Financial Literacy 2007 - Mortgages
mortgage
22 most commonly used mortgage terms

9. Escrow -- An account in which a neutral third party holds the documents and money in a real estate transfer until all conditions of a sale are met. Also, an account in which money for property taxes and insurance is held until paid; money is added to the account every time a mortgage payment is made.

10. Fixed-rate mortgage -- A home loan in which the interest rate will remain the same through the life of the loan, most often 15 years or 30 years, but sometimes 10, 20, 40 and even 50 years. Forty- and 50-year mortgages make monthly payments more affordable, but come with considerable drawbacks. For more information about the dangers involved, read the Bankrate features, " 40-year mortgage often a risky choice" and " 50-year mortgages: low payments, low equity." For help deciding between an adjustable-rate mortgage (ARM) and a fixed-rate mortgage, read the Bankrate feature " ARM vs. fixed-rate mortgage."

11. Foreclosure -- The legal process by which a homeowner in default on a mortgage is deprived of interest in the property. This usually involves a forced sale of the property at public auction with the proceeds of the sale being applied to the mortgage debt.

12. Good faith estimate, or GFE -- A written estimate of expected closing costs that a lender must provide a prospective home buyer within three days of the home buyer submitting a mortgage loan application. Brokers and lenders are required by law to make as accurate an estimate as they can.

13. Homeowners insurance -- An insurance policy that includes hazard coverage, covering loss or damage to property, as well as coverage for personal liability and theft.

14. Interest-only mortgage -- An adjustable-rate mortgage that allows borrowers to pay only the interest for a specified period of time. Interest-only mortgages are considered risky. For more information about the dangers involved, read the Bankrate feature, " Interest-only mortgage deja vu."

15. Jumbo mortgage -- A mortgage that exceeds the conforming limit. The single-family limit changes annually and the current limit is always posted on Bankrate. Rates on jumbo mortgages tend be one-eighth to one-quarter of a percentage point higher than comparable conforming mortgages. You can check the rates of both types of loans on Bankrate's mortgage search tables.

16. Margin -- The amount of percentage points, or spread, added to the index to come up with the rate your adjustable-rate mortgage will charge after each adjustment.

17. Point -- Factored into the loan's APR, a point equals 1 percent of a mortgage loan. Some lenders charge "origination points" to cover expenses of making a loan. Some borrowers pay "discount points" to reduce the loan's interest rate. Should you pay discount points or take a higher interest rate? Find out using our Mortgage Points Adviser.

18. Prepayment penalty -- This is a fee charged to borrowers who pay a loan off faster than the prescribed payment schedule. Some prepayment penalties can add up to thousands of dollars, so they're worth asking about. Many states place limits on prepayment penalties. Make sure to call your state banking commission to see if prepayment penalties are allowed where you live and, if so, how large they can be.

19. Principal -- The amount of debt, excluding interest, left on a loan.

20. Private mortgage insurance, or PMI -- An insurance policy that protects the lender against default on loans by providing a way for mortgage companies to recoup the costs of foreclosure. PMI is usually required if the down payment is less than 20 percent of the sale price. Home buyers pay for the coverage in monthly installments. PMI should be terminated when the home buyer has built up 20 percent equity in the property.

21. Title insurance -- A policy that guarantees that an owner properly has title to a property and can legally transfer title to someone else. Should a problem arise, the title insurer pays any legal damages. A policy may protect the mortgage lender, the home buyer or both.

22. Two-step mortgage -- A home loan that features a fixed rate and payment for an initial period, followed by one adjustment, then a fixed rate and payment for the remainder of the loan term. Two-step mortgages go by confusing names such as 2/28, 5/25 or 7/23. A 7/23, for example, has an initial fixed period of seven years, an adjustment and then 23 more years of payments following the adjustment.

For a complete list of mortgage terms, check out our mortgage glossary.

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