Understanding mortgage terminology can feel overwhelming. Lenders often use industry jargon that may sound like a foreign language. Whether you’re refinancing or purchasing a home, knowing these terms can help you navigate the process with confidence.
Key Mortgage Terms You Should Know
Adjustable-Rate Mortgage (ARM)
An ARM is a home loan with an interest rate that changes periodically. As a result, monthly payments may increase or decrease over time.
Annual Percentage Rate (APR)
APR represents the total yearly cost of borrowing money, including interest and fees. Expressed as a percentage, it helps borrowers compare loan offers more accurately.
Amortization
This term refers to the process of spreading loan payments over time. Each payment gradually reduces the principal while covering interest.
Cash-Out Refinance
A refinancing option that allows homeowners to borrow against their home’s equity. The new loan replaces the original mortgage while providing additional funds, often used for debt consolidation or home improvements.
Closing Costs
These are fees and expenses due at the closing of a mortgage, covering services like appraisals, title insurance, and loan processing.
Credit Report & Credit Score
A credit report details a borrower’s financial history, including debts and payment records. The credit score, a numerical rating, indicates a person’s ability to repay a loan.
Debt Consolidation
This process combines multiple debts into a single loan, simplifying repayment with one interest rate and monthly payment.
Debt-to-Income Ratio (DTI)
DTI measures a borrower’s ability to manage monthly payments. It’s calculated by dividing total monthly debt by gross monthly income and is expressed as a percentage.
Down Payment
An upfront payment made when purchasing a home. The amount impacts loan eligibility and interest rates.
Earnest Money
A deposit made to show a serious intent to purchase a home. It’s typically applied toward closing costs or the down payment.
Equity
Equity is the portion of a home’s value that belongs to the owner, calculated by subtracting the mortgage balance from the property’s market value.
Escrow
An account that holds funds for property taxes and homeowners insurance, ensuring these expenses are covered within the monthly mortgage payment.
Fannie Mae & Freddie Mac
These government-sponsored enterprises (GSEs) provide stability in the mortgage market by buying and guaranteeing loans, making homeownership more accessible.
FHA Loan
A mortgage backed by the Federal Housing Administration, designed to help low-income borrowers with smaller down payments and flexible credit requirements.
Fixed-Rate Mortgage
A home loan with a consistent interest rate for the entire term, providing predictable monthly payments.
Interest Rate
The percentage charged by a lender for borrowing money. It directly impacts monthly mortgage payments.
Loan-to-Value Ratio (LTV)
LTV compares the loan amount to the home’s appraised value. A lower LTV often results in better loan terms and lower interest rates.
Mortgage
A legal agreement where a lender provides funds to purchase a home in exchange for the property serving as collateral. The borrower repays the loan over time.
Mortgage Broker
A professional who connects borrowers with lenders and helps secure mortgage loans based on eligibility.
Mortgage Insurance (MI)
A policy that protects lenders in case of borrower default. Required for loans with low down payments, such as FHA loans.
Pre-Approval
A lender-issued document stating the maximum loan amount a borrower qualifies for, based on credit history, income, and debt.
Principal
The remaining balance of a mortgage loan, excluding interest.
Rate Lock
An agreement between a borrower and lender that secures an interest rate for a set period, protecting against market fluctuations.
Rate/Term Refinance
A refinancing option that adjusts a mortgage’s interest rate or term without providing additional cash.
Refinance
The process of replacing an existing mortgage with a new loan, often to secure a lower interest rate, adjust the term, or access home equity.
Second Mortgage
An additional loan taken out on a home that already has a primary mortgage.
Underwriting
A lender’s evaluation of a borrower’s financial risk before approving a loan.
USDA Loan
A zero-down mortgage backed by the U.S. Department of Agriculture, available for eligible rural homebuyers.
VA Loan
A mortgage program for veterans and active military members, backed by the U.S. Department of Veterans Affairs. VA loans often require no down payment.
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