Comprehensive Mortgage Vocabulary: Key Terms You Should Know

203(k) Improvement Loan

A 203(k) Improvement Loan is a specialized FHA loan designed to facilitate home repairs and renovations. It enables borrowers to finance both the purchase or refinance of a property and the necessary improvements through a single mortgage. This option provides flexibility for those seeking to invest in properties that require updates or repairs.

Acceleration Clause

An Acceleration Clause is a contractual provision in a mortgage agreement that grants the lender the authority to demand immediate repayment of the entire outstanding loan balance if the borrower defaults on their monthly payment obligations. This clause acts as a safeguard for lenders, allowing them to protect their interests in the event of borrower default.

Adjustable-Rate Mortgage (ARM)

An Adjustable-Rate Mortgage (ARM) is a type of mortgage loan where the interest rate fluctuates periodically based on prevailing market conditions. Typically, ARMs offer an initial fixed-rate period, during which the interest rate remains constant, followed by subsequent adjustment periods where the rate may change. This option appeals to borrowers seeking lower initial payments or those who anticipate changes in interest rates.

Adjustment Cap

An Adjustment Cap is a limit imposed on the amount by which the interest rate on an adjustable-rate mortgage (ARM) can increase or decrease during each adjustment period. This provision provides borrowers with protection against significant fluctuations in interest rates, thereby ensuring greater stability in monthly mortgage payments.

Adjustment Date

The Adjustment Date refers to the specific date on which the interest rate adjustment occurs within an adjustable-rate mortgage (ARM) loan. This date marks the beginning of a new adjustment period, during which the borrower's mortgage payment may change based on the revised interest rate.

Adjustment Frequency

Adjustment Frequency refers to the regularity with which the interest rate on an adjustable-rate mortgage (ARM) resets or adjusts. It is typically expressed in terms of months or years and determines how often borrowers may experience changes in their mortgage payments.

Adjustment Interval

Adjustment Interval, also known as the reset period, is the duration between changes in the interest rate or monthly payment on an adjustable-rate mortgage (ARM). This interval defines the frequency at which the loan's terms are recalculated, impacting the borrower's payment obligations over time.

Amortization Schedule

An Amortization Schedule is a detailed table that outlines each periodic payment on a mortgage loan, delineating the allocation of each payment towards both principal and interest. This schedule provides borrowers with a comprehensive overview of their repayment progress and helps them understand the distribution of payments over the loan term.

Amortization Term

The Amortization Term represents the total duration required to fully repay the mortgage loan, typically expressed in terms of the number of months. It encompasses the entire repayment period, during which borrowers make regular payments towards both the principal balance and accrued interest.

Amortization

Amortization is the gradual process of paying off a debt over time through periodic payments, typically consisting of both principal and interest components. In the context of mortgage loans, amortization ensures that borrowers steadily reduce their outstanding balance until the loan is fully repaid at the end of the term.

Annual Percentage Rate (APR)

The Annual Percentage Rate (APR) represents the total cost of borrowing over the course of a year, expressed as a single percentage. It includes not only the interest rate charged on the loan but also any additional fees or costs associated with borrowing. The APR provides borrowers with a comprehensive understanding of the true cost of their mortgage.

Application Fee

An Application Fee is a charge imposed by lenders to cover the costs associated with processing a mortgage application. This fee may vary depending on the lender and the complexity of the application process. It is typically paid upfront by the borrower upon submitting their loan application.