They say that the decisions people make in life could either make or break them. This is definitely the case with getting a mortgage, which could either make a person become a proud and satisfied homeowner or leave the same person in financial distress, which in turn could affect his or her way of life, and not in a good way by any means.
So if you’re planning to get a mortgage, you’ll find out real fast that the people you’re going to deal with will speak to you in terms that you’ll vaguely understand. Don’t worry. This happens and, in no way, gauges on how smart you are.
Focusing on the most used terms or terminology that you can find in any mortgage glossary, this piece aims to help you in getting to know some those terms, with the objective to assist you in weighing your options wisely and to help you make sound decisions in relation to being a lender in a mortgage agreement.
What Is A Mortgage?
A mortgage (also known as a deed of trust or security deed) is a legal document granting a lender a lien on real estate to ensure the borrower pays back a loan. The duration of mortgage loans commonly lasts from ten to thirty years.
How To Get A Mortgage?
If you’re setting your sites on getting a mortgage to buy a house or property, you’ll need to go to a bank or a financial institution and apply for one. The lender will approve the loan if you meet their requirements, which includes a high credit score, suitable income, and the ability to repay the loan. The lender has the right to foreclose the property if you default in the payment of the amount you borrowed and its interest.
Common Mortgage terminology- Full Mortgage Glossary
Understanding and getting to know the most common mortgage terms in this glossary will give you a clearer picture of what areas to focus on, if and when you decide to get a mortgage:
Term – Is the number of years it will take to fully repay the loan before you take full ownership of your house. Term determines the amount to be paid, the schedule of payment, and the total interest of the loan. Commonly, mortgage terms are 15 years and 30 years, but there are lenders that offer 8 years as a term.
Amortization – Is the term to describe how the payments are scheduled over the duration of the term, which is applied to both the payment of the principal and the interest owed. The early payments mostly cover the interest, but this changes over time because, as the principal gets smaller, the interest charged gets smaller too.
Preapproval – This is the conditional agreement made by the lender before an amount of money is loaned to the borrower, embodied in a document. It is considered the initial step to get a mortgage, wherein the borrower must give his or her credit score, income, and assets. This information serves as the basis used by the lender to decide whether or not the borrower is qualified and the amount.
Appraised value or appraisal – This is an informed estimate or a rough estimate of how much is the value of a property. A professional appraiser usually makes the appraisal to assure the lender that the loan will not exceed the value of the property being given as collateral.
Principal – This is the amount of money you borrowed. Let’s say you buy a house with a $200,000 loan from the bank. Then your principal balance is $200,000. The amount of the principal balance decreases as you gradually repay it over time. Each mortgage payment is applied to both the principal and interest, and doing so increases the borrower’s equity in the house that was a mortgage.
Annual Percentage Rate (APR) – The Annual Percentage Rate or APR is your loan’s annual cost as a borrower expressed as a percentage. The APR includes charges or fees reflecting the total cost of the loan that needs to be disclosed by the Federal Truth in Lending Act. Knowing the difference between the interest rate and the annual percentage rate is very important for the borrower. The APR is a reflection of a borrower’s credit true cost, wherein the interest, costs, and fees incurred in relation to the loan are included. This is quite helpful in selecting a lender because different lenders charge different rates and costs. Borrowers should always take notice of the APR, which is required by law to be included in all advertisements.
Assets – Anything that you own and has value and can be converted to cash is an asset. Bank accounts, stocks, and bonds are a few examples of what could be considered as assets. Lenders will verify these assets if you are getting a mortgage.
Fixed-rate Mortgage – This is a mortgage with a fixed interest rate all throughout the term of the loan. An example would be buying a house at 4% on a 15-year fixed-rate mortgage, which simply means that you will be paying at 4% interest of the loan monthly until the loan matures after 15 years.
Adjustable-Rate Mortgage (ARM) – this type of loan is wherein the interest rate changes depending on how the market rates perform. Interest rates are lower for the initial or introductory period of the loan, which could last up to 10 years. When the period expires, the interest rate will follow market interest rates. However, there is a cap or limit on how high the interest rates can be charged within the term.
Homeowner’s Insurance – This insurance is availed to protect houses against fires, hurricanes, vandalism, theft, and other covered perils. Also known as hazard insurance, lenders sometimes require this type of protection against specified perils.
Property Taxes – Your local government taxes your property, and the amount you are going to pay for such tax depends on the value of your house and its location. Property taxes fund libraries, roads, community development, and police departments are to name a few. It is important to consider how much property tax you are going to pay when looking for a house to purchase.
Debt-to-income ratio – This is your total and fixed recurring monthly debts as divided by your total monthly gross household income. Lenders prefer an applicant with a DTI of 50% or lower because this means that the applicant has enough money to pay for the loan based on his income.
Down Payment – Commonly ranging from 5% to 20% of the sales price of the property you are going to purchase, it is the difference in the price of that property and your mortgage loan. Most mortgages require a down payment, while some loans backed by the government may even let you purchase a house without one.
Private Mortgage Insurance (PMI) – This is the insurance that protects the lender should a borrower defaults on his or her loan. A PMI is commonly required if the borrower’s down payment is less than 20%.
Title – A written proof that you own a property. This instrument provides a physical description of the property and the names of its owner or owners. Also, liens are indicated on a title if there are any.
