Closing Costs and Terms to Know

ADJUSTABLE-RATE MORTGAGE (ARM) –
A mortgage whose interest rate is not fixed, but changes during the life of the loan, along with movements in a specified interest-rate index. ARMs are sometimes called AMLs (adjustable mortgage loans) or VRMs (variable-rate mortgages).

ANNUAL PERCENTAGE RATE (APR) –
A measure of the cost of credit, expressed as a yearly rate. It includes interest and other charges, such as closing costs. APR is designed to provide consumers with a good basis for comparing the cost of loans, including mortgages, but some experts say lenders use different methods to calculate APR, making it less useful for comparison shopping.

APPLICATION FEE –
Fee charged by lender to offset fixed costs related to mortgage loan processing such as appraisal, credit report, and underwriting.

CAP –
A limit on how much the interest rate or the monthly payment can change, at each adjustment or during the life of the mortgage. Interest caps limit the interest a lender can charge, but payment caps don’t; they only limit the monthly loan payment, so they may result in negative amortization.

CLOSING -  
The consummation of a real estate transaction. The closing includes the delivery of a deed, financial adjustments, the signing of notes, and the disbursement of funds necessary to complete the sale and loan transaction.

CLOSING COSTS –
Costs and fees associated with the change in ownership of a property and with a mortgage that are assessed at the legal closing, or settlement. Closing costs include required certifications, insurance, taxes, and other fees, and typically total three to six percent of the mortgage amount.

CLOSING FEE –
The fee charged by the closing agent who prepares the closing documents and closes the loan on behalf of the lender.

COMMITMENT FEE –
Often called an origination fee.  Generally one percent of the mortgage amount.

DISCOUNT POINTS –
Used by the lender to adjust the yield on the mortgage when it is sold to an investor. Each point equals one percent of the mortgage amount. By paying more points, the borrower can obtain a lower mortgage interest rate. Points are usually collected at closing and may be paid by the borrower or the home seller, or may be split between them.