A Glossary of General Mortgage Contract Terms

Are you considering taking out a mortgage to buy property? Here are some terms you may encounter when you read your mortgage contract.

Adjustable Rate Mortgage (ARM)

This is a loan with an interest rate that can change during the term of the loan. Payments tend to increase or decrease with the interest rate, which is typically tied to an index, like the prime rate.

Amortize

To amortize a debt means to pay it off in installments that include principal as well as interest.

Appraisal

This is a report made by a professional that estimates the value of the property to be sold or bought.

Annual percentage rate (APR)

This is a calculation of the cost of the loan as a yearly rate, expressed as a percentage. It is normally higher than the interest rate because it incorporates prepaid finance charges that are not part of the interest interest.

Balloon payment

A balloon payment is a payment at the end of a long term loan that is larger than the regularly scheduled monthly payments. It is used on loans that are not fully amortized and thus don’t pay off all the interest.

Borrower

This is someone who receives funds in the form of a loan and must repay the loan in full.

Closing Costs

This is a catch all term for all the fees a borrow must pay upon closing.

Credit Report

Your credit report is generated by a reporting agency like Trans Union, Experian or Equifax and shows historically whether you have been on time with your payments to mortgages, credit cards, rent, utilities, and other debts. It can also show what percentage of your revolving credit you’re using.

Credit Score

Your credit score shows a potential lender whether you’re likely to repay the loan—in other words, whether you’re a good risk or a bad risk.

Equity

Equity is the dollar amount of your home that you really own. As you pay off your mortgage, it is a percentage based on how much of the principal you’ve paid.

Fixed Rate Loan

A fixed rate loan is a loan where the interest rate doesn’t vary.

Foreclosure

Foreclosure is a legal procedure that a lender can use to force you to sell your house in order to repay your loan if you don’t make your payments on time.

Interest Rate

The interest rate is how much it costs to borrow money expressed as a percentage of the amount borrowed.

Lien

A lien is a legal claim against a home, such as a mortgage, tax lien or judgment lien.

Mortgage

This is the promise in which you contractually agree to put your home up as security for a loan to buy the home.