Below are some important mortgage term definitions you should be familiar with when dealing with a mortgage lender or bank. With this in mind, critical mortgage terms can vary depending on the specific type of mortgage and the lender.
- Principal: The initial amount of money borrowed to buy a home.
- Interest Rate: The percentage at which the lender charges you for borrowing the principal amount.
- Amortization: The process of paying off the mortgage over time through regular, equal payments.
- Term: The length of time over which you agree to pay off the mortgage. Common terms are 15, 20, or 30 years.
- Fixed-Rate Mortgage: A mortgage with an interest rate that remains constant throughout the life of the loan.
- Adjustable-Rate Mortgage (ARM): A mortgage with an interest rate that can change periodically, typically after an initial fixed-rate period.
- Down Payment: The initial upfront payment made when buying a home, usually expressed as a percentage of the home’s purchase price.
- Private Mortgage Insurance (PMI): Insurance that may be required if your down payment is less than 20% of the home’s value to protect the lender in case of default.
- Closing Costs: The fees and expenses associated with finalizing a mortgage, such as appraisal fees, title insurance, and attorney fees.
- Loan-to-Value (LTV) Ratio: The ratio of the loan amount to the appraised value of the property. A higher LTV typically requires PMI.
- Escrow Account: An account set up by the lender to hold money for property taxes and insurance and ensure they are paid on time.
- Prepayment Penalty: A fee charged for paying off the mortgage before the agreed-upon term.
- Origination Fee: A fee charged by the lender for processing and underwriting the mortgage.
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Credit Score: A numerical representation of your creditworthiness, which can impact the interest rate you receive.
- Appraisal: An assessment of the property’s value, conducted by a professional appraiser.
- Title Insurance: Insurance that protects the homeowner and the lender against disputes over the property’s ownership.
- Closing Disclosure (CD): A document that provides the final details of the mortgage loan, including closing costs and loan terms.
- Debt-to-Income Ratio (DTI): The ratio of your monthly debt payments to your monthly income, used to assess your ability to repay the mortgage.
- Good Faith Estimate (GFE): An estimate of the various costs associated with obtaining a mortgage.
- Mortgage Rate Lock: An agreement with the lender to guarantee a specific interest rate for a specified period.
- Hazard Insurance: Insurance that protects against damage to the property caused by hazards such as fire or natural disasters.
- Mortgage Servicer: The company responsible for collecting mortgage payments and managing the loan on behalf of the lender.
It’s crucial to understand these terms when entering into a mortgage agreement, as they can significantly impact the cost and terms of your home loan. Always consult with a financial advisor or mortgage professional if you have questions about specific terms or your mortgage agreement.
FAQs
1. What is the principal in a mortgage?
The principal is the original amount of money borrowed to purchase your home. It is the base loan amount, excluding any interest or fees.
2. How does the interest rate affect my mortgage?
The interest rate is the percentage charged on the principal by the lender. It determines the total cost of borrowing over the life of the loan.
3. What does amortization mean?
Amortization is the process of paying off your mortgage through regular, equal payments that cover both principal and interest over the loan term.
4. What is the significance of a mortgage term?
The term is the period over which you agree to repay your mortgage. Common terms are 15, 20, or 30 years, with the length impacting your monthly payments and overall interest paid.
5. What is a fixed-rate mortgage?
A fixed-rate mortgage offers a stable interest rate throughout the life of the loan, ensuring consistent monthly payments.
6. How does an Adjustable-Rate Mortgage (ARM) work?
An ARM has an interest rate that may change periodically based on market conditions, typically starting with a fixed-rate period before adjusting.
7. Why is the down payment important?
The down payment is your initial payment towards the purchase of your home. Typically expressed as a percentage of the home’s price, it affects your loan amount and possibly your interest rate.
8. What is Private Mortgage Insurance (PMI), and when is it required?
PMI is insurance that protects the lender if you default on the loan. It is usually required if your down payment is less than 20% of the home’s purchase price.
9. What are closing costs?
Closing costs are the fees and expenses required to finalize your mortgage. These can include appraisal fees, title insurance, attorney fees, and more.
10. How does the Loan-to-Value (LTV) ratio impact my mortgage?
The LTV ratio compares your loan amount to the appraised value of the property. A higher LTV may require PMI and can affect your loan terms.
11. What is an escrow account?
An escrow account is set up by the lender to manage payments for property taxes and insurance, ensuring these are paid on time.
12. What is a prepayment penalty?
A prepayment penalty is a fee that some lenders may charge if you pay off your mortgage early, before the agreed term ends.
13. What is an origination fee?
The origination fee is a charge by the lender for processing your mortgage application, including underwriting and administrative costs.
14. How does my credit score influence my mortgage?
Your credit score reflects your creditworthiness and can significantly impact the interest rate and terms you receive on your mortgage.
15. What is an appraisal, and why is it necessary?
An appraisal is an independent assessment of the property’s value to ensure that the loan amount is appropriate for the home’s worth.
16. What is title insurance?
Title insurance protects you and the lender from potential legal disputes over the ownership of the property.
17. What does a Closing Disclosure (CD) include?
The CD provides a detailed breakdown of your mortgage loan terms, closing costs, and other essential information, issued before closing.
18. What is the Debt-to-Income (DTI) ratio?
The DTI ratio compares your monthly debt payments to your monthly income, helping lenders evaluate your ability to manage additional mortgage debt.
19. What is a Good Faith Estimate (GFE)?
The GFE provides an early estimate of the costs associated with your mortgage, giving you an overview of what to expect financially.
20. What is a mortgage rate lock?
A rate lock secures a specific interest rate for a set period, protecting you from rate increases during the mortgage process.
21. What does hazard insurance cover?
Hazard insurance protects your home against damages from fire, storms, and other natural disasters, providing coverage for potential losses.
22. What is the role of a mortgage servicer?
The mortgage servicer is responsible for collecting your monthly payments, managing your escrow account, and handling customer service issues related to your mortgage.
Links to some useful tools
Click here to use our mortgage calculator and estimate you payment prior to starting you home search. We also have a property tax calculator you can use to estimate your property taxes.