When trying to obtain a loan, many terms are thrown around by your lender, real estate agent, and attorney. In some situations, you can sometimes get by with out taking the time to learn every single word used by the professionals, but in any process involving your personal finances, you want to fully understand everything that is going on in its entirety since not knowing can cost you big time. Below is a glossary of the most commonly used mortgage terms and the definitions in simple terms, so that you can be an educated borrower.

Adjustable Rate Mortgage (ARM): A mortgage loan with an interest rate that will change or adjust periodically. It depends on the rate and term of your loan how often your rate will change. It could change annually or every three years.

Amortization: This is the schedule for paying off a mortgage loan, showing the regular and required payments toward principal and interest over a set period of time.

Appraisal: This is a report done by a licensed appraiser, to determine a price a property is valued at. The appraiser bases the value on comparable sales of homes in the surrounding area.

Assessed Value: The value of a property for tax purposes and is done by a tax assessor. (The appraised value and assessed value can be different)

Broker: A broker is anyone who earns a fee while acting as an agent to bring two parties together for a transaction.

Closing: The closing is a meeting in which the buyer, seller, attorneys and sometimes even a real estate agent come together to sign the documents that transfer ownership of the home from one party to another. Many times the lender charges closing costs for a loan, and you would pay these costs at the closing. You will always need a current license with you at the closing as well.

Closing Costs: Closing costs are usually made up of escrow fees, recording fees, title search and any other costs associated with the loan. For Residential Home Funding’s Mortgages for Champions loan program, they waive all closing costs and lender fees.

Contingency: A condition that must be met for a contract to be legally binding. This term is used most frequently when talking about home inspections. For instance, when a buyer signs a contract for a home, but the deal is contingent upon the home passing inspection.

Credit Score: This is a number between 300 and 850 used to show creditors and lenders the creditworthiness of a potential borrower. The score used to qualify for a mortgage is the middle out of three bureaus, Equifax, Transunion, and Experian. The scores are calculated through an analysis of a person’s borrowing habits and payment history. The higher the score, the better.

Down Payment: The amount of the purchase price of a home the buyer has to pay up front, in cash or check. You cannot use a mortgage to pay the down payment on a home, but you can be gifted the money from a friend or family member. A gift is not money that needs to be repaid to someone else.

Equity: The difference between the value of the property and the amount still owed on it. If a home is worth $500,000 and the homeowner owes $300,000 on the mortgage, the homeowner’s equity in the home is $200,000.

Escrow: The process by which a third party holds money for safekeeping until a transaction is closed.

Escrow Account: The account where the escrow funds are being held and from which the buyer’s money is transferred to the seller and to pay fees in the sale. Some people choose to have an escrow account with their lender to cover the taxes and homeowners insurance. This means that the lender will be making these payments for the borrower.

Fixed-Rate Mortgage: A conventional mortgage loan that has an interest rate and monthly payment that remains the same for the life of the loan.

Home Equity Loan: A loan or second mortgage that a borrower can take out against the equity in a home, essentially trading equity for cash. The interest paid on a home equity loan is tax deductible.

Home Equity Line of Credit: This is similar to the home equity loan, but instead of getting a lump sum of money, the borrower is approved for a certain amount that can be withdrawn in pieces using a debit card or by check.

Home Inspection: This is a thorough examination of house done by a professional inspector. The inspector will evaluate the home and look for structural defects and things like mold. Many home buyers will have the passing of a home inspection a contingency of the sale.

Interest-Only Mortgage: This allows buyers to pay just the interest in the beginning of the loan for a set period of time. When the borrower’s interest only period is done however, the minimum monthly payment is generally higher.

Jumbo Loan: A jumbo mortgage is a non-conforming loan that is larger than the home loan limits for Freddie Mac and Fannie Mae are willing to back because they are risky. A jumbo loan generally has a higher rate than a conventional.

Lien: Claims against a property that has to be paid off before the sale of the home. A seller can sell the home if there is a small amount of money owed, but the liens have to be paid at the closing.

Loan Origination Fees: These are the fees associated with taking out a loan, such as the processing fees.

Loan-to-value (LTV): This is the ratio between the amount of the loan and the appraised value or sale price of the home. If your LTV is too high, you may not qualify for a loan.

Lock or Lock-In Period: The time period in which a loan cannot be paid off earlier than stated without financial penalty, so that the lender is assured of obtaining a certain minimum return on the investment.

Mortgage Insurance (MI): Insurance paid by the homebuyer to ensure that if the buyer defaults on the mortgage, the mortgage holder still gets their money. When the LTV is high, the lender usually requires the buyer to have MI.

Mortgage Points: Lender’s fees or advance interest that a borrower pays up front in exchange for a lower interest rate for a certain part of the loan term.

Owner Financing: A transaction in which the property seller provides the loan to the buyer.

PITI: This is an acronym for principal, interest, taxes, and insurance.

Pre-approval Letter: A letter given to a homebuyer to let them know exactly how much they qualify for. This gives the homebuyer a stronger hand in negotiations since the seller of the home already knows they have secured finances.

Pre-payment Penalty: A fee given by the lender if a borrower makes an advanced payment or pays off a loan earlier than the due date or payment terms in the agreement.

Pre-qualification: This is when a loan officer looks over potential borrowers finance and uses their knowledge to determine if they will be able to qualify for a loan. This is the first step in qualifying for a loan.

Principal: The principal is a part of the monthly loan payment that goes toward the balance of a mortgage.

Rate Lock: A commitment by a lender that an interest rate will be available for a specific length of time.

Refinancing: This is when a borrower replaces and existing loan with a new one. This is done for a number of reasons but usually is done to lower the interest rate, pay-off debt sooner, to get cash out upfront, or to switch loan types.