Learning a few mortgages terms can be handy specially if you are considering buying your dream home. Here are some of the good to know mortgage terms that is important to understand before considering of acquiring a home mortgage and might encounter while on the process of buying.

5/1 Adjustable-Rate Mortgage – is a type of Adjustable-Rate Mortgage. It begins with a fixed interest rate for five years followed by an interest rate that could be adjusted annually.

Adjustable-Rate Mortgage(ARM) –  is a type of mortgage for which the interest rate can change, usually in relation to an index interest rate.

Amortization – The Gradual reduction in the principal amount owed on a debt. During the earlier years of the loan, most of each payment is applied toward the interest owed. During the final years of the loan, payment amounts are applied exclusively to the remaining principal.

Balloon Mortgage – A loan that provides you with lower-than-usual monthly payments for a set period followed by a payment larger than usual at the end of your loan repayment period. While a balloon loan may lower your monthly payments it can also mean you make higher interest payments over the life of the loan.

Borrower – The person who takes out a loan, complete with a contract, a loan note, and a commitment to the lender to repay the loan with a defined interest rate and payment period.

Buy-Down – Funds paid to the lender by the borrower or third party for the purpose of reducing the interest rate of the loan for a specified period.

Collateral – Personal property pledged as security for a debt. Collateral for a mortgage is usually the property.

Commitment Letter – A formal document from your lender stating that you are approved for the loan. Lenders issue a mortgage commitment letter after an applicant successfully completes the preapproval process.

Conventional Loan – A home loan that is not insured or guaranteed by the federal government. A conventional loan can be for conforming or non-conforming loan amounts.

Credit Score – It predicts how likely you are to pay back a loan on time. Companies use a mathematical formula—called a scoring model—to create your credit score from the information in your credit report. There are different scoring models, so you do not have just one credit score. Your scores depend on your credit history, the type of loan product, and even the day when it was calculated.

Department of Veterans Affair (VA) – An independent agency of the federal government which guarantees long-term, low, or no down payment mortgages to eligible veterans.

Down payment – Money paid by a buyer from his own funds, as opposed to the portion of the purchase price which is financed by the lender.

Escrow – An escrow account is set up by your mortgage lender to pay certain property-related expenses, like property taxes and homeowner’s insurance. A portion of your monthly payment goes into the account. If your mortgage does not have an escrow account, you pay the property-related expenses directly.

Fannie Mae – Federal National Mortgage Association, a government-sponsored enterprise that buys and securitizes mortgages for resale in the secondary market.

FHA Loan – FHA loans are loans from private lenders that are regulated and insured by the Federal Housing Administration (FHA). FHA loans differ from conventional loans because they allow for lower credit scores and down payments as low as 3.5 percent of the total loan amount. Maximum loan amounts vary by county.

Fixed-rate Mortgage – A fixed-rate mortgage is a type of home loan for which the interest rate is set when you take out the loan and it will not change during the term of the loan.

Foreclosure – A legal procedure in which real estate is sold by the lender to pay a defaulting borrower’s debt.

Freddie Mac – Federal Home Loan Mortgage Corporation is a quasi-governmental agency that purchases conventional mortgages from insured depository institutions and HUD-approved mortgage bankers.

Grace Period – The time period between the due date of a mortgage payment and the date when late charges are assessed.

HOA Fees – Homeowners’ associations collect fees from member owners to cover the costs of maintenance, landscaping and other expenses involving common areas of a condominium building or planned community. Fees are usually collected monthly or annually.

Home Value – A property’s market worth is its home value. For purposes of loan underwriting, the home value is expressed as the appraised value, which is conducted by a professional inspector chosen by the lender. For purposes of taxes, the home value is expressed as the assessed value.

Lender – The bank, mortgage company, or mortgage broker offering the loan.

Loan Estimate – An estimate of charges that a borrower is likely to incur in connection with the loan.

Market Value – Under normal market conditions, a property would sell within a reasonable amount of time for a generally accepted market value, assuming the homeowner voluntarily sells it and a buyer voluntarily purchases it.

Mortgage – A mortgage is an agreement between you and a lender that allows you to borrow money to purchase or refinance a home and gives the lender the right to take your property if you fail to repay the money you have borrowed.

Mortgage Broker – Mortgage brokers match borrowers with lenders and originate the loan for a chosen lender. Mortgage brokers are paid from origination costs charged to the borrower or from a yield spread premium paid by the mortgage lender.

Mortgage Insurance – For conventional loans, insurance that protects the lender if you default on your loan. If your down payment is less than 20%, most lenders will require you to pay mortgage insurance. Also called private mortgage insurance (PMI).

Mortgage Interest – The amount of money the borrower pays the lender to compensate the lender for the use of its money to purchase the home. This interest is tax-deductible.

Pre-Approved – Borrowers gain this label when a lender has verified that they will be able to obtain financing for a specified loan amount.

VA Loan – A long-term, low or no down payment loan guaranteed by the Department of Veterans Affairs. Restricted to individuals qualified by military service or other entitlements.