Key Mortgage Terms To Know: A Glossary For Home Buyers

If you aren’t familiar with the lingo associated with buying a house, the process can easily seem overwhelming.

During the home buying process, your real estate agent will help remove uncertainty from your mind, but knowing certain common mortgage terms will help you feel even more comfortable.

Mortgage Glossary: Common Mortgage Terms To Know

A lack of familiarity with key mortgage terms can create unnecessary stress before you purchase a house. Therefore, we have compiled a list of key mortgage terms worth familiarizing yourself with before making an offer on a home.

1. Adjustable-Rate Mortgage (ARM)

With an adjustable-rate mortgage (ARM), the interest rate varies throughout the life of the loan, depending on market movements. There is usually a short period of fixed interest with an ARM, usually 5 – 10 years. During this period, you will typically get a lower interest rate than with a fixed-rate loan.

In the event that the loan is not repaid within the fixed term, the interest rate increases or decreases at intervals between 6 months to a year based on market conditions.

2. Amortization

Mortgage amortization refers to the loan’s repayment schedule – specifically the percentage of your payment that goes toward principal and interest each month over the course of your loan.

You will pay more interest at the beginning of your loan than the principal balance if you make the normal payment each month. However, as you continue to make payments, this shifts. When your loan is nearing its end, most of your payments will go toward paying off the principal balance, resulting in lower interest payments.

3. Annual Percentage Rate (APR)

There are two different rates represented when shopping for a mortgage, interest rate and annual percentage rate (APR). The interest rate represents the cost you pay for the lender to lend you the money.

In contrast, the APR is the annual interest rate plus any additional lender fees, such as closing costs, points, appraisals, or pulling your credit.

When comparing lenders and loan options, it’s important to consider the APR in addition to the base interest rate since it represents the true cost of the loan.

4. Closing Costs

Closing costs are the fees charged for the services necessary to close your loan application. They are also referred to as settlement costs. Closing costs include appraisals, title fees, loan origination fees, credit report fees, and pest inspection fees, among others. They tend to range from 3% to 6% of the purchase price of a home.

5. Closing Disclosure

You’ll receive a Closing Disclosure before closing on your mortgage, which includes your loan amount, interest rate, estimated monthly payments and closing costs. This is a multi-page document outlining the final terms and expenses of your mortgage. Before signing your loan, your lender must give you at least 3 days to review the Closing Disclosure. This is a very important document, so make sure you read it carefully and note any discrepancies you find.

6. Comparable Properties (Comps)

In real estate, comps (short for comparable properties) are properties that have recently been sold and are similar in size, location and amenities to the home under consideration. You can  decide how much to offer by using comps to determine the fair market value of the home.

7. Debt-To-Income Ratio (DTI)

Your debt-to-income ratio (DTI) is a measure of your gross monthly income (pre-tax) in relation to your monthly debt obligations. It serves as a key factor in assessing your ability to comfortably manage the monthly mortgage payments for your prospective home.

To compute your DTI, simply divide your total monthly debt payments by your gross monthly income. To meet the eligibility criteria for most mortgage options, lenders typically seek a DTI ratio that does not exceed 43%, though it will depend on the type of loan.

8. Deed

A deed is a tangible document that you receive upon completing your loan closing, serving as conclusive evidence of your property ownership. This document contains a detailed property description and necessitates signatures from both the seller and the buyer.

9. Down Payment

Your down payment is the initial payment made towards your mortgage loan, usually indicated as a percentage of the home price. For instance, if you opt for a 20% down payment on a $200,000 home, you’ll need to provide $40,000 during the closing process.

However, it’s important to note that a 20% down payment is not required. Depending on the type of loan, you can purchase a home with as little as a 3% down payment. Both your down payment and closing costs will be settled when you close on your loan.

10. Earnest Money Deposit

An earnest money deposit is a check you provide when submitting an offer for a home. This deposit serves as a tangible sign of your sincerity and commitment to the property transaction, reassuring the seller of your genuine interest. Typically, earnest money deposits range from 1% to 3% of the home’s total value. In the event your offer is accepted, these funds are applied toward your down payment and closing costs.

