Adjustable rate mortgage (ARM) is a 

long-term financing arrangement to buy a 

home in which the interest rate fluctuates 

over time, based on the changing cost of 

borrowing in the economy as a whole.

Annual percentage rate (APR) is  

the cost of borrowing for one year,  

including interest, fees, and other  

charges for arranging the loan or line  

of credit. Except in the case of credit 

cards, the APR is always higher than  

the nominal, or stated, interest rate.

Bid is an offer to purchase a home or 

other real estate, based on the seller’s 

asking price. The initial bid is typically 

lower than the asking price, but may be 

negotiated.

Closing is a meeting at which a buyer  

and seller, their representations, and 

other concerned parties finalize the sale  

of a home or other real estate. 

Collateral is something of value that  

a borrower uses to help guarantee  

repayment of a loan. If the borrower 

defaults, or fails to pay in full and on  

time, the lender has the right to take the 

collateral. The collateral for a mortgage 

loan is the home you are buying.

Creditworthy describes a borrower that 

lenders believe can be trusted to repay a 

loan in full and on time, based on that  

person’s previous use of credit. 

Debt-to-income (DTI) ratio is what  

you owe divided by your gross income. 

When you want to buy a home, a lender  

considers two different DTI ratios: your 

proposed housing costs in relation to your 

income and your total debt, including the 

mortgage, in relation to your income.

Down payment is the amount you must 

pay in cash to purchase a home. Most 

lenders require buyers to pay 10% to 20% 

of the purchase price in order to qualify 

for a mortgage loan to finance the rest. 

Some programs require smaller down  

payments.

Finance charge is the amount, expressed 

in dollars, that you pay for access to  

credit. Finance charges are calculated  

by multiplying the interest rate that 

applies times the principal.

Fixed-rate mortgage is a long-term 

financing arrangement to buy a home, in 

which the interest rate is set at the time 

of closing. As a result, you know when you 

buy what you owe each month over the 

loan’s term. 

Interest rate is a percentage of loan  

principal used to calculate the finance 

charge you pay to borrow.

Lender is a financial institution, such as 

a bank or credit union, that makes loans 

available to borrowers for a fee known as  

a finance charge.

Mortgage loan is a long-term  

financing arrangement you use to buy  

a home. Banks, credit unions, and  

other financial services companies offer 

mortgage loans to qualified borrowers.

PITI is the acronym for principal, interest, 

taxes, and insurance, which are the four 

components of most monthly mortgage  

payments.

Preapproval means that a lender agrees 

to provide a mortgage loan of up to a 

specified amount before you have  

actually chosen the home you wish to 

buy. The approval is contingent on the 

appraised value of the property.

Prequalification means that a lender 

indicates it is likely you will qualify to  

borrow up to a certain amount on a  

mortgage loan. However, it is not a  

commitment to make such a loan.

Principal is the amount you borrow when 

you take a mortgage loan.

Title insurance guarantees that there  

are no outstanding claims on the real 

estate you wish to buy, giving you as the 

new owner a free and clear title to the  

property. Lenders require borrowers to 

obtain title insurance to protect their 

interest in the property until the  

mortgage loan is repaid.

Underwriting is the process of  

investigating your creditworthiness 

and approving you for a mortgage loan.

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GLOSSARY

GLOSSARY