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Understanding Mortgage Terms

There are a lot of unique terms and industry jargon when it comes to mortgages. We've put together this list of some of the most used terms to help you with your home loan research:

Adjustable-rate mortgage (ARM):

This type of loan has an interest rate than can fluctuate. Typically, the initial rate for an ARM is less than that of a fixed rate mortgage. The initial rate won't change for a specified period (usually between 1 and 10 years). After that initial time, the interest rate will adjust periodically along with market rates.

Annual percentage rate (APR):

The APR is the all-in cost to borrow money to buy or refinance a home. It includes the basic interest rate you pay, along with other costs to get a home loan. The APR for an adjustable-rate mortgage is based only on the original rate and does not reflect the maximum interest rate you may pay over the life of the loan.


The lender needs to confirm the value of the property before a mortgage is approved. Most lenders will not give a mortgage for more than the market value of a home. Your lender will hire an appraiser to evaluate the home, and you will pay for the appraisal fee, which is typically $300-$450 or more, depending on the size of the home and other factors (Caginalp, 2022).


This is the formal process where you sign the final documents, making the home loan a done deal. You'll be sent a closing disclosure a few days before your closing appointment. This document details all the terms of your deal, including the cash required to close the agreement.

Debt-to-income ratio (DTI):

Your debt-to-income ratio is how much debt you are responsible for paying versus what your income is. To qualify for a home loan, lenders want to make sure that the monthly cost of your mortgage and other bills (such as car payments, credit cards, etc.) don't take up too much of your total monthly income. Generally, your DTI must be no more than 43%, though it can range as high as 50% depending on your specific financial situation, the type of loan, and your lender.

Down payment:

This is the amount of cash you put toward the purchase price of a home. A 20% down payment (with the mortgage covering the other 80% of the purchase price) puts you in line for the best loan terms. Some home loans require lower down payments of only 3%.


The amount of a home's market value that is over the mortgage balance. For example, if your home is worth $250,000 and the mortgage balance is $150,000, you have $100,000 in home equity. That means you have 40% equity.

Federal National Mortgage Association (FNMA, Fannie Mae):

This is a government-sponsored enterprise (GSE) that provides financing to lenders, which helps them offer mortgages to individual borrowers. Conforming loans follow Fannie or Freddie Mac guidelines.

Federal Home Loan Mortgage Corporation (FHLMC, Freddie Mac):

This is another GSE that provides financing to lenders that lets them offer mortgages to individual borrowers. A conforming loan follows Freddie Mac or Fannie Mae guidelines.
Talk to a Farm Bureau Mortgage Loan Consultant to answer all your mortgage questions today!

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