Glossary Of Mortgage Terms: Defined And Explained

Whether you want to take out a mortgage or you already have one, it’s helpful to get familiar with the terms you might encounter. With a clear understanding of common mortgage jargon, you can more confidently navigate the ins and outs of getting a home loan and paying it off. In this glossary, you’ll find a wide range of useful mortgage terms to know as you go through process of financing a home purchase.

Common Mortgage Terminology To Know

Getting comfortable with mortgage terms can help you make informed decisions from application to final payment. We cover some of the most common terms in mortgage lending below.

Adjustable-Rate Mortgage

An adjustable-rate mortgage (ARM) is a type of loan with an interest rate that changes over time. When you sign up for an ARM, you first get a short period of fixed interest, which is usually lower than you’ll find with a fixed-rate loan. This is the introductory period of the loan and can last for up to 10 years.

After the introductory period, your interest rate will follow market rates – you’ll often see this referred to as a variable or floating interest rate. But there is a limit to how much the interest rate attached to your loan can rise or fall due to predetermined caps.

Amortization

Loan amortization describes how the interest and principal components of your loan are spread out over your payments.

When you make a payment on your mortgage, a percentage of it goes toward interest and a percentage goes toward your loan principal. At the beginning of your loan, most of your monthly payment is allocated toward interest due to a high principal balance. But as you chip away at the loan balance, more of your monthly payment will be directed to your principal.

Annual Percentage Rate (APR)

Annual percentage rate (APR) describes the cost of borrowing. It includes the interest rate you’ll pay on your loan annually and any extra lender fees.

APR is usually expressed as a percentage. You may see two interest rates listed when you shop for a loan. The larger number is always your APR because it includes fees.

Appraisal

An appraisal is a written estimate of how much your home is worth. Most mortgage lenders require buyers to get an appraisal before finalizing a home loan.

The appraisal is intended to confirm that the lender isn’t loaning you more money than what your home is worth. Your lender may help you by scheduling an appraisal, done by an independent third party.

Appreciation

Home appreciation indicates that the value of a property increases in value over time. As a property appreciates, the homeowner can watch their home equity grow.

Assessed Value

The assessed value, sometimes called the tax-assessed value, is a metric used when determining property taxes. A higher assessed value leads to higher property taxes. In general, the assessed value of your home is consid