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Mortgage Terms You Should Know

It is very important to know your terms before applying for a mortgage. Bookmark this tab on your computer so that you can reference these terms at any time before or during the mortgage process.

Appraisal: A rough estimate of how much the home is worth.

  • Appraisals are required by lenders before a home loan can be signed.

  • The appraisal tells the lender how much can be loaned to the borrower.

  • Appraisals come from an independent third party, not the lender.

Principal: The starting balance, of the amount that is taken out in a loan.

  • The principal balance will shrink as payments are made on the loan over time.

  • If a loan is taken out for $150,000, the principal amount is $150,000.

Annual Percentage Rate (APR): Interest rate on a loan amount that is paid on an annual basis, plus any additional lender fees.

  • Usually expressed as percentage.

  • APR includes fees.

Term: The number of years the loan will be paid on until fully paid.

  • A 15-year term means monthly payments will be made for 15 years before the loan matures.

  • The most common terms are 15 and 30.

Amortization: Process of how payments spread out over time.

  • An amortization schedule can reflect consistent monthly payments and keep the borrower on track to pay off the loan within the term.

  • At first, a percentage of payment goes toward interest and a percentage goes toward the loan principal. However, as the borrower chips away at the principal over time, they will pay less in interest.

Preapproval: Document that tells how much can be taken out in a home loan, based off of criteria like credit score, income and assets.

  • Based on the information provided lenders can determine how much a borrower qualifies for in a home.

  • Preapprovals are more reliable than prequalifications.

Assets: Anything owned that has a cash value.

  • Lenders verify assets to ensure that the borrower has enough money in savings and investments to cover the mortgage in the case of a financial emergency.

Fixed-Rate Mortgage: Loan with an interest rate that does not change at any point during the term of the loan.

  • 4% on a 15 year fixed-rate loan means that there will be 4% interest on every monthly payment for the 15 year life of the loan.

  • Homeowners who choose a fixed-rate term often believe that rates will rise over the course of their loan and want the stability and predictability this type of loan provides.

Adjustable Rate Mortgage (ARM): Type of loan with an interest rate that varies depending on how market rates move.

  • After signing onto an ARM, there is a short period of fixed interest known as the introductory period.

  • The introductory period can last up to 10 years.

  • The interest rate during the introductory period is usually lower than what is offered with a fixed-rate loan.

  • Once the introductory period expires, the interest rate follows the market interest rate.

  • ARMS have caps in place that limit the total amount that interest can rise or fall over the course of the loan.

Homeowners Insurance: Type of protection that compensates for home damages during a covered peril.

  • A monthly premium is paid to an insurance provider in exchange for coverage.

  • Although it is not legally required, mortgage lenders may require a certain level of coverage for the life of the loan.

  • Covered peril may include windstorms, burglary, fire, etc.

Property Taxes: Taxes paid to the local government for owning a property.

  • The amount owed in property taxes depends on the home’s value and location.

Debt-to-Income (DTI) Ratio: DTI is equal to total fixed, recurring monthly debts divided by total monthly gross household income= total fixed monthly debts/total gross household income.

  • Mortgage lenders look at DTI to make sure there is enough money coming in to make payments.

  • Most lenders cater to applicants who have a DTI of 50% or lower.

Down Payment: First payment made on mortgage loan, brought to table at time of closing.

  • Down payment is listed as a percentage of the loan value.

  • 20% down payment on $100,000 loan means $20,000 will be brought to closing.

  • Most loan types require some kind of down payment, however some types of government-backed loans may allow the purchase of a home with no down payment.

Private Mortgage Insurance (PMI): Type of insurance that protects the lender in the event that the borrower defaults on the loan.

  • If less than 20% down payment is made, many lenders will require the borrower to pay PMI.

Title: Proof that the borrower owns the home.

  • The title includes physical description of the property, the names of anyone who owns the property and any liens on the home.

  • “I’m on the title” refers to some kind of legal ownership of the property.

Deed: A deed is the physical document that proves ownership of the home.

  • The deed is received when the loan is closed.

Real Estate Agent: Local property professional who can help you shop for a home more effectively.

  • Real estate agents can show homes in your price range, draw up offer letters and work with sellers to get a great deal on a home.

  • There are “seller’s agents” who work on behalf of sellers, and “buyer’s agents” who work with those shopping for a home.

Earnest Money Deposit: A check written to a seller when an offer is made on a home, letting the seller know that offer is serious.

  • Most are equal to 1-2% of the home’s value.

  • If the seller accepts the offer, the earnest money deposit goes towards the down payment at closing.

Home Inspection: Identifies specific problems in the home.

  • An inspector will walk through the home and test things like heating or cooling systems, light switches, and appliances to see if anything needs to be repaired or replaced.

Closing Costs: Settlement costs and fees paid to the lender in exchange for finalizing the loan.

  • The specific costs depend on the location and property type.

  • Closing costs usually equal between 3-6% of the total value of the loan.

  • Closing costs can include appraisal fees, loan obligation fees and pest inspection fees.

Seller Concessions: Clauses the buyer includes with the offer to buy a home that asks the seller to pay certain closing costs.

  • It might be asked that the seller cover things like appraisal fees or the title search.

  • A seller can reject the concessions or send a counteroffer with concessions removed.

Escrow: Escrow accounts are where lenders hold money for property taxes or homeowner’s insurance.

  • The escrow account allows the borrower to split taxes and insurance over 12 months instead of paying all at once.

  • A lender may add escrow payments to monthly mortgage dues along with principal and interest payments.

Discount Points: Optional closing cost where a borrower can pay to “buy” a lower interest rate.

  • One discount point is equal to 1% of the loan value.

  • The more purchased, the lower the interest rate will be.

  • Discount points must be covered in cash at closing.

  • Essentially the borrower will pay more upfront but enjoy savings over the life of the loan.

Title Insurance: Common closing cost.

  • Title insurance protects against outside claims to the property.

  • A single payment at closing.

  • Protects the owner for as long as they own the home.

Closing Disclosure: Document that shows the final terms of the loan.

  • Includes interest rate, loan principal, and closing costs that must be paid.

  • Lender is legally required to give the borrower at least three days to review the closing disclosure before signing the loan.

Source of Terms:


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