Commonly used financing and home mortgage terms.

Adjustable-rate Mortgage
A mortgage in which the interest changes periodically, according to corresponding fluctuations in an index. All adjustable-rate mortgages are tied to indexes.

Adjustment period
The frequency that the interest rate of an adjustable-rate mortgage is adjusted to the base rate.

Amortization
A loan payment consists of a portion which will be applied to pay the accruing interest on a loan, with the remainder being applied to the principal. Over time, the interest portion decreases as the loan balance decreases, and the amount applied to principal increases so that the loan is paid off (amortized) in the specified time.

Amortization tables
A table which shows how much of each payment will be applied toward principal and how much toward interest over the life of the loan. It also shows the gradual decrease of the loan balance until it reaches zero.

Annual percentage rate (APR)
It is a value created according to a government formula intended to reflect the true annual cost of borrowing, expressed as a percentage. APR measures the true interest cost of borrowing by including any fees or prepaid interest involved in obtaining a loan.

Appraisal value
An opinion of a property's fair market value, based on an appraiser's knowledge, experience, and analysis of the property.

Appreciation rate
The rate of increase in the value of a property due to changes in market conditions, inflation, or other causes.

Balloon mortgage
A mortgage that has level monthly payments that will amortize it over a stated term but that provides for a lump sum payment to be due at the end of an earlier specified term.

Base rate
An underlying interest rate that is used as an index for pricing variable rate loans such as credit cards.

Closing Costs
Closing costs are separated into "non-recurring closing costs" and "pre-paid items." Non-recurring closing costs are any items which are paid just once as a result of buying the property or obtaining a loan. "Pre-paids" are items which recur over time, such as property taxes and homeowners insurance. A lender makes an attempt to estimate the amount of non-recurring closing costs and prepaid items on the Good Faith Estimate which they must issue to the borrower within three days of receiving a home loan application.

Cost Analysis
A cost-benefit analysis that subtracts home ownership benefits from home ownership costs. Mortgage interest, including points, are included in the calculation of homeowner benefits.

Equity
A homeowner's financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on its mortgage and other liens.

Fixed-rate mortgage (FRM)
A mortgage in which the interest rate does not change during the entire term of the loan.

Homeowner's Insurance
An insurance policy that combines personal liability insurance and hazard insurance coverage for a dwelling and its contents.

Impounds for taxes and insurance
Typically, a monthly mortgage payment has four components: principal, interest, taxes and insurance ("PITI"). The taxes and insurance portions represent property taxes and homeowner's insurance premium, respectively. These are often required by the lender to be included on a monthly payment since regular and timely payment of both of these obligations improves the lender's collateral position.

Index
A published interest rate to which the interest rate on an Adjustable Rate Mortgage (ARM) is tied.

Initial rate
The starting interest rate on an adjustable-rate mortgage loan.

Interest-only mortgage payments
Mortgage payments that include only interest. Loan amortization does not occur in this instance.

Interest rate cap
A limit on how much the interest rate can change, either at each adjustment period or over the life of the loan.

Lien
An encumbrance against property for money due, either voluntary or involuntary.

Loan-to-value (LTV) ratio
The percentage relationship between the amount of the loan and the appraised value or sales price (whichever is lower).

Loan Qualifying Ratios
The ratio of your fixed monthly expenses to your gross monthly income, used to determine how much you can afford to borrow. The fixed monthly expenses would include PITI along with other obligations such as student loans, car loans, or credit card payments.

Margin
The difference between the interest rate and the index on an adjustable rate mortgage. The margin remains stable over the life of the loan. It is the index which moves up and down.

Mortgage points
One point is equivalent to one percent of the loan amount. Mortgage points are considered by the IRS to be a form of pre-paid interest. This means that mortgage points can be deducted from taxable income. Most lenders require that a borrower pay one or two points at closing time in exchange for a lower mortgage rate (lender's APR would stay the same).

Negative Amortization
Some adjustable rate mortgages allow the interest rate to fluctuate independently of a required minimum payment. If a borrower makes the minimum payment it may not cover all of the interest that would normally be due at the current interest rate. In essence, the borrower is deferring the interest payment, which is why this is called "deferred interest." The deferred interest is added to the balance of the loan and the loan balance grows larger instead of smaller, which is called negative amortization.

Origination fee
On a government loan the loan origination fee is one percent of the loan amount, but additional points may be charged which are called "discount points." One point equals one percent of the loan amount. On a conventional loan, the loan origination fee refers to the total number of points a borrower pays.

Payment cap
For an adjustable-rate mortgage where the interest rate and the minimum payment amount fluctuate independently of one another, this is a limit on the amount that payments can increase or decrease during any one adjustment period.

PITI
Principal, interest, taxes and insurance--the components of a monthly mortgage payment.

Prepaid interest
See Mortgage Points

Principal
Amount of debt, not including interest. The face value of a note or mortgage.

Private Mortgage insurance
Mortgage insurance that is provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults. Most lenders generally require PMI for a loan with a loan-to-value (LTV) percentage in excess of 80 percent.

Property Taxes
Levies assess on real property. A local assessor can provide information on tax rates.

Savings Rate
The interest rate expected on the most conservative of investments. A conservative estimate should be used if the money is intended to be invested for a short time only or the investor is unwilling to risk losing any of the investment.

Tax Rates
The five federal income tax rates that range from 15 percent to 39.6 percent.

Tax Savings
The amount saved on taxes by itemizing deductions on income tax returns. Mortgage interest and property taxes are tax-deductible, and therefore generate a tax shield benefit.

Tax Shield
The amount saved in taxes by taking deductions. To measure the tax shield benefit, multiply the amount of the deduction by your tax rate.

Term
Period of loan, expressed in years. Residential mortgage loans typically are made for 15- or 30-year terms.