11. Escrow

An escrow account is a financial account that safeguards funds for upcoming mandatory payments. In the realm of mortgages, the majority of individuals maintain an escrow account to avoid having to make a single, substantial payment for property taxes or homeowners insurance.

Instead, the annual costs for these expenses are divided into 12 monthly installments, which are collected in conjunction with your regular monthly mortgage payments. Your lender reviews your escrow account on an annual basis to guarantee that the appropriate sum is being collected.

12. Fixed-Rate Mortgage

A fixed-rate mortgage is a loan that has an interest rate that remains constant. This means that your principal and interest payments will remain unchanged for the entire duration of the loan. The only elements of your payment that may vary with a fixed-rate mortgage are taxes, homeowners insurance, and, if applicable, homeowners association (HOA) dues. Opting for a fixed-rate mortgage can offer stability and predictability, making it easier to manage your budget.

13. Home Appraisal

During a home appraisal, an expert independent of the lender, the buyer and the seller evaluates the home to determine its fair market value. The value of a property is determined by its characteristics as well as the recent sales of comparable properties (or comps) in the neighborhood.

It is important to get an appraisal because the lender cannot lend you more than the property’s value. When the appraisal is lower than the price you offered, you can pay the difference at closing or try to negotiate the sale price with the seller.

14. Home Inspection

A home inspection is a discretionary but strongly advised stage in your buying journey. In the course of a home inspection, a qualified home inspector carries out a visual assessment of the property, searching for any potential concerns that may necessitate attention, either presently or down the road. If you identify items in need of renovation or repair, you have the opportunity to engage in negotiations with the seller, either to have them rectify the problems or to receive a reduction in the home’s purchase price.

15. Homeowners Insurance

Homeowners insurance provides compensation in the event your home sustains damage from a covered incident, like a fire, tornado or burglary. While there isn’t a legal mandate obligating homeowners insurance, the majority of mortgage lenders require borrowers secure a homeowners insurance policy to safeguard their investment. You’ll be responsible for paying a monthly or annual premium to maintain your homeowners insurance coverage.

16. Loan Term

The loan term signifies the duration required to fully repay your home loan, provided you make the minimum monthly payments towards the principal and interest. Fixed-rate conventional loans offer terms ranging from 8 to 30 years, with 15-year and 30-year terms being the most common options.

17. Loan-To-Value Ratio (LTV)

The loan-to-value ratio (LTV) is a key metric employed by your lender to assess your loan eligibility. Each type of loan has a predefined maximum LTV, which is determined by dividing the amount you’re borrowing by the appraised value of your home.

In essence, this metric is the opposite of your down payment or home equity. As an illustration, if you provided a 10% down payment, your LTV would be 90%.

18. Mortgage Preapproval

Before formally completing your mortgage application and securing financing terms, it’s essential to identify the house you wish to purchase. During this interim period, lenders can offer a mortgage preapproval indicating the amount you can afford, taking into account your current debt, income and assets. This preliminary approval is valuable as it provides insight into your purchasing power while you explore potential homes.

19. Mortgage Points

Mortgage points, also known as prepaid interest points or mortgage discount points, offer a method for paying a portion of the interest upfront in exchange for a reduced interest rate. Each mortgage point represents 1% of the loan amount, yet you have the flexibility to purchase them in increments as small as 0.125 points.

20. Origination

Mortgage loan origination encompasses the comprehensive series of steps involved in securing a mortgage, spanning from your initial application all the way to the closing stage. Given the labor-intensive nature of this process, lenders typically charge a nominal origination fee as compensation for their services.

21. Principal

Your principal balance denotes the full sum you borrowed to acquire your home. To illustrate, if you secured a $100,000 loan from your lender for your home purchase, your principal balance would stand at $100,000. Over time, this balance decreases as you make regular loan payments.

22. Private Mortgage Insurance (PMI)

Private mortgage insurance (PMI) is a form of insurance that provides protection to the lender or investor in the event of a loan default. When you make a down payment amounting to less than 20%, mortgage insurance becomes mandatory. While this may result in a higher monthly mortgage payment, it also translates to a reduced upfront down payment.

