentage Rate (APR) takes into account any fees and points added onto the loan throughout the plan’s overall span.

Assumption is an agreement between the seller and buyer. The contract makes the buyer assume responsibility for the home seller’s current mortgage obligation. An assumption generally saves the homebuyer the monies associated with closing costs and the current interest rate.

Buy-down is the method by which a lender or homebuilder will subsidize the home loan mortgage by reducing the interest rate for the first initial years of financing. The buy-down lowers the buyer’s monthly payment for a specified and condensed period of time.

Caps refer to the upper limit on the amount a monthly payment or an interest rate can change in an adjustable rate mortgage (ARM).

Closing is the term that refers to the settlement of a property. The conclusion of a real estate sale is a closing that involves a meeting where the fund and property and funds are exchanged between the home seller and buyer.

Debt-to-Income Ratio is a ratio calculated as a percentage after the borrower’s monthly payment obligations have been tallied based upon the homebuyer’s gross monthly income.

Discount Points are the prepaid interest amounts assessed during the closing by the lending institution. A point is equivalent to one percent of the loan principal.