Common Mortgage Terms and Expressions You Should Know
We all want to live the American Dream, and having a nice, cozy place to live in is vital for that dream to come true. Unfortunately, there’s only a handful of people that can afford to buy a home with cash, and the majority of buyers seek help from financial institutions.
That help usually comes in the form of a mortgage, and that will be our main focus through this article. Did you know that 63% of homeowners in the US have mortgages?
Glossary of Mortgage Terms
Knowing some standard mortgage terms can help you better understand your obligations and set your expectations.
An adjustable-rate mortgage (ARM) is one of the key mortgage terms everyone should know. It’s a type of mortgage where the interest rate fluctuates depending on the market rates, which is why it is also known as the floating or variable-rate mortgage.
With this type of mortgage, the initial interest rate may be lower. After the introductory period expires, the interest rate will change periodically, following market trends. This type of loan is a good choice for those who can afford potential increases in their interest rate and plan to keep the loan for a limited period.
However, even an adjustable-rate mortgage should have a limit on how much the interest can fluctuate.
The following phrase in our glossary of mortgage terms is amortization, the process of how payments unfold over time. A percentage of every mortgage payment goes toward your loan principal, while the rest goes toward the interest.
In the beginning, most of the payment goes towards the interest, while by the end of the loan, practically all the money goes towards the principal. Amortization is the reduction in the amount of money you owe on the principal.
Annual Percentage Rate
An annual percentage rate (APR) consists of two parts: Interest rate and lender fees. Lender fees are any additional charges you might encounter, such as mortgage broker fees or discount points.
The APR is one of the important mortgage terms, as it is a much more realistic representation of what you’ll have to pay, unlike the interest by itself. The APR will help you compare different mortgage offers and find the most affordable one.
An appraisal is a valuation of a specific property that estimates how much your home is worth. The appraisal is a vital part of any home loan procedure, as most renowned mortgage providers require you to get one before signing for a loan. Appraisals are typically used for taxation or insurance purposes.
A balloon mortgage or a balloon loan is a type of financing that requires a lump sum to be paid off at some point of the mortgage term, usually at its end. This is one of the common mortgage terms, so always make sure to understand your obligations before signing for a loan.
If you are interested in getting a balloon loan, be advised that they have some short-term advantages but can be risky in the long run.
A blanket mortgage covers two or more pieces of real estate, and those properties serve as collateral on the mortgage. What’s most interesting with blanket mortgages is that, even though the real estate is held together as collateral, you can still sell individual properties.
To have all the relevant mortgage terms explained, we also need to mention closing costs as one of the crucial parts of any loan. These costs include any upfront fees associated with your mortgage, such as appraisal fees, loan origination fees, credit report fees, attorney fees, pest inspection, and others.
Closing costs usually range from 3% to 6% of the mortgage amount and are generally paid by homebuyers.
A conventional loan isn’t backed up by a government agency. These loans are available through private lenders, such as mortgage companies, banks, and credit unions, and are common terms in mortgage lending.
Although the federal government doesn’t guarantee them, conventional loans can be insured by two government-sponsored entities: The Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae).
A person’s debt-to-income ratio or DTI is the percentage that shows how much of their total monthly income goes toward debt payments. It includes the house payment, credit cards, and all the other loans you might have, and is calculated like this:
(Total monthly debt) / (Gross monthly income) x 100 = DTI
Next on our “Mortgage terms to know” list is delinquency, something every homeowner wants to avoid. In short, delinquency is the failure to make timely payments, and those who are delinquent are past due on their financial obligations.
Delinquencies are extremely harmful, as they negatively affect your credit rating and, in the worst case, lead to foreclosure.
You have probably already heard the term down payment, but what exactly is it? A down payment is the percentage of the purchase price a buyer pays upfront, and it is one of the mortgage terms every potential homebuyer should be familiar with.
You can consider it the first payment for your mortgage loan. Lenders usually have different requirements when it comes to down payments, but generally speaking, if you have a larger down payment, your interest rate will be lower.
And if you put down 20% on your conventional loan, you won’t have to pay for private mortgage insurance.
Earnest money is a check deposit a homebuyer should write to the seller when they want to make an offer on a home, which is why it is an essential term in our mortgage glossary. This deposit varies with different markets, but is usually equal to 1-3% of the property value.
Once the sale closes, the earnest money deposit goes toward the down payment at closing.
An escrow account, also known as an impound account, stores a portion of a borrower’s monthly mortgage payment to cover property taxes and the homeowner’s insurance premium.
The most significant advantage of an escrow account is that it gives you the option to split insurance and taxes and pay them in smaller installments instead of having to pay them all at once.
