Buying a home is an important decision that requires a lot of thought. If this is your first time, it may seem like the terminology associated with mortgages is a completely foreign language. However, it’s an important language for you to learn — knowing the ins and outs of mortgage jargon can save you from making mistakes that could cost you money.
Below you’ll find a guide to help you navigate the lingo so you can get one giant step closer to home ownership.
Getting a Mortgage
There is more to qualifying for and obtaining a mortgage than just filling out paperwork. The terminology below describes some of the steps and processes that go into getting a mortgage.
An appraisal is an inspection of the property that gives you, as the potential homeowner, and the lender an estimated value based on the property’s condition and what other comparable houses in the area are worth.
Your credit score determines the interest rate on your mortgage. It is based on your past repayment habits on credit cards or other loans and shows the lender your credit worthiness.
This is one of several numbers a lender calculates to see if you will be able to pay your mortgage. The calculated monthly mortgage payments are divided by your monthly income. The higher the quotient, the less likely you can afford the mortgage.
Good Faith Estimate
This is an estimate from the lender letting you know approximately what the closing costs are expected to be. The estimate is meant to give you an idea of what you’ll be paying so you can save and won’t be caught off guard.
You must have homeowner’s insurance before the mortgage closes. It’s a combination of personal liability and hazard insurance meant to protect you, your guests, and your belongings.
Also called an LTV ratio, this is calculated by dividing the loan amount by the property value. To qualify for a mortgage, this number usually has to be 80% or higher.
This is the amount that you actually borrow from a lender. You will have to pay this back, plus interest and other fees.
Mortgage Rate Types
There are several mortgage rate types, and they all have different advantages and disadvantages. Knowing which kind will best suit your needs is essential.
Also known as an ARM, this type of mortgage has an interest rate that is fixed for a short amount of time, then changes — or adjusts — at set intervals. The interest rate is lower in the initial period and can go up or down in the adjustment period.
This type of mortgage is temporary and is based on the construction schedule of a house that is in the process of being built. After the house is built, the construction mortgage changes into another more permanent mortgage.
This type of mortgage is one in which the interest rate does not change for the entire duration of the loan, which can be anywhere between 10 and 40 years.
An interest-only mortgage allows the borrower to make payments just toward the interest for a short initial period, after which the monthly payments usually increase and include payments toward the principal as well.
This is a non-standard loan that is very risky for the lender because it is larger than the loan limits of Fannie Mae and Freddie Mac. Jumbo loans typically have higher interest rates than other mortgage types.
Fees and Interest
Your down payment and monthly mortgage payments are not the only costs you’ll incur. There are several other fees that you will have to pay to close your mortgage, as well as potentially some penalty fees if you try to pay off your mortgage early. Below you’ll find the other types of fees associated with your mortgage.
Annual Percentage Rate
Also called an APR, this is the interest rate of your mortgage per year. The APR can be fixed or adjustable depending on the type of mortgage you choose.
These are all the costs associated with the closing, or finalization of the sale. Closing costs can include attorney fees, escrow payments, taxes, and title insurance fees.
Loan Origination Fees
These costs usually equal about 1% of the loan amount and go toward paying the loan application processing fees.
You will only incur this penalty fee if you try to pay off your mortgage too quickly. If you want to pay off your mortgage faster, be sure to read over the terms in order to avoid these fees.
Paying Your Mortgage
Paying off your mortgage should be high in your list of priorities. These terms are associated with both early and regular loan repayment, as well as the consequences of paying off your mortgage (increasing your equity).
This is the schedule for your mortgage payments. It is a breakdown of the regular monthly payments you make toward both the principal and the interest over the term of your mortgage.
Most mortgages require a monthly payment, but you can pay it off more quickly with a bi-weekly mortgage. In this situation, you pay half of the monthly payment every two weeks, which works out to be 13 regular payments instead of the 12 you would pay otherwise.
Equity is the difference between the value of a property and the amount still owed on the mortgage. It starts out low, but the more you pay, the higher your equity generally becomes.
This is part of your monthly mortgage payment that the lender holds for taxes on the property. It is separate from the funds used to pay the principal and interest.
Lenders want to ensure that they receive a certain minimum interest amount in exchange for their loan. The lock-in period is an amount of time during which you can’t pay off your mortgage early without incurring a prepayment penalty.
This is an acronym for principal, interest, taxes and insurance. These are typically the four components of your monthly mortgage payment.
Sometimes, in order to reduce the interest rate or to recalculate the mortgage period, a borrower can refinance. There are fees and new closing costs to consider, but refinancing may be beneficial depending on your situation.
You need to be aware of mortgage terminology so you can understand the paperwork you sign.