Mortgage and Home Equity Glossary

State Farm Bank® deposit accounts are FDIC insured.

General Definitions

Adjustable Rate Mortgage (ARM) – May offer an lower initial interest rate and monthly principal and interest payments for a specific period of time, after which time the rate will reset periodically based on changes in a specific index.

Annual Percentage Rate (APR) – The APR or Annual Percentage Rate is different than the interest rate. It is meant to provide a measure of the overall cost of the loan, meaning that it considers certain fees, including certain third party fees, that may be charged in conjunction with obtaining the loan. The APR can be used as a tool to understand the cost of credit and to comparison shop for credit with different lenders.

Discount Point/Origination Point – A point is a fee equal to one percent of the loan amount. Discount points are used to buy down the interest rate of the loan. Discount points are different from origination points or broker fee. Origination points sometimes are fees the lender or broker may charge for originating the loan.

FICO – An abbreviation for Fair Isaac Corporation and refers to a person's credit score based on credit history. Lenders use the credit score and other factors to decide if the applicant is a good candidate for a loan. A credit score is evaluated using information from the three major credit bureaus and is usually between 300 and 850.

Fixed Rate Mortgage – A loan for which the interest rate and monthly principal and interest payment will remain the same for the life of the loan. With this type of mortgage, your monthly payments for principal and interest never change.

Monthly P&I – Monthly Principal and Interest Payment. This amount includes the principal portion used to pay down the loan balance, plus the interest.

Mortgage Rate Lock – An agreement between the borrower and the lender that allows the borrower to lock in the interest rate on a mortgage over a specified period of time. There may be rate lock extension fees charged to the borrower if the loan does not fund prior to the rate lock expiration date.

Lien/Lien Position – A lien is a legal interest that a person or entity (the lien holder) has on the property of another person until a debt owed is paid back. Generally, the position of a lien is determined by its recording date. First mortgages are typically recorded first and are in the first lien position. Second mortgages — such as home equity loans — can be in the first or second lien position.

Loan-to-Value (LTV) ratio – A risk assessment ratio lenders use to help determine the suitableness of a mortgage loan. It's calculated by dividing the mortgage loan amount by the appraised market value of the property. For example, if you need to borrow $160,000 to purchase a $200,000 home, your LTV ratio is: 160,000/200,000 = .8 or 80%.

Loan Purpose – The reason why you are seeking the mortgage loan, such as to purchase a new home or refinance an existing loan.

Prepayment Penalty/Early Closure Fee – A prepayment penalty can be imposed by the lender if the consumer repays the loan or terminates an open end line of credit within a certain time frame. This is different from an early closure fee, where the lender may recoup the bona-fide third party charges that were initial waived at closing.

Property Type – Pertaining to residential mortgages, property type is categorized as: Single Family Residence, Multi-Family 2–4 Units, or Condominium.

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State Farm Bank, F.S.B., Bloomington, Illinois ("Bank"), is a Member FDIC and Equal Housing Lender. NMLS ID 139716. The other products offered by affiliate companies of State Farm Bank are not FDIC insured, not a State Farm Bank obligation or guaranteed by State Farm Bank, and may be subject to investment risk, including possible loss of principal invested. The Bank encourages any interested individual(s) to submit an application for any product(s) offered by the Bank. We also encourage you to obtain information regarding the Bank's underwriting standards for each type of credit or service offered by visiting or by contacting the Bank at 877-SF4-BANK (877-734-2265). Callers who are hearing or speech impaired should dial 711 or use a preferred Telecommunications Relay Service. To apply for a Bank product, you may also see your participating State Farm agent.

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