Part of what makes the homebuying and mortgage process so overwhelming is that there seems to be an entirely new language that you may not be familiar with. Your realtor or lender may toss out phrases like “adjustable rate,” “escrow,” or “amortization,” and expect you to follow along. To help you “talk the talk” like a pro, we’ve compiled a glossary of common mortgage terms you should know.
Types of Mortgages | Mortgage Process | Mortgage Repayment
Types of Mortgages Glossary
It’s not easy choosing the best mortgage option, especially if you’re still not sure how each one works.
Adjustable-Rate Mortgage (ARM): Also called a variable-rate mortgage, this is a loan with an interest-rate that changes over the life of the loan.
Conventional Mortgage: A loan that is not issued or guaranteed by the federal government.
FHA Loan: A loan that is made through a private lender but is insured by the Federal Housing Administration; borrowers pay mortgage insurance which encourages lenders to offer lower interest rates and more flexible qualification requirements.
Fixed-Rate Mortgage: A loan where the interest rate is locked-in and remains the same throughout the life of the loan.
VA Loan: A loan that is made through a private lender but guaranteed by the Department of Veterans Affairs; available to active military members or veterans, these loans do not require a down payment and there is no minimum score requirement.
Mortgage Process Glossary
Once your offer to buy a home is accepted, and your mortgage application is submitted, there is a ton going on behind the scenes. Here are the common mortgage approval terms you might hear.
Appraisal: An estimate of the fair market value of what a home is worth; this is used by lenders to ensure a borrower is requesting an appropriate amount of money. Lenders will only approve a loan amount when a property appraises for the sale price or more than the sale price.
Closing Agent: Also called a settlement agent, this is a third-party individual who oversees the final details of the real estate closing or transferring the property ownership to the new buyer.
Closing Costs: These are fees paid at the property closing and include miscellaneous fees charged throughout the home sale, including loan origination fees, appraisal fees, underwriting fees, etc. A buyer should get a “good faith estimate” of their closing costs before closing. Closing costs are normally paid by the buyer, but it can be negotiated that the seller pays some or all of the costs.
Debt-to-Income Ratio: A percentage that represents an individual’s monthly debt divided by their gross monthly income (before taxes); lenders use a 43% threshold to determine if a borrower will run into trouble making monthly repayments.
Down Payment: The up-front payment a buyer makes on new home; the higher your down payment, the less money you need to borrow on a mortgage loan. Depending on the lender and type of mortgage, down payments can range from 3% – 20% of the purchase price.
Earnest Money: A deposit put down on a potential home when a potential buyer submits an offer; it shows that they are a serious buyer. If the offer is accepted, the earnest money can be deducted from their down payment.
Home Inspection: A non-evasive, visual examination of a home including all key areas — electrical, plumbing, heating/cooling, structural, roofing, insulation, fireplaces/chimney, ventilation, and general interior/exterior; any issues will be submitted on a final report. The buyer can ask the seller to fix any issues or renegotiate the selling price so they can fix the issues in the future.
Loan Officer: Also called a loan originator, he or she will assist a borrower in finding the best mortgage product and be the main point of contact between the lender and borrower throughout the mortgage process.
Loan Processor: This individual is responsible for all the prepping and organizing of loan paperwork and seeing the loan application through the approval process.
Pre-Approval: A more involved process of finding out a specific mortgage amount and interest rate a borrower can qualify for; potential borrowers complete an official mortgage application and the lender runs a credit check and pulls a credit rating. This serves homebuyers when they are ready to place an offer on a new home.
Pre-Qualification: The process of supplying a lender with your overall financial picture — debt, income, assets — and receiving a general estimate of the mortgage amount you could be approved for; it is a simple process, which can be done online or over the phone, at no cost. This serves homebuyers in the initial house hunting stage.
Underwriter: This individual reviews all of a potential borrower’s loan paperwork and determines the risk involved with offering a mortgage to that borrower. They ultimately determine if a loan application will be approved or not.
Mortgage Repayment Glossary
Repaying your mortgage involves a little bit more than just writing a check each month. The glossary of common mortgage terms below is focused on your loan repayment.
Amortization: The process of paying off debt over time through regular payments; a mortgage will have an amortization schedule, or repayment schedule, which details each payment on the loan.
Annual Percentage Rate (APR): The annual interest rate charged for borrowing money.
Escrow Account: An account created by a lender to hold the property tax and insurance costs that are included in a mortgage payment; a lender will hold this money “in escrow” until their client’s property taxes or insurance premiums need to be paid.
Home Equity: Your share of your home’s value; as you repay your mortgage, you begin to earn a larger share of your home’s value. In terms of dollars, home equity is the current market value of your home, less any remaining mortgage payments.
Homeowners Insurance: Insurance coverage that protects a home and the items within the home, in case of damage (fire or natural disaster) or theft; if a home is financed, the lender will most likely require that the homeowner carry homeowners insurance.
Loan Term: The set period of time for the repayment of a loan.
PITI: A mortgage payment that includes Principal, Interest, Taxes, and Insurance.
Principal: The amount borrowed; it does not include interest charged on a loan.
Private Mortgage Insurance (PMI): When a buyer pays down a down payment of less than 20%, their lender may charge private mortgage insurance. This protects the lender if a homebuyer cannot repay the loan. A homeowner can request that PMI be cancelled when the outstanding loan balance reaches 80%, and a lender will automatically drop PMI when a loan balance reaches 78%.
Property Taxes: Taxes paid to your municipality for the privilege of owning a piece of real estate. Two property taxes a homeowner will pay are real estate taxes and school taxes. Property taxes will vary depending on the location of the property and assessed value of the property. Property taxes can be paid directly to a tax collector or through an escrow account set up by your mortgage lender.
Refinance: When a borrower applies for a new mortgage to replace an original mortgage; this is usually done so a homeowner can obtain a better interest rate or change their loan term. The funds from the second mortgage are used to repay the first mortgage. During a refinance, the home owners must undergo the entire mortgage process again.