Mortgage Vocabulary: Terms You Need to Know[yoast-breadcrumb]
Mortgage Vocabulary: Terms You Need to Know
Buying a home is an exciting time, but it can also be overwhelming with all the mortgage terms and vocabulary involved. As your friendly neighborhood financial experts here at Delancey Street, we want to help explain some key mortgage words and phrases so you can navigate the homebuying process with confidence. This guide covers everything from common acronyms like PMI to lesser-known terms like amortization.
Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage means your interest rate can go up or down during the life of your loan. With an ARM, your rate is fixed for an initial period, usually 5, 7 or 10 years, then adjusts annually based on market conditions. Your monthly payment will change accordingly. ARMs allow for lower initial rates but less long-term stability.
Amortization refers to the process of paying off your mortgage loan through a series of payments over a set period of time. Each payment goes towards both principal (the amount you originally borrowed) and interest. In the beginning, more goes to interest but by the end, more goes to principal.
Annual Percentage Rate (APR)
The APR represents the total cost of your mortgage loan, including the interest rate plus any fees and closing costs. It’s expressed as a yearly rate so you can easily compare loans. The lower the APR, the less expensive the loan.
An appraisal is an estimate of your home’s market value, performed by a licensed professional. Lenders require an appraisal to ensure the home is worth at least the amount of the mortgage loan. If the appraisal comes in low, you may need to put down a larger down payment.
Lenders want to see you have adequate assets or cash reserves to qualify for a mortgage. Assets might include checking/savings accounts, retirement accounts, investments, etc. Reserves help ensure you can still make payments if you lose your job or have an emergency.
Some mortgages require a large final “balloon” payment at the end of the loan term. Since it can be difficult to make such a big payment all at once, balloon mortgages are less common than fully-amortizing loans.
Capitalization refers to adding unpaid interest charges to your mortgage principal balance. This increases the size of your loan and total interest paid over the long run. Some loan modifications involve capitalization.
With a cash-out refinance, you take out a new mortgage for more than what you currently owe and get the difference in cash. This allows you to tap home equity for expenses like home improvements, but also increases your loan amount.
Closing costs include fees charged by the lender to process and finalize your mortgage. Common costs include origination fees, appraisal/credit report fees, title fees, recording fees and more. Closing costs range from 2-5% of the loan amount.
Your credit scores play a key role in mortgage qualification. Most lenders require a minimum score in the 620-640 range. The higher your scores, the better your chances of getting approved and securing lower interest rates.
Debt-to-Income Ratio (DTI)
Lenders calculate your DTI by adding up your monthly debt payments like car loans or credit cards and dividing that by your gross monthly income. Most want to see your DTI below 43%. A lower ratio signifies you can more comfortably afford the mortgage payment.
Deed of Trust
A deed of trust is a document you sign at closing granting the lender a lien on your home. This gives them the legal right to foreclose if you fail to repay the mortgage. It protects the lender in case of default.
The down payment is the amount you pay upfront when purchasing a home, typically 10-20% of the purchase price. A larger down payment reduces the mortgage amount you need to borrow and shows lenders you’re financially committed.
Part of your monthly payment goes into an escrow account to cover property taxes and homeowners insurance. This ensures these costs are paid on time. Any leftover money remains in your account and goes towards future taxes/insurance.
With a fixed-rate mortgage, your interest rate stays the same for the entire loan term. Your payment doesn’t change, providing stability. However, you can’t take advantage of lower rates without refinancing.
Foreclosure is the legal process where a lender takes possession of your home for failure to make mortgage payments. It usually involves auctioning off the property to recoup their losses. This severely damages your credit.
The interest rate is the cost of borrowing money for your mortgage, typically ranging from 3-7% currently. Lower rates save you money over the loan’s lifespan. Your rate depends on market conditions, loan type, down payment, and credit.
If you miss a mortgage payment, the lender may charge a late fee, often around 5% of your monthly payment. On a $2,000 mortgage payment, that’s $100! Stay on top of your due dates and grace periods to avoid penalties.
Within 3 days of applying, the lender provides a Loan Estimate detailing important terms like the interest rate, monthly payment, closing costs, and other key details. Compare this to the final Closing Disclosure.
Loan-to-Value Ratio (LTV)
The LTV ratio compares how much you’re borrowing to the appraised value of the home. A $200k loan on a $250k home has an 80% LTV. High LTVs signify less equity and may require private mortgage insurance.
Mortgage insurance protects the lender if you default. It’s typically required if your down payment is less than 20%. Options include government-backed MI like FHA or private MI through companies like MGIC. The premium gets added to your monthly payment.
This upfront fee covers processing your mortgage application and ranges from 1-2% of the loan amount. Ask if the lender will waive or reduce this fee. Shop around for the best combination of rates/fees.
Points are an upfront fee you can pay to reduce your interest rate. One point equals 1% of the loan amount. Paying more points upfront saves more in interest over the long run but increases your closing costs.
Pre-Approval vs Pre-Qualification
Pre-approval means a lender has verified your income, credit, and eligibility and is ready to approve a mortgage up to a certain amount. Pre-qualification is more informal and based on the info you provide. A pre-approval holds more weight.
The loan principal is the amount of money you originally borrow from the lender. Your monthly payments chip away at the principal until it’s fully paid off. In the beginning, most of your payment goes to interest costs.
Private Mortgage Insurance (PMI)
PMI is extra insurance required if your down payment is less than 20%. You pay a monthly premium until you build 20% equity in the home. PMI protects the lender but adds to your costs.
These fees cover officially recording your deed and mortgage documents with the county clerk’s office. This enters them into the public record and shows your home ownership. Recording fees are typically $50-100.
Refinancing a mortgage means taking out a new loan to pay off your existing one. You get a new term, rate, and payment. Refinancing can help lower your rate or monthly costs but involves fees to do so.
A second mortgage is an additional loan that uses your home as collateral on top of your primary mortgage. It provides access to home equity but also increases your total borrowing costs.
The mortgage term is the length of time you have to repay the loan, typically 15 or 30 years. Shorter terms mean higher monthly payments but less interest paid over the life of the loan.
A title search examines public records to ensure the property title is clear and you can legally take ownership. It identifies liens, claims, or other issues that could affect your rights as a homeowner.
Truth-in-Lending Disclosure (TIL)
Within 3 days of applying, the lender must provide this form with APR details, finance charge, amount financed, total payments, and other key facts. Compare this with your final Closing Disclosure.We hope this glossary gives you a helpful overview of key mortgage vocabulary and terms you’ll likely encounter during the homebuying process. Don’t hesitate to reach out to our lending experts here at Delancey Street if you need any clarification or have additional questions along the way. We’re here to help explain mortgage concepts in simple terms so you can make informed decisions.