Mortgage Terms to Know

Navigating your way through the real estate market, whether buying or selling, can be a daunting task. According to Rocket Mortgage, 40% of surveyed buyers weren’t aware of ANY home buying terms. Here we break down some of the terms that you need to know in order to help you better navigate achieving your real estate goals.

Mortgage Terms to Know

Adjustable-Rate Mortgage (ARM)

An ARM is a type of loan where the interest rate fluctuates depending on how market rates move. You’ll typically first get a short period of fixed interest. Additionally, the interest rate is usually initially lower during the introductory period but can increase along with the going market rates.

Amortization

Amortization is the process of how payments are spread out over time. When payments are applied, you’ll first pay the interest, with the remainder of the payment going to the principal of the loan. Initially you can expect a majority of your payment to go toward interest, but will gradually have more applied toward the principal as you continue to pay the loan.

Annual Percentage Rate (APR)

Annual percentage rate is the interest rate that’s paid on the loan annually. APR’s are expressed as a percentage and will also include fees that go into the loan.

Appraisal

An appraisal is an estimate of how much your home is worth on the market. Lenders require that your home is appraised before you get a home loan to ensure that the loan aligns with the value of the home. This is typically done by a 3rd party.

Balloon Loan or Mortgage

A balloon loan is reflective of the size of the payments that are typically made. This type of financing requires lump sums to be paid at some point throughout the term, and most commonly at the end of the term.

Closing

A closing is the final step in securing your new home. The buyer and seller align and sign all documents and ownership is officially transferred from the seller to the buyer.

Closing Costs

Closing costs are settlement fees that you pay in exchange for the loan from a mortgage lender. These closing cost fees can include inspection fees, appraisals, and will account for between 3% – 6% of the total value of the loan.

Comparable Market Value (Comps)

A similar property that has listed and sold within 5% of the property sales price within the last 90 days.

Debt-To-Income (DTI) Ratio

This formula calculates your total monthly expenses divided by your monthly gross household income. This assures the lender that you have sufficient funds to take on the loan and that the risk isn’t too high for the loan. Ideally you’ll have a total debt to income ratio of lower than 50%.

Deed

A deed is a physical document that proves you officially own your home. This document is received at the closing of your purchase.

Down Payment

Your down payment is the first payment that’s applied toward the mortgage. This is usually reflected as a percentage of the total home value.

Earnest Money Deposit

This is a check that you write to the seller of the home that assures the seller that you’re serious about purchasing the home. The amount usually sits between 1-3% of the home’s value and will be directly applied toward your down payment at closing if the seller accepts your offer.

Escrow

An Escrow Account is a third-party holding account that protects both the buyer and the seller by holding funds until conditions of the property purchase are met. The funds deposited by the buyer prove to the seller that they can close on the property while the escrow account provides a seamless release of the funds once a deal is finalized.

Fixed Rate Mortgage

A fixed rate mortgage ensures that the rate remains the same throughout the entirety of the loan. If you choose to go with a fixed rate (instead of variable), then you’re expecting rates to rise over time or are more comfortable knowing exactly what you’ll pay over the term of the loan.

Home Inspection

The home inspection requires an inspector to walk around the home that you’re looking to buy to inspect the lights, switches, heating & cooling, and other items that can often be overlooked. This will provide peace of mind that the home you’re buying will be fully operating on move-in day.

Homeowners Insurance

Homeowners insurance is a type of property insurance that provides coverage for the resident(s) of the home. This is meant to cover damages to your home or any accidents that may occur on your property.

Loan Estimate

A loan estimate is meant to help you better understand the total costs of your home. The loan estimate will factor in your anticipated closing costs, interest rate, monthly payment, and more.

Loan to Value (LTV) Ratio

Loan to value is used to determine the amount of risk in the loan. It helps determine how much money needs to be put down and what the interest rate on that loan will be based on the risk.

Mortgage Note

A mortgage note is the document you sign at the end of your closing. The note entails the agreement between the borrower and lender to reflect the terms.

Pre-Approval

The pre-approval process is one of the first steps in securing a loan. During this process, you’ll report income, assets, liabilities and credit scores to see if you’ll qualify for a loan. Once pre approved, you’ll have a better understanding of your budget.

Principal

The principal is the initial amount that you take out for the loan. This is separate from the interest that’s charged on top of the loan by the lender.

Private Mortgage Insurance (PMI)

Private mortgage insurance is a vehicle that the lender uses to protect them in the event that the loan is defaulted on. PMI is usually required when a home buyer puts down less than 20% of the home’s value for their down payment, therefore can be seen as having higher risk to a lender.

Property Tax

Property taxes are paid to your local government. Tax rates will vary depending on home value and location, but are an important expense to account for. Expect your taxes to help fund municipalities such as libraries, police and fire departments, & libraries.

Refinancing

Refinancing takes place on an existing mortgage when you essentially trade the debt you’ve taken on to buy the home for another loan. This usually includes a new rate and term to better meet your financial goals.

Term

The term is the number of years that you’ll pay on your home. This is calculated by the total value of the property and interest rate charged by the lender. You’ll typically see loans in terms of 15 or 30 years.

Title

The title certifies that you own the home. The title will detail a description of the property, anyone that owns a piece of the property, and any liens on the house.

Title Insurance

As part of a closing cost, you’ll need to purchase title insurance to protect yourself against potential outside claims to the property. This is a one time purchase rather than most types of insurance that charge every month.

Underwriting

This is the process where your loan application is analyzed to determine the risk to the lender when making the loan. Underwriting will entail a review of credit history and property value.