Purchasing your home is likely
the largest financial investment
you will make in your lifetime.

And, with a myriad of different financing options available, it can often be difficult to determine which option is best for your needs.

We’re here to help. We’ve taken the time to do a little of the legwork for you by compiling a list of common home-related finance terms that you may find useful as you embark on this exciting new chapter in your life.

• Adjustable-Rate Mortgage (ARM)

  Also known as a variable-rate loan, an ARM usually offers a lower initial rate than a fixed-rate loan. The interest rate changes at specified adjustment periods based on a published index that tracks changes in the current finance market. ARMs also have caps or a maximum and minimum that the interest rate can change at each adjustment period.

• Adjustment Period

  The time between interest rate adjustments for an ARM.

• Amortization

  Paying off a loan over a specified period of time and at particular interest rate.

• Amortization Schedule

  A schedule provided by mortgage lenders to show how the principal portion of your mortgage payment increases and the interest portion of the mortgage payment decreases over the term of your mortgage.

• Annual Percentage Rate (APR)

  The amount that your loan costs annually. This includes the interest rate, points, broker fees and certain other credit charges you may be required to pay.

• Assets

  Everything of value an individual owns.

• Balloon Mortgage

  A mortgage with monthly payments based on a 30-year amortization schedule, with the unpaid balance due in a lump sum payment at the end of a specific period of time (usually 5 or 7 years).

• Capacity

  Your ability to make your mortgage payments on time.

• Closing Costs

  The costs to complete the real estate transaction. These costs are in addition to the price of the home and are paid at closing and include points, taxes, title insurance, financing costs, and other items.

• Collateral

  A property that is used as security for a debt.

• Commitment Letter

  A letter from your lender stating the amount of the mortgage, the number of years you have to repay the mortgage (the term), the interest rate, the loan origination fee, the annual percentage rate and the monthly charges.

• Concession

  Something given up or agreed to in negotiating the sale of the house.

• Counter-offer

  An offer made in response to a previous offer.

• Credit

  The ability of a person to borrow money, or pay over time for goods or services.

• Credit Bureau

  A company that gathers information on consumers who use credit.

• Credit History

  A record of credit use comprised of a list of individual consumer debts and a record of whether or not these debts were paid back on time or "as agreed."

• Credit Report

  A document used by the credit industry to examine your use of credit.

• Credit Score

  A computer-generated number that summarizes your credit profile and predicts the likelihood that you'll repay future debts.

• Creditworthy

  Your ability to qualify for credit and repay debts.

• Debt

  Money owed from one person or institution to another person or institution.

• Debt-to-Income Ratio

  The percentage of gross monthly income that goes toward paying for your monthly expenses.

• Deed-in-Lieu of Foreclosure

  A cancellation of your mortgage if you voluntarily transfer the title of your property to your mortgage company. Usually you must try to sell your home for its fair market value for at least 90 days before a mortgage company will consider this option. A deed-in-lieu of foreclosure may not be an option if there are other liens on the property, such as second mortgages, judgments from creditors, or tax liens.

• Deed of Trust

  A legal document in which the borrower transfers the title to a 3rd party (trustee) to hold as security for the lender. When the loan is paid in full the trustee transfers the title back to the borrower. If the borrower defaults on the loan the trustee will sell the property and pay the lender the mortgage debt.

• Default

  Failure to repay your mortgage loan.

• Depreciation

  A decline in the value of a home due to changing market conditions or lack of upkeep.

• Down Payment

  A portion of the purchase price of our home not borrowed from your lender, generally 3-20%, paid up front.

• Earnest Money Deposit

  A deposit to show that you're committed to buying a home. The deposit is not refunded if your offer is accepted unless one of the contract contingencies is unfulfilled.

• Equity

  The value in your home above the total amount of any liens against your home.

• Escrow

  The holding of money or documents by a neutral third party before closing. Escrow can also refer to an account held by the lender (or servicer) into which a homebuyer pays money for taxes and insurance.

• Fixed-Rate Mortgage

  A mortgage with an interest rate that remains constant over the entire term of the loan.

• Forbearance

  A temporary reduction or suspension of your mortgage payments. Forbearance is often combined with a reinstatement or a repayment plan to pay off the missed or reduced mortgage payments.

• Foreclosure

  A legal action that ends all ownership rights in a home when the homebuyer fails to make the mortgage payments or is otherwise in default under the terms of the mortgage.

• Gift Letter

  A letter from a family member verifying that he or she has given you a certain amount of money as a gift and that you don't have to repay it.

