Mortgage terms you need to know

Taking out a mortgage to pay for a home is a big decision. In fact, it’s one of the biggest financial decisions you’ll ever make. Not only do you have to find a house that fits your needs and budget, but you also have to understand the ins and outs of a mortgage loan.

If you’ve never had a mortgage before, some of the terms used by lenders could be new to you. From appraisals, equity, and points to closing costs and escrow, all the different names can get confusing.

To ease your mind and help you better understand your mortgage, we’ve put together a list of the most commonly used mortgage terms with definitions.

Check out our Mortgage Terminology Printable for you to use!

Note: The following are not legal definitions; use as a general guideline only. If you specific questions about mortgages or real estate, contact a real estate or mortgage lending professional.

Mortgage terms you need to know

Abstract: Many states use titles. Not so in Iowa! An abstract is a physical record of the history of ownership of a property. Before a property changes hands, the abstract must be found/located and reviewed/updated by an attorney.

Adjustable Rate Mortgage (ARM): A type of mortgage where the interest rates can (and will) change as specific market indexes change. An ARM typically begins with a lower, fixed interest rate for a period of time and, after that period, adjusts based on the index. Different ARMs track different indexes. (Example: a 7/1 ARM will have a fixed rate for the first seven years and changes every year after that).

Amortization: The value of a loan over a period of time. Usually presented as an amortization schedule that shows exactly how the loan is expected to be repaid. (Example: the amortization schedule for a 30-year mortgage will show how much interest and principal is paid each month for 30 years.)

APR (Annual Percentage Rate): The rate of interest paid to the mortgage lender. (This can be fixed or adjustable rate.)

Appraisal: The estimated market value of a property. A professional appraiser examines a property and does other research (typically on comparable properties) to determine the estimated market value. The appraiser provides a written report to the lender.

Assessed value: The property value determined by local government to figure annual property taxes.

Assumable Mortgage: A type of mortgage that can be transferred, with the original loan terms, to a buyer.

Bridge Loan: A short-term loan used to purchase a new house before finalizing the sale of the old house.

Cap: The maximum interest (and, therefore, monthly payment) expected from a borrower on a loan.

Closing: When the final, formal documents in a real estate transaction are signed and transferred to the new owner. All payments and fees are made to the appropriate parties.

Closing Costs: Fees and payments paid by the buyer and seller of a real estate transaction at closing. Costs can include title fees, attorney fees, points, down payment and other expenses associated with the purchase.

Closing Statement: A statement listing the financial details of a real estate closing.

Construction Loan: A short-term loan used to finance building a new home during the construction phase.

Conventional Mortgage: A loan not backed by a specific government program (like FHA or VA loans). Many conventional loans conform to standards set by government-sponsored entities (Freddie Mac and Fannie Mae).

Credit Report: Details of a person’s credit history from the credit bureaus. Credit reports include financial information submitted to the credit bureaus by lenders, credit card companies and other financial institutions.

Credit Score: A 3-digit number that shows lenders how likely you are to repay your debt. Most lenders use a FICO score (300-850) to predict risk associated with lending you money.

Debt-to-Income Ratio: The percentage of a person’s gross monthly income that goes toward re-paying all debt.

Down Payment: The amount of cash paid out of pocket for the price of a home. Lenders require a minimum percentage of the purchase price to qualify for different loan programs.

Earnest Money: The amount of money a buyer offers in good faith when making an offer to buy a property.  Earnest money is a small percentage of the price of the home and put in escrow until the final closing.

Equity: The difference between the value of a property and the amount owed on the property.

Escrow: An account used to hold money for future costs. With a mortgage, the lender sets up an escrow account in which the borrower makes deposits monthly (as part of their mortgage payment). It is used to pay for future property taxes and, sometimes, annual insurance fees.

FHA (Federal Housing Administration): FHA offers loans through certain lenders. FHA helps make home-ownership a possibility for borrowers that don’t qualify for the guidelines of a conventional loan.

Fixed Rate Mortgage: A mortgage with the same, guaranteed interest rate throughout the life of the loan (payments remain the same for the length of the loan).

Foreclosure: A legal process in which lender takes possession of a mortgaged property when the borrower cannot meet the obligations of the mortgage agreement.

Good Faith Estimate: An estimate prepared by the lender listing the anticipated loan costs and fees the borrower will be expected to pay at closing. Lenders must legally provide good faith estimates to borrowers.