Deed – This is a legal document that transfers ownership of a property from a seller to a buyer. This document is required to be delivered to the buyer after the term of the mortgage.
Earnest Money Deposit – Typically made after a purchase agreement is signed by the parties, which is a down payment or deposit to convey good faith. Earnest money is usually 3% to 5% of the price of the house that a prospective homeowner wants to buy. The money goes into an escrow account till a suitable financing is decided upon. But this is credited to the purchase price. Generally, the seller gets the money if no sale is finalized.
Closing costs – Are known as settlement costs, which are the costs incurred when a borrower obtains a loan and is the amount of money needed to close a mortgage deal. These may include escrow fees, title insurance, lender charges, real estate commissions, and transfer taxes. Closing costs are listed on every loan estimate and is provided by the lender. Closing costs are expected to range between 2% to 5% of the purchase price. If a borrower wants to save, this should be given attention as well.
Escrow – Funds that are deposited with a third party for safekeeping until a specific date arrives or a condition is fulfilled. Real estate transactions usually use one to handle money for buyers and sellers. Earnest money goes into escrow until a sale is completed. Lenders also set up escrow accounts, in cases of homeowner’s insurance and property taxes, where a part of the mortgage payment goes into.
Title insurance – There are two types of title insurance: a lender’s title insurance and an owner’s title insurance. Both of these types protect against any title disputes, such as contractor liens or tax. Lenders commonly require borrowers to have lender’s insurance as protection against specifically covered perils. The owner’s title insurance is also available to guard against future claims.
Closing Disclosure – This is a document required to be issued to consumers that provides important information such as interest rate, monthly payments, and other costs.
Equity – It is the difference between the appraised value or fair market value of a house or property and outstanding balances from mortgage and other liens on such property. Stated differently, this is the difference between debts you owe on your house and its market value.
Good faith estimate – This is a detailed account of specific estimated costs in relation to a loan of a house that the lender is required to give the borrower. Now called the loan estimate, is a way for consumers to get to know the total cost of a mortgage, and gives consumers the chance to compare and shop around for loans that provides the most suitable rates for their budget. Lenders are given three business days to provide applicants with a loan estimate. This includes a detailed explanation of the specified loan amount, interest rate, estimated monthly payments, estimated taxes, insurance costs, assessments, and the estimated amount of money needed to be at hand at closing.
Origination fee – A lender charges this fee for processing expenses when making a mortgage loan application. It is commonly a percentage of the amount loaned. The charges may include the cost of underwriting and funding the loan. This fee could reach as much as 1% to 6%, which could have a significant impact if the loan sought is a large amount.
Underwriter – This the individual who approves or denies a loan based on the lender’s underwriting and approval guidelines.
Underwriting – The process where the lender decides to deny or grant a loan to a borrower based on the borrower’s credit history, income, assets and liabilities, appraisal of the house that the borrower wants to buy. All of these will be assessed for risk and matched to an appropriate rate, term, and loan amount. Stated differently, underwriting is the review of a loan application wherein it is scrutinized before it is approved. It is good to take note that underwriting is included in the lender’s origination fee. In the event the underwriter denies the loan, the lender must provide a written explanation if one is requested.
Mortgage insurance – This is the type of insurance that protects the lender in case the borrower defaults. Generally, this type of protection is required for borrowers who put down less than 20% of the price of the house or property.
Points – If a borrower wants to lower the interest rates over time, points are availed by such borrower to do so. Points are obtained when you pay more upfront in exchange for a lower rate of interest. A single point is equal to 1% of the mortgage. Interest rates are lowered, but this depends on the type of loan, the mortgage market behavior, and the lender’s policies regarding interest rates.
Rate – This is expressed as a percentage and is the cost you have to repay to borrow funds. This type of rate does not include any other fees or charges that are incurred when availing a mortgage loan. Interest rates are influenced by several factors, such as a borrower’s credit score, the type of the loan, the duration of the loan, down payment made, and the price of the house or property.
Rate lock – Also known as lock-in, this is availed by some borrowers to be used as a safety net from the fluctuating interest rates, with the end goal of saving money. Provided there are no changes to a person’s mortgage application. A rate lock guarantees that the interest rate will not change from the day of the offer until the day of the close on the house or property. Rate locks usually have a duration of 30 to 60 days, but can be made to be for a longer time.
These are just some of the most common terms you have to be familiar with when you are looking for a house. It may be that being familiar with these terms or other industry terms, is not your cup of tea, but the benefits of being acquainted with them are undeniable.
Let the whole thing be a fun experience because, as you learn common mortgage terms, you will be more confident in getting a conversation with people in the mortgage world. Everything you will learn will be to your advantage and will help you with your choices or decisions.
Further, this guide aims to assist you before you apply for a mortgage loan or even after a loan has been granted to you. It will help a lot if you can take the time to research more of these terms on your own. Several websites provide an online glossary of mortgage terms free of charge. You can either add more terms to this guide or start your very own list of terms that best suits your needs.
Lastly, if you have the time to explore these online glossaries of mortgage terms, you can extend that activity by watching videos about the mortgage and other related topics. The added audio and visual aid will likely strengthen your understanding of how a mortgage works. Who knows, you might become very interested in talking and learning about mortgage, and as a result, you might find yourself teaching or explaining mortgage terminology to other people.
Now, this can be really fun and can be a reason to pursue a newly-found career path. But first and foremost, happy house hunting!