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An Adjustable Rate Mortgage (ARM) is a type of loan with an interest rate that varies depending on how market rates move. When you sign up for an ARM, you first get a short period of fixed interest. This is the introductory period of the loan and can last for up to 10 years.

During your introductory period, your interest rate is usually lower than what you’d get with a fixed-rate loan. After the introductory period expires, your interest rate will follow market interest rates - you’ll often see this referred to as a variable or Floating Interest Rate. ARMs have caps in place that limit the total amount that your interest can rise or fall over the course of your loan.

Home Loan Amortization is the process of how payments spread out over time. When you make a payment on your mortgage, a percentage of your payment goes toward interest and a percentage goes toward your loan principal.

In the beginning of your loan, your principal is high and most of your payment goes toward interest. However, you chip away at your principal over time and pay less in interest. An amortization schedule can reflect consistent monthly payments and keep you on track to pay off your loan within the mortgage term.

Annual percentage rate (APR) is the interest rate you’ll pay on your loan annually plus any additional lender fees. You’ll usually see APR expressed as a percentage. You may see two interest rates listed when you shop for a loan. The larger number is always your APR because it includes fees.

Closing costs are settlement costs and fees you pay to your lender in exchange for finalizing your loan. Some common closing costs include appraisal fees, loan origination fees and pest inspection fees. The specific costs you’ll need to cover depend on your location and property type. Closing costs usually equal 3 – 6% of the total value of your loan.  

A Closing Disclosure is a document that tells you the final terms of your loan. This document includes your interest rate, loan principal and the closing costs you must pay. Your lender is legally required to give you at least 3 days to review your Closing Disclosure before you sign on your loan.

Your debt-to-income ratio is equal to your total fixed, recurring monthly debts divided by your total monthly gross household income. Mortgage lenders look at your DTI when they consider you for a loan to make sure that you have enough money coming in to make your payments. You may have trouble finding a loan if your DTI is too high. Most lenders cater to applicants who have a DTI of 50% or lower.

An earnest money deposit is a check that you write to a seller when you make an offer on a home. Most earnest money deposits are equal to 1 – 3% of the home’s value. An earnest money deposit tells the seller that you’re serious about buying their home. If the seller accepts your offer, your earnest money deposit goes toward your down payment at closing.

Most people who have a mortgage have an escrow account where their lender holds money for property taxes or homeowners insurance. This allows you to split taxes and insurance over 12 months instead of paying it all at once. Your lender may add escrow payments to your monthly mortgage dues along with principal and interest payments.

A fixed-rate mortgage has the same interest rate throughout the term of the loan. For example, if you buy a home at 4% on a 15-year fixed-rate loan, it means that you’ll pay 4% interest on your loan every month for your entire 15-year term. Homeowners who choose a fixed-rate term often believe that rates will rise over the course of their loan and want the stability and predictability this type of loan provides.

A pre-approval is a document that tells you how much you can afford to take out in a home loan. Many lenders consider the pre-approval to be the first step in getting a mortgage. When you apply for a pre-approval, your lender will ask you about your credit score, income, assets and other financial information. Your lender will then use these details to tell you how much you qualify for in a home. This can give you a rough budget to use when you compare properties.  Keep in mind that a pre-approval isn’t the same as pre-qualification. Pre-qualifications usually don’t involve asset and income verification, which means that they aren’t as reliable as pre-approvals. Make sure you get a pre-approval before you begin shopping for homes.

Your principal balance is the amount that you take out in a loan. For example, if you buy a home with a $150,000 loan from your lender, your principal balance is $150,000. Your principal balance shrinks as you make payments on your loan over time.

Private mortgage insurance (PMI) is a type of insurance that protects your lender in the event that you default on your loan. Your lender will usually require you to pay PMI if you have less than a 20% down payment. You have the option to remove PMI from your loan when you reach 20% equity in your property.  

Seller concessions are clauses in your offer that ask the seller to pay certain closing costs. For example, you might ask the seller to cover elements like appraisal fees or your title search. The seller can reject your concessions or send you a counteroffer with concessions removed. Limitations on the percentage of your closing costs sellers can cover varies by property type.  

A title is proof that you own a home. Your title includes a physical description of your property, the names of anyone who owns the property and any liens on the home. When someone says that they’re “on the title” of a home, it means that they have some kind of legal ownership of the property. For example, if your parents helped you purchase a home, they’d likely be listed on the title.

Title insurance is a common closing cost. You buy title insurance to protect yourself against outside claims to your property. Unlike other types of insurance, you don’t need to pay for title insurance every month. Instead, you make a single payment at closing that protects you for as long as you own the home.