• Good-Faith Estimate

  A written statement from the lender itemizing the approximate costs and fees for your mortgage.

• Gross Monthly Income

  The income you earn in a month before taxes and other deductions. This figure may also include rental income, self-employment income, alimony income, child support, public assistance payments, and retirement benefits.

• Housing Expense Ratio

  The percentage of your gross monthly income that goes toward paying for your housing expenses.

• HUD-1 Settlement Statement

  A final listing of the costs of a mortgage transaction. This statement provides the sales price and down payment, as well as the total settlement costs required from the buyer and seller.

• Index

  The published list of interest rates used to calculate the interest rate for an ARM.

• Inflation

  A rise in the general level of prices of goods and services.

• Inquiry

  A request for a copy of your credit report. Inquiries occur every time you fill out a credit application and/or request more credit. Too many inquiries can lower your credit score.

• Interest

  The cost you pay to borrow money, usually expressed as a percentage of the amount borrowed.

• Liabilities

  Your debts and other financial obligations.

• Lien

  A claim or charge on property for payment of a debt. With a mortgage, the lender has the right to take the title to your property if you don't make the mortgage payments.

• Loan modification

  This is a written agreement between you and your mortgage company that permanently changes one or more of the original terms of your mortgage to make the payments more affordable.

• Loan Origination Fees

  Fees paid to your mortgage lender for processing the mortgage application, usually in the form of points.

• Lock-In Rate

  A written agreement guaranteeing a specific mortgage interest rate for a certain length of time.

• Low-Down-Payment Feature

  A feature of some mortgages, usually fixed-rate mortgages, that helps you to buy a home with as little as 3% down.

• Margin

  The percentage added to the index for an ARM to establish the interest rate on each adjustment date.

• Market Value

  The current value of your home based on what a purchaser would pay, sometimes determined by an appraisal.

• Mortgage

  A loan to purchase your home that uses the home itself as collateral. The amount of your mortgage is usually the purchase price of your home minus your down payment.

• Mortgage Broker

  An independent finance professional that specializes in bringing borrowers and lenders together to complete a real estate mortgage.

• Mortgage Insurance (MI or PMI)

  Insurance needed for mortgages with a low down payment—usually those less than 20% of the home price.

• Mortgage Lender

  The lender providing funds for a mortgage. Your lender will also manage the credit and financial information review and the loan application process through closing.

• Mortgage Rate

  The interest rate you pay on the money borrowed to buy your house.

• Net Monthly Income

  Your monthly take-home pay after taxes.

• Points

  1% of the amount of the mortgage loan. For example, if a loan is made for $200,000, one point equals $2,000.

• Pre-Approval Letter

  A letter from a mortgage lender indicating that you qualify for a specific mortgage amount. The letter, while not required, shows sellers that you're a serious buyer, and is a valuable tool to have during your home search.

• Predatory Lending

  Unfair, deceptive, or fraudulent practices of some lenders during the loan origination or mortgage servicing process such as convincing borrowers to agree to unfair and abusive loan terms or knowingly making a loan that a borrower cannot afford to repay.

• Pre-Qualification Letter

  A letter from your mortgage lender that states that you're pre-qualified to buy a home. This letter does not commit the lender to a particular mortgage amount.

• Principal

  The amount of money borrowed to buy your house or the amount of the loan that has not yet been repaid to the lender. This does not include interest payments.

• Rate Cap

  A limit placed on the amount the interest rate on an ARM can increase or decrease during an adjustment period.

• Refinance

  Getting a new mortgage with all or some portion of the proceeds used to pay off the original mortgage.

• Reinstatement

  Your lender may agree to let you pay the total amount you are behind, in a lump sum payment paid by a specific date. There may be late fees and other costs associated with a reinstatement plan.

• Repayment Plan

  The most common way of resolving a loan default is to work out a plan that will let you repay part of the loan delinquency each month, along with you regular monthly installment.

• Short Payoff

  A sale in which a lender allows a property to be sold for less than the existing loan balance, due to factors such as the borrower’s financial circumstances, the property’s physical condition, and local real estate market conditions.

• Truth-In-Lending Act (TILA)

  A Federal law that requires disclosure of a truth-in-lending statement for consumer loans including a summary of the total cost of credit, such as the APR and other loan specifics.

• Underwriting

  The process lenders use to determine loan approval. It involves evaluating the property and the borrower's credit and ability to pay the mortgage.

• Uniform Residential Loan Application

  A standard mortgage application form your lender will ask you to complete. This form requests information such as your income, assets, liabilities, and a description of the property you plan to buy.