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.
- 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.
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.