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Definitions

Prequalification
Based on information about income, assets and debt you give a lender verbally, the lender determines whether or not you are likely to be approved for a mortgage and the maximum mortgage you will qualify for. Approval of a mortgage will be dependent on written verification of this information and an appraisal of the home you wish to purchase.

Fixed Rate Mortgage
This is the most common type of mortgage where your monthly payments for interest and principal (mortgage balance) stay the same for the life of the loan, usually 15 or 30 years. Property taxes and homeowners insurance may increase, but this will have minimal impact on your monthly payments.

Adjustable Rate Mortgage (ARM)
Adjustable rate mortgages usually offer an interest rate that is 2-3 percent below a comparable fixed rate mortgage. However, the interest rate changes at specified intervals (for example, every year) as interest rates fluctuate. With an ARM, your monthly payments can increase or decrease at each set interval. There are many types of adjustable rate mortgages. Your lender can help you decide if one is right for you.

Escrow
When a homebuyer borrows more than 80% of the purchase price of the home, the lender will require the borrower to pay estimated annual property taxes and homeowner's insurance each month as part of the mortgage payment. This money is deposited into a special escrow account. An escrow account is usually non-interest bearing and is used strictly to accumulate these funds. The lender will then pay the property taxes and insurance, when due, directly from these funds. Any overpayments must be refunded to the borrower each year. If your downpayment is 20% or more or the purchase price, you may elect to establish an escrow account with your lender. Many people find it more convenient this way.