If you’re new to buying a home and don’t have the time to read an encyclopedia on mortgages, this is the article for you. We’ll go over some basic mortgage terms and concepts to get you started.

Choosing to obtain a mortgage is an important and significant decision. It costs money both when the mortgage is obtained, and throughout the life of the loan in the form of interest. It also results in a large monthly expense. Therefore, the borrower should carefully choose where to purchase a loan as well as what type of loan program to choose.

You’re mortgage education should start with some basic explanations that will help you understand and pick your loan: closing costs, APR, rate, monthly payment, ARM, fixed, and of course, mortgage.

Let’s start with the definition of a mortgage. A mortgage is when you borrow money to either refinance your current home or to buy someone else’s home. The collateral for the loan is the house itself. In other words, if you were to break your mortgage contract, such as by missing payments, then the mortgage holder would be able to take possession of your home.

The rate is the percentage used to calculate how much interest you’ll pay on your mortgage. This is an important number because it determines your cost for borrowing money. When the interest rate on your loan always stays the same, the rate is called “fixed”. When the rate has the possibility of changing, then the loan is called an ARM or adjustable rate mortgage.

Besides interest, there are additional costs associated with obtaining a home loan. These could include fees for underwriting, the application, checking your credit history and scores, having the property’s value appraised, loan origination, title search and insurance, etc. Together, these fees are called “closing costs”.

Brokers and lenders can charge different amounts for these closing costs, which makes using the interest rate by itself an ineffective method of deciding where to buy a loan. Instead of comparing interest rates, you should compare what is known as the Annual Percentage Rate or APR, since it is calculated by adding the closing costs to the loan amount. It provides a more standardized number for comparing loans among lenders.

Besides looking at the APR, you’ll want to pay attention to the total monthly payment that you will owe. Besides including principal and interest, this amount includes property taxes, hazard or homeowner’s insurance, mortgage insurance, and HOA dues. Mortgage insurance is independent of interest rate, and when factored into your monthly costs, could result in a loan program with a higher interest rate having a lower monthly payment than a loan with a lower interest rate.