If you are new to mortgages and residential lending, it can sometimes be overwhelming to understand all of the related terminology. Helping clients become informed consumers is important to us at Guardian Mortgage, so we’re happy to provide you with definitions of common terms used in dealing with mortgage loans. Keep in mind that this is a simplified financial glossary and, as always, if you have questions or want to talk to a real person, we’re available to help.
Adjustable Rate Mortgage
An adjustable rate mortgage (ARM) differs from a standard fixed-rate mortgage because its interest rate can change several times during the loan term. The initial interest rate on an ARM is usually lower than with a fixed-rate loan. It stays the same for a set period of time, then can adjust lower or higher depending on market conditions.
Amortization means to pay off a debt through periodic payments. The length of those payments is called the term. Mortgage payments are structured to apply most of the payment to interest at the start of the loan term. Therefore, payments will pay off a larger portion of the interest at first and then gradually increase the amount paid toward principal.
The appraisal is a standard report within the mortgage industry that details the characteristics and estimated value of a property at a specific point in time as determined by a licensed real estate appraiser. Appraisals are only valid for a set period of time and describe the home’s condition, age, square footage, neighborhood, and sales prices of comparable nearby homes, among other things.
Buyers and sellers have fees connected with the purchase and sale of a property. If a loan is being used to purchase the home, buyers typically pay a larger portion of the costs related to the financing functions performed by the mortgage company, whereas sellers’ costs are usually associated with transactional fees such as real estate agent fees, tax transfer fees, etc.
The down payment is a percentage of the purchase price paid at closing which reduces the total amount borrowed. Larger down payments reduce risk for mortgage lenders, which can result in lower interest rates and other transactional fees.
When entering into a purchase contract, earnest money—sometimes called “good faith deposit”—serves as confirmation that the buyer is vested in the transaction and motivated to fulfill the conditions set forth in the contract, such as securing financing and having inspections performed. Earnest money becomes non-refundable at a certain point of the process. The real-estate agent can clarify which conditions must be met for earnest money to be returned should the contract be breached by either party.
Home equity is the appraised value of the home minus the home’s liabilities. For example, if the home is valued at $300,000 and the owners have a mortgage of $200,000, the home’s equity is $100,000.
An escrow account holds funds related to property taxes, insurance, homeowners’ association dues, and other assessments. A lender may require borrowers to pay a certain amount as part of their monthly mortgage payment to ensure that the escrow account is sufficiently funded. The lender then disburses these assessments to the appropriate agency when they are due.
Mortgage interest payments are funds paid from the borrower to the lender. Basically, it’s the cost of borrowing money. It is calculated as a percentage called interest rate (see below).
Mortgage Interest Rate (Note Rate)
The interest rate is what lenders charge to loan money. It’s usually calculated as a percentage and can vary based on the borrower’s risk or other industry factors. Higher risk profiles can result in a higher rate. Adjustable rate mortgages have a fixed interest rate for a certain period of time and then may adjust up or down, based on market conditions. Fixed-rate mortgages will have the same rate for each installment of the loan.
The fees charged by some lenders to cover the preparation of new loan applications and other documents related to mortgage processing.
The principal is the amount which a borrower owes on a loan and must pay back to the lender.
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