Homeowners Insurance (sometimes referred to as Hazard Insurance): An insurance policy that protects the value of a property in case of loss or damage. Homeowners insurance protects both the homeowner and the lender. Lenders require it to be in place before closing.

Interest Rate: A percentage rate of a loan charged to a borrower by a lender as a fee for financing the loan. (Interest rates can be fixed or adjustable.)

Lien: The legal term for money owed on a property.

Loan-to-Value Ratio (LTV): Percentage of the property value that is borrowed. To calculate the LTV divide the value of the home by the mortgage amount.  (Example: A property is valued at $100,000 and has a mortgage of $80,000. 80,000/100,000 = 80% LTV.)

Mortgage: The legal documentation of the terms and conditions of a loan used for the purchase of a property.

Mortgage Insurance: Insurance added on to the mortgage, designed protect the lender in case the borrower cannot make their monthly mortgage payments.

Origination Fee: A fee paid by the borrower to the lender for processing the mortgage (typically a percentage of the loan value).

PITI: PITI is an acronym meaning Principal Interest Taxes Insurance. It includes the four elements of a monthly mortgage payment.

Points (also known as discount points): Percentage points of the loan amount. Borrowers can pay “points” to the lender at closing to reduce their interest rate, therefore reducing the monthly payments. Typically, one point is 1% of the mortgage.

Pre-approval: A lender confirms a borrower’s financial situation and determines eligibility for a specific loan amount.

Pre-paid costs: Any costs for a mortgage paid out of pocket before closing (could be appraisal fees, earnest money, attorney fees, etc.).

Pre-qualify: A lender estimates how much someone can borrow based on general information provided about the borrower’s overall financial situation.

Principal: The amount of money borrowed for the mortgage loan. The principal amount goes down with each payment.

Private Mortgage Insurance (PMI): On conventional loans, borrowers must get private mortgage insurance when they put down less than a 20% on the value of a property. PMI protects the lender if the borrower cannot meet the obligations of the loan. Once the borrower reaches 20% equity (or 80% LTV), they can cancel PMI.

Property Taxes: Local government taxes charged to homeowners, based on the value of the property. Property taxes are paid on a semi-annual or annual basis.

Rate Lock: An agreement between a lender and a borrower that the lender will guarantee a specific interest rate for a specified period.

Refinance: When a borrower finds a lower interest rate on a mortgage and takes out a new loan to replace their old loan (to lower their payment). The borrower can do this through their current lender or a new lender.

Settlement Costs: The closing costs associated with a mortgage loan.

Title: The legal document that specifies the official owner of a property.

Title Company: A company that researches legalities associated with the title of a property. They also issue the title insurance for the property.

Title Insurance: Insurance issued by a title company to ensure a property is free of any problems that could adversely affect the mortgage. Lenders require title insurance.

Title Opinion: In Iowa, an attorney will review the abstract and update it appropriately. The attorney will search for and find defects that will have to be cleared before the property can change ownership.

Truth in Lending Disclosure: A document lenders are legally required to provide to borrowers that states the interest rate, loan amount and cost of the loan at maturity.

Underwriting: A process lenders use to assess the credit and financial competence of borrowers. This process assesses potential risk and is a deciding factor in offering a loan to a borrower.

USDA Loan: Administered by the United States Department of Agriculture, USDA home loans help people who don’t qualify for conventional loans buy homes in rural areas.

VA Loan: Administered by the Department of Veterans Affairs, VA home loans assist active military, reservists, and veterans.

Variable Rate Mortgage (VRM): Also referred to as an adjustable-rate mortgage (ARM), a VRM is a home loan with an interest rate that can change with market indexes. (See adjustable-rate mortgage.)

Buying or selling a home can, at times, feel intimidating and overwhelming. But it doesn’t have to be. At Coluzzi Real Estate, we answer all your questions and simplify the process every step of the way. Please don’t hesitate to contact us at any time!

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About the Author:

Amanda has lived in the Des Moines area since 1999, where she and her husband have bought and sold a handful of homes over the years, including a recent flip. Amanda enjoys writing, obsesses about personal finance and is fond of looking at houses. She loves sharing useful tips and info to make life easier for anyone wanting to buy or sell a home. In her spare time, Amanda cherishes time with her family, volunteers with IHYC, gardens, hikes, and practices TaeKwonDo. You can read more of her writing at whywemoney.com