Mortgage Loan Vocabulary

Adjustable-rate mortgage loan (ARM): ARMs have a variable interest rate, and the monthly payment may change periodically based on a variable rate index. Most ARMs have limits on how often, and by how much, the interest rate can change.

Amortization: The gradual pay-off of debt in regular installments over a specified time period, usually 15 or 30 years. An 'amortization schedule' shows how much of each payment goes to principal, and how much goes to interest.

Credit rating (FICO score): A number assigned to you by each of the three major credit reporting agencies based on how you've managed your credit accounts in the past. Lenders use this rating to determine how risky you are as a borrower. Request copies of your credit reports before submitting a mortgage loan application and review them for accuracy.

Debt-to-income ratio: A ratio that helps lenders determine what size mortgage payment you can afford. It's calculated by adding up all your monthly debt payments, then dividing that figure by your monthly income. The resulting ratio should be below about 36 percent to ensure that you can comfortably cover your debt and living expenses.

Fixed-rate mortgage loan: The interest rate and payments on a fixed-rate mortgage don't change over the life of the loan.

Interest-only mortgage loan: An interest-only loan allows the borrower to pay only interest for a certain length of time. After this period expires, payments convert to a traditional amortizing structure.

Interest rate: Expressed as an annual percentage of your loan balance, it's the rate you pay for borrowing money.

Loan-to-value (LTV): This percentage is the mortgage amount divided by the home's appraised value. Mortgages are far less expensive when the loan amount is less than 80 percent of the home's value.

Maturity: The length of time you have to repay the debt.

P&I: An abbreviation for "principal and interest," which refers to your monthly payments. A lender may provide you a quote on P&I payments, which would be your full monthly payment as long as you aren't required to carry insurance or make monthly installments on your property taxes.

PITI: An abbreviation for "principal, interest, taxes and insurance." Many lenders require that you carry private mortgage insurance (see PMI below) and make monthly installments on your property taxes.

PMI (private mortgage insurance): Lenders require you to pay PMI when your loan balance exceeds 80 percent of your home's value. PMI protects the lender against loss if you default.

Points: Mortgage loan fees that are paid upfront. There are two kinds: discount points and origination points. Discount points are tax-deductible, prepaid interest: the more points you pay, the lower your interest rate. Origination points are fees associated with your mortgage and are not tax deductible.

Principal: The balance outstanding on the loan, not including any interest owed.

Subprime mortgage loan: Made to borrowers who don't qualify for conventional mortgage loans. Expect higher interest rates and more restrictive terms.

This lesson is brief, but invaluable. Being able to 'talk the talk' with your lender will hopefully head off any ugly break-ups down the road.