12 Mortgage Terms You Should Understand
Mortgage loans are easy to understand, if you know the language. So before you sign on the dotted line, you should learn some basic mortgage terminology to keep your eyes from glazing over when you hear these words.
- Adjustable rate mortgage: A mortgage loan with an interest rate that will change or "adjust" periodically, such as every three years or annually after the fifth year, changing the monthly payment due. ARMs are best if you plan to sell the home before the rate adjusts.
- Amortization: The schedule for paying off a mortgage loan, showing the regular, required payments toward principal and interest over a set period of time.
- Credit score: A number between 300 and 850 used to show creditors and lenders the creditworthiness of a potential loan borrower. It is calculated through an analysis of a person's borrowing and repayment habits. How timely you are paying bills or how much revolving credit card debt you have can affect your score. The higher the score, the better.
- Equity: The value of a property minus the remaining mortgage balance. Equity is gained or lost by the appreciation or depreciation in the market value of the property. It is also typically gained as payments toward principal are made on the mortgage loan.
- Fixed-rate mortgage: A mortgage loan that has an interest rate and monthly payment that remain the same for the life of the loan (typically, 15 or 30 years.) A 15-year mortgage offers quicker repayment for faster equity buildup, usually at a lower interest rate than longer term mortgages.
- Home equity loan: A loan or second mortgage that a borrower can take out against the equity in a home, essentially trading equity for cash.
- Loan origination fees: Sometimes called "points," are loan processing fees equal to 1 percent of the loan amount.
- Mortgage insurance: Protects the lender should the borrower default on the loan. The insurance is typically issued by the FHA or a private mortgage insurer. Mortgage insurance is usually required if the homebuyer borrows more than 80 percent of the market value or purchase price of the home.
- Mortgage points: Lender's fees or advance interest that a borrower pays up front in exchange for a lower interest rate for a certain part of the loan term, often over the life of the loan.
- PITI: An acronym for principal, interest, taxes and insurance, the four components of a mortgage payment.
- Principal: The part of a monthly loan payment that reduces the outstanding balance of a mortgage, and becomes the equity for the borrower.
- Refinancing: The process of obtaining a new loan to replace an existing loan. Typically this is done to reduce an interest rate or to extend the loan over a different period of time (for instance, starting again at 30 years or down to 15 years). It is done either to lower monthly payments, pay off a debt sooner, switch an adjustable rate mortgage to a fixed rate one, or obtain some cash back.
