Common mortgage terms
When dealing with the lending world, it can sometimes feel like everyone is speaking a foreign language. Learning the following key mortgage terms can help the process go more smoothly.
• Appraisal: A written analysis of the estimated value of a property, as prepared by a qualified appraiser. The lender uses this in determining your qualification for a loan.
• Closing: The meeting where the lender, homebuyer and seller meet to complete the sale and mortgage process. After closing, the home officially belongs to the buyer.
• Closing costs: This mortgage term refers to the money paid at closing to the lender. 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. The closing costs are usually about 2 percent to 6 percent of the mortgage amount.
• Credit report: A report of your credit history that a lender uses to determine your creditworthiness. It shows your history of borrowing and repaying money.
• Down payment: The amount of cash a homebuyer pays to make up the difference between the purchase price (plus closing costs and fees) and the mortgage amount. Usually, 20 percent of the purchase price is the required down payment to avoid having to pay for private mortgage insurance.
• Equity: The difference between the fair market value of your home and the current amount left on your mortgage. It is also referred to as the owner’s interest.
• Interest rate: The annual interest on a loan, based on a percentage of 100. The lower your interest rate, the lower your monthly payment.
• Lock-in: A guarantee from a lender that you will be granted a certain interest rate for a specific time period, such as thirty days prior to closing.
• Mortgage refinancing: When you pay off one mortgage with the proceeds from another, you are refinancing. You may do this to get 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.
• 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: Getting pre-approved for a mortgage requires that you complete a mortgage application and supply a lender with all the necessary documentation to check your financial background and credit rating. You will then be told the exact mortgage amount for which you are approved.
• Pre-qualification: Occurs when a lender estimates what size loan, usually a mortgage, you can afford. A prequalification 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 percent down on a home, lenders often require you to take out private mortgage insurance (PMI). It is typically added to your monthly mortgage payment and protects the lender in the event that you default on the loan.
• Term: The time period for your loan.
• Title: The document that shows ownership of the property.