Mortgage 101


Adjustable Rate Mortgage (ARM) - A mortgage in which the interest rate and payment changes periodically over the life of the loan based on changes in a specified index. The changes are usually subject to a cap.


Annual Percentage Rate (APR) - The APR is a calculation based on a standardized government formula designed to reflect the true annual cost of borrowing, expressed as a percentage.

Closing Costs - Costs that the borrower must pay at the time of closing, in addition to the down payment.

Credit Scoring - Also known as credit grading, is an unbiased way of determining a borrower's risk level. Values are associated with your personal financial attributes, such as your income, asset and debt levels, the length of time spent at your current address and current job, and your credit history.

Fixed Rate - The interest rate is “fixed,” or does not change, for the term of the mortgage.

Flood Insurance - National Flood Insurance is available to any property owner whose local community participates in the national program by adopting and enforcing floodplain management.

Interest Only Mortgage - An Interest Only Mortgage is a mortgage that allows a borrower to pay only interest on the loan for some or all of the term of the loan. During the Interest Only period of the mortgage, the loan is not amortized and no principal is paid down.

Mortgage Insurance (MIP or PMI) - Insurance that covers the lender against losses incurred as a result of a default on a home loan. This is generally required on all loans that have a Loan To Value (LTV) ratio higher than 80%. Also, FHA loans and some first-time buyer programs still require mortgage insurance regardless of the LTV ratio. When you have accumulated 20% of your home’s value as equity, you can ask your lender to waive the PMI.

Origination Fee - The fee that a lender charges you for processing a loan. It doesn’t usually include fees for appraisals, credit reports, inspections or loan document preparation. Like points, origination fees are usually computed as a percentage of the loan amount. However, unlike points, the origination fee is not included in your Annual Percentage Rate calculation.

Points or Discount Points - Amounts paid to the lender based on a percentage of the loan amount to lower or "buy down" the interest rate. Each point represents one percent of the loan amount. For example, one point on a $100,000 mortgage is 1% of $100,000, or $1,000.

Verification of Deposit (VOD) - A form used by your lender or broker to verify bank deposits and other financial assets you list on your loan application. Some loan programs allow you to skip asset verification in exchange for a fee or higher interest rate.