An FHA loan is one of the standard mortgage terms we have all heard; here’s what it actually stands for: FHA is an abbreviation of the Federal Housing Administration, a government agency that regulates home financing in the US.
Loans issued and backed up by this agency are called FHA loans. This means that, if a foreclosure happens, the FHA will intervene to cover a part of the lender's financial losses or even all of them.
To qualify for an FHA loan, a borrower needs to meet specific requirements. They need to have a credit score of at least 500 or 580, depending on the size of your down payment. Said down payment can be either 10% or 3.5%, respectively.
A fixed-rate mortgage is another standard member of mortgage terminology. It is a mortgage that has fixed interest rates throughout the life of the loan. Many homeowners prefer this type of mortgage for its predictability and stability.
Even if the selling market rates change, their interest rate stays the same, making budgeting a lot easier.
The interest rate is the most basic term here, and we mentioned it a few times in this article. Here’s what it stands for: The interest rate is the number that represents the percentage of your principal you are required to pay to the lender for borrowing their money.
It is determined by various factors, such as your credit score, income, current market rates, etc.
Mortgage terms and definitions can sometimes sound unusual or even funny, but you should always take them seriously and understand them properly. A jumbo loan or mortgage is a type of financing that exceeds the limits set by the Federal Housing Finance Agency (FHFA).
As they are made for luxury properties, jumbo loans come with specific requirements and tax implications and cannot be guaranteed by Frannie Mae or Freddie Mac.
The loan-to-value ratio measures the difference between the loan amount you’re borrowing and the property’s value. A loan-to-value ratio is one of the basic mortgage terms, and lenders use it to calculate the lending risk before approving a loan.
Loans with a higher LTV ratio are considered high-risk loans, which is why they usually require private mortgage insurance and have a higher interest rate.
PITI is an acronym that refers to the four major elements of the mortgage payment: Principal, interest, taxes, and insurance. The principal represents the amount you’re borrowing. Interest is the percentage you are required to pay to the lender for giving you the loan.
The T is for property taxes you are required to pay based on your property value. And, last but not least, comes the homeowner’s insurance, which protects your property in case of any damage. So, if somebody asks you, “What is PITI in mortgage terms?” just remember these four elements and their importance.
Private Mortgage Insurance
Private mortgage insurance (PMI) is designed to protect the lender and his assets. In case a borrower stops making payments on the loan, and a foreclosure happens, the lender will stay secure thanks to the PMI. This type of insurance is usually required when:
- A borrower wants to refinance their loan, and their equity is less than 20% of the value of the property;
- A borrower takes out a conventional loan, and their down payment is less than 20%;
Our glossary of mortgage terms wouldn’t be complete if we didn’t mention seller concessions, so here’s what they are. Seller concessions are closing costs the seller may agree to pay to motivate the buyer to make an offer.
Seller concessions can include property taxes, origination fees, attorney fees, appraisal fees, and more.
A USDA loan is a type of mortgage insured and backed up by the US Department of Agriculture. This type of loan is designed for homebuyers who agree to live in rural or suburban areas and need help purchasing the property.
The best thing about USDA loans is they do not require any down payment, and even those with bad credit scores can qualify for them.
Our mortgage terms dictionary has come to an end, and the last term on the list is the VA loan. VA loans are the mortgages available to veterans, active-duty service members, and eligible surviving spouses.
The US Department of Veterans Affairs guarantees these loans. Just like USDA loans, VA loans do not require down payments or have any credit score requirements.
Frequently Asked Questions
What is the mortgage exit fee?
The mortgage exit fee is one of the commercial mortgage terms that represents the amount you are required to pay for closing your mortgage account.
An exit fee applies when a borrower wants to remortgage to another deal with the same lender, switch to a different lender, or just wants to finish paying off their mortgage.
What is APRC?
APRC is an abbreviation of the Annual Percentage Rate of Charge, and it’s not the same as the Annual Percentage Rate. It shows the total cost of the mortgage throughout the entire loan term, including all the fees required.
Is it better to get a fixed or variable mortgage?
Understanding mortgage terms is extremely important, especially if you are thinking about requesting a loan. The more you know, the easier it will be to make a good decision and take the best out of it.
If you prefer more predictable payments, you should go for a fixed-rate loan. However, if you believe interest rates might decrease over the mortgage period, you should choose a variable-rate loan.
For years, the clients I worked for were banks. That gave me an insider’s view of how banks and other institutions create financial products and services. Then I entered the world of journalism. Fortunly is the result of our fantastic team’s hard work. I use the knowledge I acquired as a bank copywriter to create valuable content that will help you make the best possible financial decisions.
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