It’s easy to get lost in the jargon of the lending world. If you would like to gain a better understanding of the information regarding your mortgage loan process, please review the list of key mortgage terms below.
Annual Percentage Rate (APR): The annual rate charged for the mortgage loan, sometimes referred to as the “true cost of a loan”. It includes both your interest rate and any additional cost or prepaid finance charges. APR is often used as a universal measurement that can assist you in comparing the cost of mortgage loans offered by different mortgage lenders.
Appraisal: A written analysis of the estimated home market value of a property that is prepared by a qualified appraiser who has compiled maps, photographs, and sketches of the property inside and out. The lender will use this analysis in determining your qualification for a loan.
Closing: The meeting where the lender, homebuyer, and seller meet to complete the sale and mortgage process by transferring ownership. After closing, the home officially belongs to the buyer.
Closing costs: Closing costs are fees paid at closing. It includes a loan origination fee, points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge, and other costs assessed at settlement. Typically, buyers pay about two to five percent of the mortgage amount.
Credit report: A detailed report of your credit history that a lender uses to determine your creditworthiness. It shows your financial history with specific focus on your ability to repay borrowed money.
Down payment: The initial amount a homebuyer pays to make up the difference between the purchase price and the mortgage amount. It also serves as a “good faith deposit” to show commitment toward completing the real estate transaction. A down payment of at least 20% of the purchase price usually ensures that you avoid paying for private mortgage insurance.
Equity: The difference between the fair market value of your home and the current mortgage amount you owe to the lender. It is also referred to as the owner’s interest.
Escrow: An escrow account is a separate account that holds funds that are beyond your mortgage payment for the purpose of paying for mortgage insurance and property taxes.
Interest rate: A rate which is charged for the use of money from a lender and is calculated by dividing the amount of interest by the amount of principal. It is the annual interest on a loan, based on a percentage of 100. The lower your interest rate is, the lower your monthly payment will be.
Lock-in: Locking your rate means the lender agrees to provide you with a particular interest rate. This lock protects you from rate fluctuations, meaning your rate won’t go up or down regardless of market conditions that may change before you close on your home.
Mortgage: The loan in which real estate is used as collateral. It is the legal agreement, by which a bank or other creditor lends money with interest attached, that a borrower is obligated to pay back with a predetermined monthly amount.
Mortgage refinancing: When you obtain a new mortgage to replace the original. You pay off one mortgage with the proceeds from another in order to receive a better interest rate, change your mortgage product, change the terms of your mortgage, get money to renovate your home, or to pay off debt.
Origination fee: The fee charged by a lender for processing a loan.
PITI: An acronym that stands for principal, interest, taxes, and insurance. These four items typically make up a borrower’s entire mortgage payment.
Points: An amount that can be paid to a lender to lower the interest rate on your loan at closing. Each point is equal to 1 percent of the loan amount (e.g. two points on a $200,000 mortgage would cost $4,000).
Pre-approval: When a lender has the borrower complete a mortgage application and supply all the necessary documentation to check the borrower’s financial background and credit rating. The borrower will then be told the exact mortgage amount for which they are approved based on what the lender has collected and verified.
Pre-qualification: When a lender estimates what size mortgage loan you may be able to afford with basic material such as income, employment, credit, and bank account information. A pre-qualification estimate is non-binding.
Principal: The amount of debt, not counting interest, left on a loan.
Private Mortgage Insurance (PMI): If you put less than 20% down on a home, lenders often require you to take out Private Mortgage Insurance. It is typically added to your monthly mortgage payment and protects the lender in the event that you default on the loan.
Term: The length of time in which you will make payments toward a mortgage.
Title: The document that shows evidence of ownership of a property.