Mortgage Loan Terms Home Buyers Should Know

As you proceed through the home loan process you will encounter a variety of terms, many of which may be unfamiliar and confusing.  To better navigate that process and make an informed, confident mortgage selection, take time to explore financing terminology.  Some of the more common terms are briefly explained below to help you get started.
Very simply defined, amortize means to pay off a debt or loan, such as a mortgage, by making regular payments.  Part of each payment is applied toward the amount borrowed and another part goes toward the interest due.

Adjustable Rate Mortgage (ARM)
One of the two primary types of mortgage.  With an ARM, the interest rate fluctuates over the life of the loan.  Changes in rate occur at preset intervals and are linked to an economic index, such as United States Treasury securities.  When the index goes up, interest rate and monthly mortgage payments can follow suit.  Likewise, when the index goes down, rate and payments may also decrease.
Closing Costs
These are fees associated with obtaining a home loan.  Some are paid at the time that the deal closes.  Others are settled as the charge is incurred.  Closing costs include expenses for the appraisal, credit report, hazard insurance, private mortgage insurance, attorney's fees, and lender charges.

Down Payment
This is the lump sum cash payment that a buyer makes toward the purchase price.  It is paid up front, and the remainder of the purchase price is financed.   Down payments typically range anywhere from five to twenty-five percent; however loan programs that allow zero down payment are not uncommon today.
Fixed-Rate Mortgage
A mortgage where the interest rate remains constant over the life of the loan.  This mortgage type offers more stability and carries less risk than ARMs.

Interest is the amount a borrower pays to compensate the lender for the use of the money to buy the home.  It is calculated as a percentage of the total amount borrowed.

Often used to refer to the loan to finance real estate, a mortgage is technically a borrower's pledge of the property to the lender as security for paying the debt.   This pledge is in the form of a written instrument which becomes void upon payment or performance of the terms.

This acronym references the monthly payments borrowers make to their lenders.  It includes principal (the amount borrowed) and interest on the loan, real estate taxes, and homeowners insurance.  If private mortgage insurance is required, that will be included in the amount as well.

Points are fees paid up front to the lender in exchange for a lower interest rate on a mortgage loan.  Paying points reduces the rate on a mortgage because the lender gets a prepaid portion of the interest rather than collecting it in payments across the term of the loan.  One point is equal to one percent of the loan amount.

Private Mortgage Insurance
Called PMI for short, private mortgage insurance is a policy that protects the lender against financial loss if a borrower defaults.  Lenders want either a substantial down payment, traditionally 20 percent, or insurance that will pay them the principal amount if they foreclose.  Typically, if the down payment falls short of 20 percent of the home's value on a conventional loan -- one not backed by the federal government -- the borrower will most likely have to pay for private mortgage insurance.

Title and Title Insurance
Holding title means that a buyer has evidence of right to ownership of the property.  Lenders usually require clear title -- assurance that there are no liens or legal questions with regard to ownership.  Problems with property titles are usually uncovered during a title search, which is a close examination of all public records that involve title to a specific property.   As an added safeguard, buyers and lenders purchase title insurance to protect themselves from losses resulting from problems with the title that are not found during the title search but that are discovered after closing.

Information is for educational and informational purposes only and is not be interpreted as financial or legal advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.