Mortgage Vocabulary Words
The Homebuying process can be complex and full of confusing industry jargon.
Stay educated with these common terms and definitions!
Mortgage Terms on This Page:
Adjustable Percentage Rate (APR)
Annual Percentage Rate (APR) in the mortgage industry represents the true cost of borrowing for homebuyers.
It includes the interest rate plus lender fees, points, and other charges, providing a comprehensive measure of mortgage costs.
APR helps homebuyers compare different mortgage offers effectively. Understanding APR is crucial for making informed decisions and securing the best mortgage deal.
Adjustable-Rate Mortgage (ARM)
A mortgage with an interest rate that can change periodically based on an index.
An ARM starts with a fixed interest rate for a set period, like 5, 7, or 10 years. After this period, the rate can change based on a specific index plus a margin.
This means your monthly payments can go up or down.
Amortization
The process of paying off your mortgage over time through regular payments of principal and interest.
Each payment covers both interest and a portion of the principal. This helps you gradually reduce your debt until it’s fully paid off.
Closing Costs
Closing Costs are fees you pay when you finalize buying a home.
They include expenses like loan fees, appraisal fees, and title insurance. These costs are usually 2% to 5% of the home’s purchase price.
Combined Loan-to-Value (CLTV)
The ratio of all loans on a property to the property’s value.
It helps lenders assess the risk of lending when multiple loans are involved. A lower CLTV ratio generally indicates less risk for the lender.
Down Payment
The initial amount of money you pay upfront when buying a home.
It is usually a percentage of the total purchase price. A larger down payment can reduce the amount you need to borrow and lower your monthly payments.
Escrow
A financial arrangement where a neutral third party holds funds or assets for two parties involved in a transaction until specific conditions are met.
In real estate, escrow accounts are used to manage property taxes and insurance payments. This ensures that funds are available and payments are made on time.
Fixed-Rate Mortgage
A home loan with an interest rate that stays the same for the entire term of the loan.
This means your monthly payments for principal and interest remain constant. Fixed-rate mortgages are popular because they offer predictable payments, making budgeting easier.
Foreclosure
The legal process where a lender takes ownership of a property because the borrower fails to make mortgage payments.
The lender then sells the property to recover the amount owed on the loan. Foreclosure can significantly impact the borrower’s credit score and financial stability.
Interest
Interest is the cost of borrowing money, usually expressed as a percentage of the principal.
It’s what you pay the lender for the loan. Interest can be fixed or variable, affecting your monthly mortgage payments.
Pre-Approval
A lender’s conditional commitment to loan you a specific amount of money for a home purchase.
It is based on a review of your credit history, income, debt, and assets. Pre-approval helps you understand how much you can afford and shows sellers you are a serious buyer.
Principal
The amount of money you borrow to buy your home.
It’s the base amount of your loan before interest is added. Paying down the principal reduces the total amount you owe.
Private Mortgage Insurance (PMI)
The insurance that protects the lender if you default on your loan.
It’s required if your down payment is less than 20% of the home’s purchase price. PMI is usually included in your monthly mortgage payment.
Refinancing
The process of replacing your current mortgage with a new one, usually to get a lower interest rate or change the loan term.
This can help reduce your monthly payments or overall loan costs. Refinancing involves applying for a new loan and paying closing costs.
Term
The length of time over which you will repay your mortgage.
Common terms are 15, 20, or 30 years. The term affects your monthly payments, and the total interest paid over the life of the loan.
Title
A legal document that shows ownership of a property. It includes details about any liens or claims against the property.
Having a clear title is essential for proving you own the home and can sell it without issues.
Loan-to-Value
The ratio of the loan amount to the appraised value of the property.
It helps lenders assess the risk of lending money. A lower LTV ratio generally indicates less risk for the lender.
Second Mortgage
A loan taken out on a property that already has a mortgage. It allows you to borrow against the equity in your home.
Second mortgages typically have higher interest rates than first mortgages and are subordinate to the first mortgage.
