Are you thinking about buying a home? Whether you are a first-time homebuyer or searching for a vacation home or investment property, there are many terms you will read or hear throughout the mortgage process. Familiarizing yourself with the terminology ahead of time will help you learn and prepare – ensuring all of your questions are answered, there are no surprises, and the process goes smoothly.
Here are 25 mortgage terms defined to help you along your homebuying journey:
1. Adjustable-Rate Mortgage - A mortgage that offers a low introductory fixed-rate term. This is a great option for homeowners who are planning on selling or refinancing their home in 5-7 years as it lowers the rate and payments during the introductory fixed period.
2. Amortization - A schedule that includes the amount of principal and interest paid each month over the course of the mortgage loan.
3. Annual Percentage Rate (APR) - The total cost of the mortgage stated as a yearly rate and includes the base interest rate, loan origination fee (points), commitment fees, prepaid interest, and other credit costs.
4. Appraisal - An appraisal is conducted to confirm the value of a home compared to others like it in the same area.
5. Closing Costs - Also known as settlement costs, this is the amount of money needed to close on the mortgage loan and may include insurance, taxes, lender charges, escrow fees, and more.
6. Closing Disclosure - A document that details the final terms of the mortgage loan.
7. Credit Report - A report that details information about how long you have had credit, how much credit you have, your payment history, and how much of your available credit is being used.
8. Debt-to-Income Ratio (DTI) - The monthly debt payments divided by your gross monthly income; measures your ability to repay the mortgage loan.
9. Deed - A legal document that confirms ownership rights to a property.
10. Discount Points - A charge paid in exchange for a lower interest rate.
11. Down Payment - The first payment you make on your mortgage loan; usually listed as a percentage of your loan value. It’s actually a myth that you need 20 percent down to buy a home!
12. Earnest Money - A deposit of good faith paid to the seller showing that you are serious about purchasing a home.
13. Escrow - Monthly allowance for property taxes, homeowners insurance, and potentially private mortgage insurance (PMI).
14. Fixed-Rate Mortgage - A mortgage that offers a stable monthly interest rate and payment over the term of 30 or 15 years.
15. Homeowners Insurance - Insurance coverage for the full or fair value of a home.
16. Inspection - An inspection may be conducted to check for damage, pests, or other issues with a home.
17. Interest Rate - The percentage of the principal charged to borrow money. The rate is usually expressed as an annual percentage.
18. Loan-to-Value Ratio (LTV) - A measure comparing the amount of the mortgage loan with the appraised value of the property.
19. Pre-Qualification - The process of determining if you meet minimum loan requirements and how much you can afford to spend on a home.
20. Principal - The balance you owe on the mortgage loan (does not count interest). It shrinks as you make mortgage payments over time.
21. Private Mortgage Insurance (PMI) - If your down payment is less than 20 percent, you are required to pay private mortgage insurance (PMI).
22. Property Taxes - Taxes paid to your local government; the amount depends on your home’s value and where you live.
23. Rate Lock - When your interest rate is locked at a specific cost for a certain amount of time.
24. Seller Concessions - When the seller agrees to help pay certain closing costs, which may include the property taxes, attorney fees, title insurance, appraisal, and more.
25. Title Search - A title company searches county records to ensure the property title is clear and free of any complications, like pending debts or liens.
TIP: Be sure to save these terms and refer back to them during the mortgage process!
If you have questions about the process or you’re ready to get started, contact your local HOMESTAR Mortgage Loan Originator today!