Mortgage Terms to Know

Loan Fundamentals

If you choose to rent a place, you must consider a few fundamental items. The following is a list of some pros and cons of renting a home.

• Amortization: Amortization refers to how loan payments are structured over time. Early payments include more interest; later payments focus more on principal.
• Interest: Interest is the cost of borrowing money from a lender. It's the added amount you pay over time for using the loan—on top of the principal.
• Principal: The principal ia the actual amount of money you borrow for your home loan. Not a person. Not a title. Just the loan balance itself before interest.

Rates & Terms

• Fixed Rate: A fixed rate mortgage means your interest rate stays the same for the life of the loan. That stability helps keep your monthly payment predictable, even if market rates change.
• Interest Rate:The interest rate is the cost of borrowing the loan.
• Annual Percentage Rate (APR): The APR reflects the total yearly cost of the loan, including some fees. APR gives a fuller picture when comparing loan options.
• Loan Term: The loan term is the length of time you have to repay your mortgage, such as 15 or 30 years. Longer terms usually mean lower monthly payments—but more interest paid over time.
• Rate Lock: A rate lock allows you to secure an interest rate for a set period of time. This helps protect you from market changes before closing.

Buyer Qualification

• Credit Score: Your credit score is a number that reflects how you’ve managed credit in the past. Lenders use it to help evaluate loan eligibility, interest rates, and mortgage options.
• Debit-to-Income Ratio (DTI): Your debt-to-income ratio compares monthly debt payments to your income. Lenders use it to help assess affordability and financial stability.
• Pre-Qualification: Pre-qualification is an early estimate from a lender of how much you may be able to borrow. It’s based on basic financial information and helps you shop for a home with more confidence.

Upfront & Closing Costs

• Closing Costs: Closing costs are one-time fees paid to finalize your mortgage and complete the home purchase. They usually include items like appraisal fees, title services, and lender costs—no recurring charges.
• Down Payment: A down payment is the money you contribute upfront when buying a home. It shows financial commitment and can impact your loan options and monthly payment.

Ongoing Accounts & Insurance

• Escrow: An escrow account is managed by your mortgage lender to hold funds for property taxes and homeowners insurance. Think of it as an organized middle step that helps keep important payments on track.
• Homeowners Insurance: Homeowners insurance protects your home and belongings from certain losses. Most lenders require it before closing and throughout the life of the loan.
• Private Mortgage Insurance (PMI): PMI is additional insurance often required when a down payment is less than 20%. It protects the lender, and in most cases, it can be removed once enough equity is built.

Property Value & Ownership

• Appraisal: An appraisal is a professional estimate of a home’s value. Lenders use it to help ensure the loan amount aligns with the property’s worth.
• Equity: Equity is the difference between your home’s value and what you owe on your loan. As you pay down your loan and as your home’s value increases, your equity grows.