Understanding the various mortgage terms can be a daunting task for first-time home buyers. With so many different types of mortgages, interest rates, and other factors to consider, it can be hard to know what's best for you. Fortunately, you're here!

Today, we're going to delve into the commonly used terms when it comes to mortgages to help you stay in the know:

1. Adjustable Rate Mortgage

An adjustable-rate mortgage is a loan with an interest rate that can change over time. The rate is typically fixed for an initial period, usually up to 10 years, and then can adjust annually based on market conditions. During the fixed period, the borrower is charged the same interest rate, and after this period, the rate can increase or decrease depending on the market.

‍2. Annual Percentage Rate

The APR is an annualized rate that includes the cost of borrowing plus any extra fees associated with the loan. It is important to note that the APR is a more comprehensive measure than the interest rate alone, as it will reflect all applicable charges associated with the loan. This figure is generally expressed as a percentage and can be used to compare the cost of loans from different lenders.

3. Amortization

Home loan amortization is the process of breaking down a mortgage loan into smaller payments over an agreed-upon period of time. Each payment consists of both principal and interest, with the principal amount gradually decreasing over the life of the loan while the interest amount gradually decreases as well. As time passes, more of each payment is applied to the principal, allowing the loan to be paid off in full by the end of the loan term.

4. Appraisal

An appraisal is a process that helps you get an estimate of the value of your home. It is usually required by mortgage lenders before they give you a home loan. This appraisal is used to make sure that the lender isn't loaning you too much money for the value of your home. The appraisal will usually be carried out by an independent third party which may be arranged by your lender.

5. Closing Disclosure

A Closing Disclosure is a document that provides you with the final details of your loan. It includes the interest rate, the amount of money you are borrowing, and any fees you will have to pay at the closing of your loan. Your lender must give you at least three days to review the Closing Disclosure before you sign the paperwork.

6. Closing Costs

Closing costs are the expenses that you pay to your lender when you finalize your loan. These costs can include the appraisal fee, loan origination fee, and pest inspection fee. The number of closing costs you will need to pay will vary depending on your location and the type of property you are buying. Generally, closing costs are around 2-6% of the total cost of the loan.

7. Balloon Loan

A balloon loan is a type of financing that requires a large payment at the end of the term. It can be structured as an interest-only mortgage, where only the cost of interest is paid throughout the term, or it can include both interest and principal payments. The large payment at the end of the term is what gives the loan its name.

8. Discount Points

When you purchase discount points, you are essentially pre-paying part of your loan interest in exchange for a lower interest rate. Each point you buy is equal to 1% of your loan amount and will reduce the interest rate you will pay on loan. Investing more money upfront in the form of discount points can result in a lower interest rate and can save you money in the long run.

9. Down Payment

A down payment is an initial payment made towards a mortgage loan. It is usually expressed as a percentage of the total loan amount. This payment is required to secure the loan and is typically a substantial sum. For instance, if you are taking out a loan for $100,000 and you make a 20% down payment, you will need to bring $20,000 to the closing. Most types of loans require some kind of down payment.

10. Escrow

Most people with a mortgage have a special account called an escrow account where their lender keeps the money for property taxes and homeowners insurance. Instead of having to pay the taxes and insurance all in one lump sum, this account allows them to break the payments into twelve equal installments. The lender adds the escrow payments to the borrower's regular monthly mortgage payment, which already includes principal and interest.

11. Title Insurance

Title insurance is a form of protection purchased at the time of closing, which safeguards you from any potential outside claims to your home. As opposed to other types of insurance that require periodic payments, title insurance is a one-time fee that stays in effect for your entire period of ownership.

12. Earnest Money Deposit

When you make an offer on a home, an earnest money deposit is a payment you submit to the seller to demonstrate your commitment to the purchase. It usually amounts to 1 - 3% of the home's value, and if the seller accepts the offer, it goes towards the total down payment. The earnest money shows the seller that you are serious about buying the property.

13. Private Mortgage Insurance

PMI is an insurance policy that your lender will require you to carry if you put down less than 20% when you purchase a property. It guards the lender in the event that you can't pay back the loan. Once you have paid down your loan to the point that you have 20% equity in the property, you can request to have the PMI removed.

‍14. Homeowners Insurance

Homeowners insurance provides a financial safeguard for your home in the event of a covered event. By paying a monthly premium to your insurance company, you can be assured that any damage to your home caused by a fire, burglary, or windstorm will be taken care of.

15. Mortgage Term

Your mortgage term is the length of time that you have agreed to pay off your loan. This can be anywhere from 8 years to 30 years, but the most common terms are 15 and 30 years. During the time of the loan, you will make monthly payments until the loan matures and you have fully paid off the loan.

16. Seller Concessions

When making an offer on a property, you may ask the seller to cover some of your closing costs. This can include any number of fees, such as appraisal costs or title search fees. Although the seller is not obligated to accept your request, they may counteroffer with fewer concessions. Depending on the type of property, the number of fees a seller can cover may be limited.

Conclusion

And there you have it. These are just some of the many terms you will run into in the mortgage world. Knowing how complex things can be, we always recommend that you hire a real estate agent to help you out! They have the knowledge and skills to help you navigate through the home purchasing process quickly and easily, ensuring you can settle in your new home without a headache.

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