Mortgage Basics

An adjustable-rate mortgage (ARM) is a home loan with a variable interest rate. With an ARM, the initial interest rate is fixed for a period of time. After that, the interest rate applied on the outstanding balance resets periodically, at yearly or even monthly intervals.

APR is the annual cost of a loan to a borrower — including fees. Like an interest rate, the APR is expressed as a percentage. Unlike an interest rate, however, it includes other charges or fees such as mortgage insurance, most closing costs, discount points and loan origination fees.

An appraisal is an unbiased professional opinion of a home’s value and is used whenever a mortgage is involved in buying, refinancing, or selling that property.

A conventional loan is a mortgage loan that’s not backed by a government agency. Conventional loans are broken down into “conforming” and “non-conforming” loans. … However, some lenders may offer some flexibility with non-conforming conventional loans

A home construction loan is a short-term, higher-interest loan that provides the funds required to build a residential property. Construction loans typically are one year in duration. During this time, the property must be built and a certificate of occupancy should be issued.

A credit report comprises your credit history with detailed information of credit accounts (credit card and loans), bankruptcies, and late payments (if any). It consists of a credit score that is referred by the lenders to check your creditworthiness when you apply for a loan

This number is one-way lenders measure your ability to manage the monthly payments to repay the money you plan to borrow. To calculate your debt-to-income ratio, you add up all your monthly debt payments and divide them by your gross monthly income. Usually no more than 45%, but some of the lenders allow it up to 50%.

A delinquent mortgage is a home loan for which the borrower has failed to make payments as required in the loan documents. A mortgage is considered delinquent or late when a scheduled payment is not made on or before the due date.

Loans with excessive prior mortgage delinquencies are not eligible for delivery to Fannie Mae. Excessive prior mortgage delinquency is defined as any mortgage tradeline that has one or more 60-, 90-, 120-, or 150-day delinquency reported within the 12 months prior to the credit report date.

For 2022, the FHA floor was set at $420,680 for single-family home loans. This minimum lending amount covers most U.S. counties. The FHA ceiling represents the maximum loan amount. For 2022, the FHA ceiling was set at $970,800 for single-family home loans. This represents the highest amount that a borrower can get through the FHA loan program.

An FHA-insured loan is a US Federal Housing Administration mortgage insurance-backed mortgage loan that is provided by an FHA-approved lender. FHA mortgage insurance protects lenders against losses.

An FHA loan is a type of mortgage insured by the Federal Housing Administration that may let you make a down payment as low as 3.5% and that has less-restrictive credit requirements than many conventional home loans.

First-time home buyers (FTHB) may use a number of different types of loan programs to purchase their first home. Popular FTHB loans include programs offered by FHA, VA, USDA, Fannie Mae, and Freddie Mac with low down payments. Some programs define a FTHB as someone who hasn’t purchased a home in three years or more.

The term “fixed-rate mortgage” refers to a home loan that has a fixed interest rate for the entire term of the loan. This means that the mortgage carries a constant interest rate from beginning to end. Fixed-rate mortgages are popular products for consumers who want to know how much they’ll pay every month.

An appraisal is a professional opinion of your home’s value and is an important step in the home-buying process. Appraisals are conducted by licensed or certified professionals, who provide opinions as unbiased third parties. The appraiser gets paid for valuing your home but has no skin in the game when it comes to whether you qualify for a mortgage or refinance as a result of their estimate.

A home equity line of credit (HELOC) is a line of credit that allows you to borrow against your home equity. Equity is the amount your property is currently worth, minus the amount of any mortgage on your property. Unlike a home equity loan, HELOCs usually have adjustable interest rates. For most HELOCs, you will receive special checks or a credit card, and you can borrow money for a specified time from when you open your account. This time period is known as the “draw period.” During the “draw period,” you can borrow money, and you must make minimum payments. When the “draw period” ends, you will no longer be able to borrow money from your line of credit. After the “draw period” ends you may be required to pay off your balance all at once or you may be allowed to repay over a certain period of time. If you cannot pay back the HELOC, the lender could foreclose on your home. 

A home inspection is often part of the home buying process. You typically have the right to hire a home inspector to examine the property and point out its strengths and weaknesses. This is often especially helpful to test a home’s structural and mechanical systems including heating, ventilation, air conditioning, and electrical.

An initial interest rate cap is defined as the maximum amount that the interest rate on an adjustable-rate loan can adjust at the first scheduled rate adjustment. Interest rate caps are usually placed on mortgage rates to insulate borrowers against extreme rate jumps over the life of the loan. Because they are initial, the rate cap is subject to change after the initial period has concluded.

