List of Basic Mortgage Terms
When applying for your first home mortgage, even the
best mortgage companies can use some pretty unfamilar terms. However, you must become familiar with basic mortgage terms so that you can make the best decision. So, we are going to explain a few of the
basic terms that you will encounter. Remember, when you are meeting with your mortgage company, if you have questions or do not fully understand something, speak up! The lender will be happy to explain it to you.
Amortization
Basically, this means the process of paying off a loan through equal, periodic payment amounts.
Appraisal
An estimated value of a piece of real estate. This estimate is determined by a professional called a "real estate appraiser".
The last meeting between the buyer, seller and lender. At this meeting, the buyer and seller legally exchange the funds for the property (sometimes called the settlement). The buyer also pays the closing costs at this point. These will include the origination fee,
mortgage points, the appraisal fee, title search of the property and insurance, property survey and taxes, the fee to record the property deed and any charges for the buyer's credit report. All total, the cost for the closing will usually amount to about 3 to 6 percent of the total mortgage amount. Tip: Some of these fees are negotiable. Check with your mortgage lender about this!
A report that documents the borrower's credit history as well as their current credit standing.
The ratio of the borrower's monthly payment obligations divided by the borowwer's gross monthly income
Money paid by the borowwer to make up the difference between the contract price and the amount which the lender will loan. In most cases, the down payment amount depends on how much the property costs.
Money exchanged between the potential buyer and the seller. This shows the seller that they buyer is serious about purchasing the property.
(See Escrow)
An account held by the lender into which the home buyer pays money for tax or insurance payments. Also earnest deposits held pending loan
closing.
You will not be allowed to close on your mortgage if you don't have insurance for your home. A few of the things covered by
Homeowner insurance are fire damage, theft and hurricane or tornado damage.
The percentage that you are charged to borrow a certain amount of money.
The fee charged by a lender at
closing to prepare loan documents, make credit checks, inspect and sometimes
appraise a property; usually computed as a percentage of the face value of the loan.
Prepaid interest assessed at
closing by the lender. Each point is equal to 1 percent of the loan amount (e.g., one point on a $100,000 mortgage would cost $1,000). See our
Mortgage Points Explained page for more detail.
The remaining amount of debt on the lown. This amount does not include the remaining interest.
Private Mortgage Insurance (PMI) |
Some borrowers are unable to finance a 20 percent
down payment and in these instances, lenders will accept an amount less than 20 percent, possibly as little as 5 percent. However, when a borrower takes advantage of this provision, lenders will require that the borrow carry a private mortgage insurance policy. This policy (PMI for short) usually requires an initial premium payment and, in most cases it will require an additional monthly fee. Once the borrower has paid about 78% of the original mortgage amount, the lender should stop charging the PMI premiums. However, for best results, the borrower will need to monitor the loan and notify the lender when it approaches the 78% target.
Taxes are the amount of money that each property owner must pay. Typically, the amount is based on the perceived value of your property. These taxes are used by state or governments to build and maintain roads, schools, and other projects to benefit the public.
Amount of money that the borrower pays to the lender for recording the property sale with local authorities. Once this step is completed, the sale is part of public record.
This is a federal law. It requires the lender fully disclose to the home buyer the amount of the Annual Percentage Rate. It is to be disclosed shortly after the borrower applies for the loan. Also known as Regulation Z.
These are the
basic mortgage terms you should be familiar with before your purchase a home. Understanding these terms will allow you to avoid many of the pitfalls and get the best deal possible for your mortgage. As a rule, you should try to secure a fixed interest rate for your mortgage. A fixed rate mortgage will allow you to focus on making payments towards the
principal, so you can pay off the loan faster.
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