Mortgage Terms You Should Know
When looking at getting a mortgage, there are some terms that you should familiarize yourself with so you know what your mortgage lender is talking about. Below is a list of the most commonly-used “mortgage phrases” and their meanings to help you understand them better:
Adjustable Rate Mortgage (ARM) – A mortgage in which the interest rate is adjusted periodically based on an index.
Appraisal – The determination of property value based on recent sales information of similar properties.
Asset – Valuable items, encumbered or not, owned by a person, corporation, or entity.
Biweekly Mortgage – Mortgage loan payments that requires a payment twice monthly, yielding thirteen payments per year instead of twelve. This significantly reduces the time a principal is paid off.
Closing – Final arrangements to transfer title of property as well as allocate charges and credits.
Closing Costs – Closing costs are fees paid by the borrower when a property is purchased or refinanced. Costs incurred include a loan origination fee, discount points, appraisal fee, title search, title insurance, survey, taxes, deed recording fee, and credit report charges.
Credit Report – A report to a prospective lender on the credit standing of a prospective borrower. Used to help determine creditworthiness. Information regarding late payments, defaults, or bankruptcies will appear here.
Debt-to-Income Ratio (DTI) – The ratio of aggregate monthly debt to aggregate monthly income.
Down Payment – Money paid by a buyer from his own funds, as opposed to that portion of the purchase price which is financed.
Earnest Money Deposit – A deposit made by a potential home buyer to show that they are serious about purchasing the property.
Equity – The difference between the current market value of a property and the principal balance of all outstanding loans.
Fixed-Rate Mortgage – A mortgage where the interest rate does not change for the life of the loan.
Good Faith Estimate – An estimate of charges which a borrower is likely to incur in connection with a loan closing.
Gross Monthly Income – The total amount the borrower earns per month, not counting any taxes or expenses. Often used in calculations to determine whether a borrower qualifies for a particular loan.
Interest Rate – The percentage of an amount of money that’s paid for its use over a specified time period.
Lender – The bank, mortgage company, or mortgage broker offering the loan.
Loan – The principal, or amount of total borrowed money, that is repaid with interest.
Loan Officer – An intermediary between lending institutions and borrowers, loan officers solicit loans, represent creditors to borrowers, and represent borrowers to creditors.
Loan-To-Value Ratio – The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage. A LTV ratio of 90 means that a borrower is borrowing 90% of the value of the property and paying 10% as a down payment. For purchases, the value of the property is assumed to be the purchase price, for refinances the value is determined by an appraisal.
Mortgage – A legal document that pledges property to a creditor for the repayment of the loan, and is the term used to describe the loan itself.
Mortgage Broker – A mortgage company that originates loans, joining the borrower and lender for a real estate loan, earning a placement fee.
Origination Fee – The fee imposed by a lender to cover certain processing expenses in connection with making a loan. Usually a percentage of the amount loaned.
Pre-Approval – A term used to mean that a borrower has completed a loan application and provided debt, income, and savings information that has been reviewed and pre-approved by an underwriter.
Principal – The amount of debt, not counting interest, left on a loan.
Purchase Agreement – A written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold.
Refinancing – The process of paying off one loan with the proceeds from a new loan, using the same property as security.
You’ll probably hear several of these phrases from your mortgage lender when getting a loan. Whenever you don’t understand something, be sure to ask him or her to explain it in layman’s terms to be sure you understand the whole mortgage process.