17 Mortgage Terms to Know

Getting a mortgage is already stressful enough as it is, but it also comes with a lot of new terms that can be overwhelming for those not familiar with them. Here is a list of some terms that you may want to know before getting a mortgage loan that will help you understand a little bit better.

Amortization: This is the process of how payments spread out over time. It is the reduction in the principal amount owed on a debt. At the beginning of your loan, most of the payments are going to be applied towards the interest. As you chip away at the principal, the interest payment becomes lower so, towards the end of the loan, less of the payment is being applied to the interest. An amortization schedule breaks down how the monthly payments are applied into principal and interest.

Annual Percentage Rate (APR): The cost of the loan to the borrower (that’s you!). It includes the loan on an annual basis plus any additional lender fees (ex. mortgage insurance, discount points, and loan origination fees). This is usually expressed as a percentage and you will occasionally see two different percentages. The larger number will always be the APR because it includes fees.

Appraisal: A rough estimate of how much a home is worth. Mortgage lenders will require that you get an appraisal before you sign off on a home loan. This ensures that they are not lending you more than the home is worth.

Assets: This is anything that you own that has a cash value. When you apply for a mortgage loan, the lender will want to verify your assets to ensure that you can pay off your loan with savings/investments in case of a financial emergency. Some examples of assets are:

• Checking and savings accounts
• 401k or other retirement funds
• Stocks and bonds
• Mutual funds
• Certificates of deposits (CDs)

Closing Costs: Settlement costs and fees you pay to your lender in exchange for finalizing your loan. Some common closing costs include appraisal fees, loan origination fees, and pest inspection fees. The specific costs you need to cover depends on your location and property type. Closing costs are usually about 3-6 percent of the total value of your loan.

Closing disclosure: Document that tells you the final terms of your loan, including your interest rate, loan principal, and closing costs. Your lender must give you at least 3 days to review your closing disclosure before you sign your loan.

Discount Points: At closing, you can pay to “buy” a lower interest rate. One discount point = 1% of your loan value. The more discount points you buy, the lower your interest rate will be, but you must cover them in cash at closing. Basically, you’re paying more upfront to pay less over the life of the loan.    

Equity: Difference between what you owe on your home and the market value of that home. This builds as you pay down your mortgage and it can also grow if the home values in your region change noticeably. You can tap into this value over time, in the form of a home equity loan, home equity line of credit, or a reverse mortgage.

Escrow: The lender makes a separate account where they hold funds. This splits taxes and insurance over 12 months instead of paying it all at once. Your lender can add escrow payments to your monthly mortgage dues along with principal and interest payments.

Loan estimate: This is a breakdown that is simpler for consumers to understand the total cost of a mortgage and to shop for their best loan. It explains the specified loan amount, interest rate, estimated monthly payments, estimated assessments, insurance and taxes, and the estimated cash needed at closing,

Mortgage insurance: This protects the lender in case of non-payment. It’s usually required for borrowers who put down less than 20%.

In government-backed mortgages, this can look like:

• FHA: borrowers pay an upfront fee and annual premium
• USDA: borrowers pay an upfront fee and an ongoing premium
• VA: usually a one-time fee at closing.

Preapproval/pre-qualification: These terms are sometimes used interchangeably and can mean different things to different lenders. The important part is that this lets sellers know you’re serious about purchasing the property. This can give you an edge over other buyers who do not have one and is just an estimate of how much you can borrow based on your income, credit score, and a few other factors.
Getting a preapproval will have a small negative impact on your credit score, but multiple inquiries add up to one hard credit pull. So, you can still fill out multiple mortgage applications within 14 to 45 days and it wouldn’t be too bad.

Principal: The amount borrowed. A portion of each of your payments goes toward the principal and another goes toward the interest.

Rate: The cost you pay to borrow money and expressed as a percentage. It does not include any other charges associated with the mortgage loan. The rate is influenced by factors such as your credit score, the type and length of the loan, the down payment, and the price of the home.

Rate lock: Since interest rates change so much, some homebuyers opt for a rate lock (aka lock-in) which guarantees that the interest rate won’t change between the day they make the offer and the day they close on the home (as long as nothing changes to your mortgage application).

Title insurance: There are 2 types of title insurance- lender and owner. Both guard against any disputes about the title, such as tax or contractor liens. Lenders usually require homebuyers to have lender’s title insurance. Having owner’s title insurance protects you against future claims.

Underwriting: This is the review of your loan application, to see if you will be approved. Underwriting is part of the lender’s origination fee. It takes into account things such as your credit history, income, assets, liabilities, and the appraisal of the home. Based on what the underwriter finds, the loan will be approved or denied. If the loan gets denied, ask why.