23. Property Taxes

You will need to make annual or semiannual payments for property taxes to your local government, determined by the location and assessed value of your home. Property taxes typically contribute to funding various public services, including school districts, community amenities, and various development projects. Your full payment is typically broken down into smaller, monthly payments that you pay in the escrow portion of your monthly mortgage payment.

24. Refinance

Mortgage refinancing takes place when a borrower replaces their original loan with a new one. Refinancing becomes advantageous when it offers borrowers a more favorable payment plan, a reduced interest rate or an altered loan duration. You can also access your home equity with a cash out refinance. However, if you’re contemplating mortgage refinancing, it’s crucial to keep in mind the closing costs associated with securing a new loan.

25. Seller Concessions

Seller concessions, also known as seller assists or seller contributions, encompass the closing costs that the seller has consented to cover in order to reduce expenses for the buyer. These concessions are specified in a clause within the purchase agreement. Sellers may choose to assume costs such as property taxes, attorney fees, origination fees, title insurance and appraisal expenses.

26. Servicing

Servicing involves the management of a loan, which encompasses tasks such as collecting your mortgage payment, allocating it to investors and handling monthly payments for mortgage insurance. If you have homeowners insurance and property taxes included in escrow, servicing also entails collecting payments for these expenses.

27. Title

A house title is concrete evidence of ownership, providing a detailed description of the property and land you’re acquiring. Additionally, the title document enumerates any encumbrances or liens that grant specific rights to others under certain circumstances.

The chain of title chronicles the historical ownership lineage of the property in question. It falls upon the title insurer, when you purchase your home, to verify that exclusive legal rights to the property are held only by the seller, ensuring a clear and uncontested ownership.

28. Title Insurance

Title insurance, a typical closing expense, provides protection against external claims on the property. In contrast to many insurance types that necessitate monthly premiums, title insurance is a single, upfront payment made during closing that covers any underlying issues with your home’s title that a title agency may have missed.

29. Underwriting

Underwriting represents a phase in the mortgage origination process during which your lender conducts thorough assessments to validate your income, assets, debts, and property particulars. This step essentially serves as the lender’s means of evaluating the level of risk associated with granting you a mortgage.

30. Approval

This process commences with the same credit assessment as previous approval stages but necessitates supplementary documentation, such as W-2s or bank statements, to complete the evaluation.

Mortgage Loan Terms Related To Types Of Home Loans

Understanding different types of home loans and the specific characteristics associated with each can help you choose the right mortgage for your financial situation and homeownership goals.

Conforming Loans

A conforming loan is a type of mortgage that conforms to the criteria and loan limits established by government-sponsored entities (GSEs) like Fannie Mae and Freddie Mac. These criteria encompass factors such as maximum loan amounts, credit score prerequisites, and debt-to-income ratios. Lenders perceive conforming loans as lower risk because they align with these standardized criteria, rendering them eligible for acquisition or endorsement by GSEs.

FHA Loans

FHA loans, backed by the Federal Housing Administration (FHA), are government-supported mortgages intended to promote homeownership among individuals with more modest financial resources. Notably, they feature a relatively low down payment requirement, often as minimal as 3.5% of the home’s purchase price, broadening access to homeownership for a diverse range of buyers. FHA loans are also recognized for their flexibility in credit score criteria, permitting qualification for borrowers with lower credit scores.

Non-Conforming Loans

Non-conforming loans, commonly known as jumbo loans, fall into a distinct mortgage category. They surpass the maximum loan limits established by government-sponsored entities such as Fannie Mae and Freddie Mac. These loans deviate from the conventional criteria, primarily in terms of loan amount, and are consequently perceived as higher-risk by lenders. This higher risk often translates into more stringent credit prerequisites and elevated interest rates for borrowers. Non-conforming loans are frequently sought after by individuals aiming to purchase high-value properties or homes situated in upscale real estate markets where the standard loan limits fall short.

VA Loans

VA loans, constitute a specialized form of mortgage financing meticulously crafted to extend advantageous homeownership opportunities to eligible veterans, active-duty service members and surviving spouses. These loans bear the endorsement of the U.S. Department of Veterans Affairs (VA), endowing beneficiaries with several benefits including the absence of a down payment obligation, competitive interest rates and lenient credit prerequisites. VA loans are designed to ease the financial path toward homeownership for veterans and service members.

