Understanding Common Mortgage Terms

If you’re applying for a mortgage for the first time, you’ll likely come across some things you don’t understand. Mortgages are legal documents and their wording can be confusing at best. Here are several mortgage terms you should familiarize yourself with before heading in to see a lender. 

Common Mortgage Terms

Adjustable-Rate Mortgage (ARM) – This type of mortgage has a set low-interest rate for the first few years that changes after a specific period to an interest rate that fluctuates with the market. 

Amortization – the accounting method that determines the monthly payment amount on a loan. 

Balloon Payment – A large one-time payment due at the end of a loan.

Collateral – Property used to secure a loan. 

Contingency – This is a clause built into an offer that allows either the buyer or the seller to back out if certain requirements aren’t met. 

Debt-t0-Income Ratio – a calculation used by lenders to determine a buyer’s eligibility for a loan. It is factored by dividing a borrower’s monthly expenses by their income. 

Earnest Money – money paid by the buyer to the seller once an agreement has been reached via a purchase agreement. If the buyer backs out without buying the home, the seller receives the money. Once the sale has gone through, the earnest money is usually applied to the buyer’s down payment. 

Escrow – a third-party account that holds money for two parties involved in a transaction. 

Fixed-Rate Mortgage – a mortgage with a fixed interest rate. The payments remain the same throughout the life of the loan. 

Interest-Only Mortgage – a type of mortgage that allows the borrower to pay only the interest each month. The principle remains unchanged during this time. 

Origination Fee – This fee is charged by lenders to pay for the cost of processing a loan

PITI – This acronym stands for Principal, Interest, Taxes, and Insurance. These elements often make up a monthly mortgage payment. 

Rate Lock – This is a guarantee given by the lender to the borrower that locks the interest rate at a certain level for a specific period of time. 

Settlement Costs – another term for closing costs

Title Insurance – a cost to the borrower often required by the lender to protect them from loss in the event that the title is incorrect. This cost is included in the closing costs. 

Underwriting – the process in which the lender determines a borrower’s ability to repay the loan. In underwriting, the borrower’s credit history is reviewed, the property value is looked at, and a determination is made as to the borrower’s ability to pay back the loan. 

VA Loan – a type of loan offered by the U.S. Department of Veteran Affairs to military personnel. 

Warranty Deed – a legal document that guarantees the seller has the right to sell the property. 

Zero-Down Mortgage – a loan that requires no down payment and finances 100 percent of the purchase price. 

The home buying process can be confusing, especially when terms you don’t understand are thrown around. Make sure you know the terms listed above before heading to a lender for a mortgage.