A Closing Disclosure is a five-page form that provides final details about the mortgage loan you have selected. It includes the loan terms, your projected monthly payments, and how much you will pay in fees and other costs to get your mortgage

The prime rate is the interest rate that commercial banks charge their most creditworthy corporate customers. The federal funds overnight rate serves as the basis for the prime rate, and prime serves as the starting point for most other interest rates.

The prime rate hasn’t budged since March 2020. The current prime rate is 3.25% (02/2022).

An interest-only mortgage is a loan with scheduled payments that require you to pay only the interest for a specified amount of time.

The Federal National Mortgage Association (Fannie Mae) purchases and guarantees mortgages from lending institutions in an effort to increase affordable lending. Fannie Mae is not a federal agency. It is a government-sponsored enterprise under the conservatorship of the Federal Housing Finance Agency (FHFA).

FHA loans are loans from private lenders that are regulated and insured by the Federal Housing Administration (FHA). FHA loans differ from conventional loans because they allow for lower credit scores and down payments as low as 3.5 percent of the total loan amount. Maximum loan amounts vary by county. 

Foreclosure is when the lender or servicer takes back property after the homeowner fails to make mortgage payments. In some states, the lender has to go to court to foreclose on your property (judicial foreclosure), but other states do not require a court process (non-judicial foreclosure). Generally, borrowers must be notified if the lender or servicer begins foreclosure proceedings. Federal rules may apply to when the foreclosure may start.

An initial adjustment cap is typically associated with adjustable-rate mortgages (ARMs). This cap determines how much the interest rate can increase the first time it adjusts after the fixed-rate period expires. It’s common for this cap to be either two or five percent – meaning that at the first rate change, the new rate can’t be more than two (or five) percentage points higher than the initial rate during the fixed-rate period.

Mortgage insurance protects the lender if you fall behind on your payments. Mortgage insurance is typically required if your down payment is less than 20 percent of the property value. Mortgage insurance also is typically required on FHA and USDA loans. However, if you have a conventional loan and your down payment is less than 20 percent, you will most likely have private mortgage insurance (PMI). 

Lender’s title insurance protects your lender against problems with the title to your property-such as someone with a legal claim against the home. Lender’s title insurance only protects the lender against problems with the title. To protect yourself, you may want to purchase owner’s title insurance.

The loan-to-value (LTV) ratio is a measure comparing the amount of your mortgage with the appraised value of the property. The higher your down payment, the lower your LTV ratio. Mortgage lenders may use the LTV in deciding whether to lend to you and to determine if they will require private mortgage insurance.  

The margin is the number of percentage points added to the index by the mortgage lender to set your interest rate on an adjustable-rate mortgage (ARM) after the initial rate period ends. The margin is set in your loan agreement and won’t change after closing. The margin amount depends on the particular lender and loan. 

An origination fee is what the lender charges the borrower for making the mortgage loan.  The origination fee may include processing the application, underwriting and funding the loan, and other administrative services. Origination fees generally can only increase under certain circumstances. 

Principal, Interest, Taxes, and Insurance, known as PITI, are the four basic elements of a monthly mortgage payment. 

A reverse mortgage allows homeowners age 62 or older to borrow against their home equity. It is called a “reverse” mortgage because, instead of making payments to the lender, you receive money from the lender. The money you receive, and the interest charged on the loan, increases the balance of your loan each month. Most reverse mortgages today are called HECMs, short for Home Equity Conversion Mortgage.

The right of rescission refers to the right of a consumer to cancel certain types of loans. If you are buying a home with a mortgage, you do not have a right to cancel the loan once the closing documents are signed. However, if you are refinancing a mortgage, you have until midnight of the third business day after the transaction to rescind (cancel) the mortgage contract. The three-day clock does not start until you sign the credit contract (usually called the promissory note), you receive a Truth in the Lending disclosure form, and you receive two copies of a notice explaining your right to rescind.  

When lenders use the term, they generally mean a loan program for borrowers who do not qualify for a prime loan, often with a higher interest rate.

A VA loan is a loan program offered by the Department of Veterans Affairs (VA) to help service members, veterans, and eligible surviving spouses buy homes.  The VA does not make the loans but sets the rules for who may qualify and the mortgage terms. The VA guarantees a portion of the loan to reduce the risk of loss to the lender. The loans generally are only available for a primary residence.

The Rural Housing Service, part of the U.S. Department of Agriculture (USDA) offers mortgage programs with no down payment and generally favorable interest rates to rural homebuyers who meet the USDA’s income eligibility requirements.