Mortgage Loan Terms Related To The Loan Process

Navigating the mortgage process can be complex, with a plethora of terms and concepts to understand. To help demystify this journey, we’ve compiled a list of essential mortgage terms that every homebuyer should be familiar with.

Loan Estimate

A Loan Estimate is a standardized form provided by a mortgage lender to a borrower within 3 business days of receiving a loan application. This document outlines the estimated terms and costs associated with a mortgage loan. It includes key details such as the interest rate, monthly payment amount, estimated closing costs, and the total amount of money the borrower is expected to repay over the life of the loan.

Loan Limits

Loan limits refer to the maximum amount of money that a borrower can obtain through a specific type of loan, typically established by government agencies or entities. These limits are set to ensure that loans remain within manageable and standardized parameters, taking into account factors such as the borrower’s creditworthiness, the type of loan and the regional cost of housing.

Mortgage Prequalification

Mortgage prequalification is an initial step in the homebuying process where a prospective borrower provides basic financial information to a lender or mortgage broker. Based on this information, the lender provides an estimate of the loan amount the borrower might qualify for. Mortgage prequalification is typically a quick and informal process and does not involve a thorough examination of the borrower’s credit report or financial documents. Prequalification is not a commitment to lend; it’s a preliminary assessment to help borrowers understand their potential purchasing power.

Mortgage Loan Terms Related To Closing

As you approach the final stages of your real estate journey, the closing process, it’s crucial to be well-versed in the terminology that accompanies this significant milestone. To ensure you’re fully prepared for this crucial step in homeownership, we’ve compiled a comprehensive list of key terms related to the closing process.

Final Walkthrough

The final walkthrough, typically carried out by the homebuyer the day prior to the real estate transaction’s closing, serves as a final visual inspection of the property’s condition. Its primary purpose is to confirm that the property aligns with the agreed-upon terms, including the completion of any negotiated repairs or enhancements. During this walkthrough, the buyer ensures that essential systems like plumbing and electrical are in proper working order, assesses the property for any new damage, and verifies the presence of any personal property items included in the sale.

Notary Public

A notary public is a legally sanctioned and unbiased professional appointed by a state government to act as a witness during the execution of significant documents, especially those associated with legal, financial or real estate matters. The notary public’s primary responsibilities encompass confirming the identity of the signatories, ascertaining their willingness to sign the document, and, when necessary, administering an oath or affirmation. Subsequently, the notary public applies their official seal or stamp to the document, signifying its proper and lawful execution.

Under Contract

“Under contract” in the context of a real estate listing refers to the status of a property that has received and accepted an offer from a prospective buyer. When a property is under contract, it means that the buyer and seller have reached a mutual agreement on the terms of the sale, including the purchase price, contingencies, and closing date. However, the sale has not yet been finalized or completed.

Who Can You Ask About Mortgage Terminology?

Home buyers looking to understand the meanings of important mortgage terms can turn to a variety of trusted sources for clarification. Real estate agents, who possess extensive knowledge of the home-buying process, are often a valuable resource. They can explain key terms, such as “down payment,” “escrow” or “closing costs,” in a way that’s easy to grasp and relevant to your specific situation.

Real estate attorneys are another valuable source of information. They specialize in legal aspects of property transactions and can provide detailed explanations of complex terms related to contracts, titles, and legal obligations.

Mortgage lenders, being experts in the field, can also offer insights into mortgage terminology. They can help you understand terms like “interest rate,” “amortization” or “loan-to-value ratio” and how they affect your loan terms.

Seeking guidance from these professionals ensures that you have access to accurate and tailored explanations of mortgage terms, empowering you to make informed decisions throughout the home-buying process.

The Bottom Line

Purchasing your first home can be a daunting experience if you encounter a constant stream of unfamiliar terminology and acronyms. However, gaining a firm grasp of the terms discussed in this article will enhance your readiness to confidently navigate the mortgage process.

With the right lender, you’ll have access to a wealth of resources, expert advice, and innovative solutions to help you achieve your homeownership goals. Don’t hesitate; take the first step today and turn your homeownership dreams into reality.