5 Mortgage Terms You Gotta Know So You Don't Sound Dumb

Hey, maybe you don’t know your APR from your ARM. That’s AOK.

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Fact: Nearly a quarter of us don’t even understand how the most basic of loans even work. Want to own your own house? Sure you do. So, okay. Grab a coffee, and let's cover the basic vocab of that most basic of home-buying transactions: the loan that bridges the gap to home-ownership -- the mortgage.

APR: It’s not short for April, people

If you've been doing any Googling at all on mortgages, then you've seen a mortgage-interest rate. This is, at its most basic, how much a lender will charge a borrower on a home loan.

Now, if you've seen the mortgage-interest rate, then you've seen the APR rate, too. It's impossible to miss. In lists of competing mortgage rates, the APR rate is not only larger, numbers-wise, it's more prominently featured. This is because the APR is the whole ball game: It's the annual-percentage rate that the borrower will pay on a loan after the various extras, such as broker fees, are factored in. In other words, it's the truest representation of what the loan will cost. 

ARM: This one can be dangerous

This acronym also comes into play when you're sifting through interest rates. ARM stands for adjustable-rate mortgage. It's a mortgage that starts at one rate, say, 4 percent, and then at a date in the future, adjusts to whatever the going rate is, whether that's lower than than your original loan (yay!) or higher (boo!)

Sometimes you'll see ARMs expressed as "5/1 ARM," "7/1 ARM" or something along those lines. This means your rate is locked for a specific number of years (five in a 5/1 ARM; seven in a 7/1 ARM) before the rollercoaster ride starts.

The ARM stands in contrast to the fixed-rate mortgage. The fixed-rate mortgage is what it is: If you sign up for a 30-year, fixed-rate deal, then you'll pay 4 percent on your loan in 2017, and 4 percent on your loan in 2047.

Points: Bad on your driver’s license, but really good for a loan

For the uninitiated, points are great when you’re, say, on a Chris Hardwick late-night game show. But in real life, points may be the most mysterious of mortgage terms. Put simply, mortgage points are fees paid to the lender at closing in exchange for a reduced interest rate. Points are also known as discount points. That's because a point can lower your monthly mortgage payment. Here's how.

If you sign up for $300,000 loan with a 3.5 percent interest rate with 1 point, then you'll pay the lender $3,000 up front. (Each point is equal to 1 percent of the loan amount.) If you can’t afford that $3,000 chunk, then you'll look for the (perhaps higher) interest rate that's gauged to 0 points.

PMI: It’s not TMI, trust us

You may have read that the 20-percent mortgage down payment is dead, but it's still a magic number, and if you don't cobble together enough cash to hit it (and you're not applying for a federally backed Federal Housing Administration loan), then you'll be required to have private-mortgage insurance. That's PMI. (We don’t know how to say PMI in ASL, but at least Robert can help us with the “I” part.)

PMI bridges the gap between what you're putting in -- say, 10 percent of the home price -- and the 20 percent that the bank really wants. PMI will your increase your monthly mortgage payment -- until, that is, you no longer have it. PMI ends once the balance on your loan falls to a certain percentage of the value of your home.

Escrow: Short for, “You’re almost there!”

You may think you're in home-buying hell when you try to wrap your mind around escrow, but you're really in limbo. What it comes down to is this: Once your offer on your dream house has been accepted, you’ll put up a deposit. This money usually represents 1-2 percent or more of your purchase price, and it will be placed in limbo, sorry, escrow.

The cash will be held by a third party -- meaning, neither you nor the seller, nor Lenny from The Simpsons -- until the deal is sealed, and escrow, as they say, is closed. If the purchase doesn't go through, there'll be a refund, minus any fees.