Buying a home is one of the largest purchases you’ll make. While getting a mortgage and making your home purchase, you may find there are a lot of terms and phrases that are being used. We want to help you feel confident and understand these terms as you make decisions about your home and mortgage.
Adjustable-Rate Mortgage: This is a type of mortgage where the interest rate will fluctuate over the life of the loan. Typically, this loan will have an initial fixed rate for a set period of time before changing to an adjusting rate for the remainder of the term.
Amortization: This refers to how your loan will mature. This schedule of payments allows you to have a set payment, while the breakdown of interest and direct principal payments fluctuate within your monthly payments over time.
Annual Percentage Rate: Commonly referred to as an APR, this is the rate you’ll be charged annually to borrow the funds for your mortgage. This rate is shown as a percentage.
Appraisal: This is the assessment done on the home you would like to purchase. This is done to verify that the value of the home is worth the amount provided by your mortgage loan.
Assets: Assets are your possessions that hold monetary value. This can include cash, boats, jewelry, stocks, bonds, real estate and more. This is included on your mortgage application as your lender will evaluate your net worth and debts when considering a loan.
Closing Costs: These are the costs associated with closing on the mortgage of your home. These costs will include your down payment, title insurance, taxes, and fees.
Closing Disclosure: A closing disclosure is provided by your lender and will include details on your loan terms, monthly payments, fees, and any other costs associated with the closing on your loan.
Debt-to-Income Ratio (DTI): This ratio is utilized by lenders to determine how much they can safely provide to you with a loan. It compares your income with the total of your debts to create a percentage, with lenders typically preferring to keep the ratio of debt payments to be under 30-40% of your income.
Deed: This is the paperwork that you sign when property ownership is transferred. It is on this document that you agree that your lender can place a lien on the property, using your new property as collateral for the loan.
Down Payment: This is the payment that you’ll make when you purchase your home. While there are some exceptions, many types of mortgage loans will require a down payment. This can be anywhere from 3% up to 20% of the total loan amount depending on the mortgage.
Earnest Money: To show you are serious about purchasing a home, earnest money is put down as a good faith payment when an offer is accepted. Typically, this amount is agreed upon in the offer on a home. The earnest money will be applied to your down payment or closing costs.
Equity: Home equity is the difference between how much you still owe on your mortgage loan and the current market value of your home. This is essentially how much of the home you own, but can fluctuate with market values.
Escrow: Escrow is the legal agreement to utilize a third party to hold funds or property for the buyer and seller until you close on your new home. Escrow accounts are used to protect the earnest money deposit and to hold the funds for taxes and insurance costs on the home.
Fixed-Rate Mortgage: This is a type of mortgage where the interest rate will remain the same throughout the life of the loan.
Home Inspection: A home inspection is done to verify the safety and structure of a house before closing on your mortgage. An inspector will perform an assessment on the physical structure and mechanical components of the home. The inspector will then provide a report with details of their findings and any recommendations they have.
Homeowners Insurance: This is property insurance that covers your home in case of loss, damage, or accidents on the property. You will need to have proof of your homeowners insurance for the closing on your home.
Interest Rate: This is a percentage charged on the total amount of your loan. This is charged by your lender for borrowing the funds.
Loan Estimate: After you’ve applied for a mortgage, you’ll receive a loan estimate from your lender that will provide you with estimated information about the loan, like the interest rate, your payment options, and closing costs.
Loan to Value Ratio (LTV): This ratio compares the loan amount that you’re requesting to the appraised value of the property you want to purchase. This is typically expressed as a percentage.
Points: Mortgage points, or discount points, are a fee that you can pay your lender in exchange for a reduced interest rate. Points are relative your loan, so typically one point will cost 1% of your loan.
Preapproval: Once you submit a loan application, the lender reviews your financial information in depth and will run a credit report, then providing a specific loan amount that you have been preapproved for. Your lender can provide you with a preapproval letter to be used when submitting offers on a new property.
Prequalification: A prequalification provides you with an estimated loan amount that a lender could potentially provide. This is a preliminary process that is based on an overview of financial information you provide, rather than the in-depth process of a preapproval.
Principal: The principal of your mortgage loan is the amount of funds you are borrowing. The interest you pay to borrow that amount of funds is based on the principal.
Private Mortgage Insurance (PMI): This is insurance that covers your mortgage in case you default on payments or are unable to meet the agreed upon conditions of the loan. This may be required on your loan, especially if your down payment is less than 20 % of the home value.
Property Taxes: This is a tax that is paid on the property. Estimated property taxes are included in your monthly payment, held in an escrow account, and then paid on your behalf each year through that account.
Real Estate Agent: A real estate agent is a licensed professional who will help you as you become a buyer or seller of a property.
Refinance: When you refinance your mortgage, you replace your current mortgage loan with a new loan. Your lender will pay off the old loan with the new loan. This can be done to lower your interest rate, adjust your payments, or modify your terms.
Term: When referring to your mortgage, your term is the length of time before you will repay the loan in full. Mortgage loans are typically anywhere from 15 to 30 years.
Title: The home title is a document that shows ownership of your property. If you have a mortgage, there will be a lien on your title from the lender.
Title Insurance: Title insurance protects you from the financial loss in the case of defects in a title.
If you’re looking for help with your mortgage, our specialists at Wasatch Peaks can help! Whether you’re wanting to learn more about what a mortgage loan is or you’re ready to buy your home, it’s important to have someone you can trust, and our specialists are here for you.
