Understanding Mortgage Lingo

Learn the terminology before applying for a mortgage

Whether you are about to tackle the mortgage process for the first time or the fifth time, you need to understand the lingo behind the process. 

Loan officers use terms and phrases during the course of your home purchase that may not make sense to you if you are not experienced with the process. Real Estate Agents likely will use them too.

Mortgage Lingo

Few, if any, of these terms are complex, but they are not phrases that most people will encounter outside of the mortgage process:

• Adjustable Rate Mortgages (ARM): Loans with an initial fixed-rate period (usually 5, 7 or 10 years). After the fixed-rate period, your interest rate may change once per year—either up or down depending on market conditions. ARMs are almost always lower in rate than fixed loans and can offer huge savings to first-time home buyers, especially those who don’t plan on staying in their first home for more than 10 years.

• Amortization: The gradual reduction of debt over the term of the loan. Amortization occurs through repayment of principal.

• Annual Percentage Rate (APR): The yearly cost of a mortgage including interest and other expenses or charges such as private mortgage insurance and points expressed as a percentage.

• Appraisal: A written estimate of a property’s current market value.

• Closing: The conclusion of a real estate transaction when legal documents are signed and funds are disbursed.

• Closing Costs: Expenses over and above the cost of the property, which can include items such as title insurance, appraisal, processing, underwriting, and surveying fees.

• Credit Report: A report from an independent agency detailing credit history and previous and current debt to help determine creditworthiness. Equifax, Experian, and TransUnion are the major credit reporting agencies in the U.S.

• Credit Score: A mathematical formula that predicts an applicant’s creditworthiness based on credit card history, outstanding debt, type of credit, bankruptcies, late payments, collection judgments, too little credit history, and too many credit lines.

• Deed: The legal document that transfers property from one owner to another.

• Down Payment: The amount of a home’s purchase price paid upfront.

• Earnest Money: Deposit made by a buyer toward the down payment to show good faith when the purchase agreement is signed.

• Equity: The monetary difference between your mortgage balance and the actual market value of your home.

• FHA Loan: Fixed- or adjustable-rate loan insured by the Federal Housing Administration. FHA loans are designed to make housing more affordable, particularly for first-time home buyers.

• Fixed-Rate Mortgages: Mortgage with an interest rate and a payment that doesn’t change over the term of the loan. Should the current market interest rate fall below your fixed rate, contact your mortgage expert right away to discuss the benefits of refinancing. 

• Good Faith Estimate: A written estimate of the closing costs the borrower likely will have to pay to obtain the loan.

• Interest-Only Loan: Mortgage that gives the option of paying just the interest, or the interest and as much principal as you want in any given month during an initial period of time.

• Interest Rate: The percentage rate that a lender charges to borrow money.

• Lock or Lock-In: A lender’s guarantee of an interest rate for a set period of time. The lock-in protects you against rate increases during that time.

• Points (or Discount Points): Points are upfront fees paid to the lender at closing. Typically, one point equals one percent of your total loan amount. Points and interest rates are inherently connected. The more points you pay, the lower your interest rate.

• Principal: The balance (not counting interest) owed on a loan. A 30-year, fixed-rate mortgage is amortized so that the longer you have the loan, the more principal you reduce with each payment.

• Private Mortgage Insurance (PMI): Insurance to protect the lender in case the borrower defaults on the loan. With conventional loans, PMI is typically not required with a down payment of 20 percent or more of the home’s purchase price.

• Title Search: Examination of municipal records to ensure that the seller is the legal owner of a property and that there are no liens or other claims against the property.

• Underwriting: In mortgage lending, the process of determining the risks involved in a particular loan and establishing suitable terms and conditions for the loan.

Original article published by TheBalance.com

Written By: SHASHANK SHEKHAR