Common Mortgage Terms: 10 Words You Need to Know
Looking for and buying a new home can be overwhelming — not just because you have to take the time to compare houses and study neighborhoods, but also because you have to compare mortgage types and study home loan terms! In order to make your home-buying experience as stress-free as possible, it’s best to familiarize yourself with a few mortgage terms and go over the basics of home buying through a course like the Consumer Financial Protection Bureau’s “know before you owe” program. Get started by memorizing these 10 common mortgage terms.
- Amortize: Amortization is the process of gradually paying off debt. When deciding on a mortgage, you’ll often look at amortization schedules that compare different loan payment options. Every mortgage has a unique amortization schedule and estimated payoff date.
- APR: Annual percentage rates (APRs) include all fees associated with a loan, including its interest rate and other costs such as mortgage broker fees and points.
- Down payment: You’ll need to submit a down payment to your lender in order to secure a home loan. This initial payment typically ranges from 10 to 25 percent of the home’s total purchase price.
- Earnest money: Before you make a down payment, you’ll often be required to make an earnest money deposit to show that you’re serious about the transaction and have good faith that you will be able to secure the mortgage. The earnest money is typically held by a third party until the mortgage is secured, in which case the earnest money is then put toward paying off your other expenses.
- Equity: Your equity equals the value that you own in a property. As you make more mortgage payments and the market value of a home increases, your equity in the house increases.
- Escrow: Monthly escrow payments go toward paying annual property taxes and insurance. Escrow accounts collect these payments over time, and return any unused funds to you after property tax and insurance payments have been made.
- Fixed and adjustable rate mortgages: Fixed-rate mortgages maintain the same interest rate over time, whereas adjustable-rate mortgages have fluctuating interest rates that change based on federal interest rates.
- Interest rate: Interest rates are charges assigned to you in return for borrowing money to pay for a home. In recent years, interest rates have ranged from 9-10% in 1986 to 3-4% today.
- Points: Points are fees you pay to a lender. A single point is equal to 1% of your total loan amount. Discount points allow you to pay a portion of your interest payments in advance, and origination points (also called origination fees) represent amounts you must pay the lender in exchange for creating and obtaining the loan.
- Principal: The principal of a mortgage is the amount you borrowed to purchase a home, not including fees or interest. Every mortgage payment you make will go toward paying off your home’s interest, principal, or both.