18 Mortgage Terms You Need To Know

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Mortgage lenders often communicate using specialized terminology, which can be confusing, especially for first-time homebuyers. It's crucial to grasp these terms when preparing to embark on the mortgage journey for the first time.

Below are key terms you might encounter while navigating the home loan market:

  1. Adjustable-rate mortgage (ARM): Unlike fixed-rate mortgages, ARMs feature an interest rate that remains steady for an initial period, then adjusts periodically based on a specified benchmark.

  2. Annual percentage rate (APR): Reflecting the true cost of borrowing, APR encompasses not only the interest rate but also origination charges and points associated with the loan.

  3. Appraisal: Conducted by a licensed professional, an appraisal evaluates the value of the prospective property to ensure it aligns with the loan amount.

  4. Closing costs: These are expenses incurred at the finalization of a mortgage, covering items like origination fees, title insurance, and local taxes, typically ranging from 1% to 3% of the home's sale price.

  5. Conventional mortgage: Unlike government-backed loans, conventional mortgages adhere to standards set by entities like Fannie Mae and Freddie Mac.

  6. Debt-to-income (DTI) ratio: DTI ratio compares your debts to your gross income, with lenders generally preferring ratios of 36% or lower.

  7. Earnest money: A deposit accompanying a purchase contract to demonstrate commitment to the transaction, which may be forfeited if the contract is terminated without valid cause.

  8. Escrow: Lenders establish escrow accounts to manage funds for property taxes and homeowners insurance, with portions of mortgage payments allocated to cover these expenses.

  9. FHA loan: Backed by the Federal Housing Administration, FHA loans offer accessible financing options for individuals with less-than-ideal credit or limited down payments.

  10. Home inspection: A thorough examination of a property conducted by a licensed professional to identify any potential issues before finalizing the purchase.

  11. Loan-to-value ratio (LTV): LTV ratio expresses the mortgage balance as a percentage of the property's value, typically based on the initial purchase price.

  12. Mortgage insurance (PMI/MIP): Required for loans with less than a 20% down payment, mortgage insurance protects lenders in case of borrower default.

  13. Mortgage servicer: Responsible for managing administrative tasks related to loan repayment, such as collecting payments and handling taxes and insurance.

  14. Origination fee: Charged by lenders to initiate mortgage loans, origination fees vary and should be considered when comparing lenders.

  15. PITI: Represents principal, interest, taxes, and insurance—the essential components of most mortgage payments.

  16. Title insurance: Provides protection against ownership disputes by insuring the legal ownership of the property.

  17. USDA mortgage: Guaranteed by the U.S. Department of Agriculture, these loans offer zero-down financing with favorable rates for properties in designated rural areas.

  18. VA mortgage: Backed by the Department of Veterans Affairs, VA loans are available to eligible veterans, military members, and their families.

Understanding these terms equips you to navigate the mortgage process confidently and make informed decisions that suit your family's needs. While this list covers essential terms, delving deeper into mortgage intricacies before starting the process is advisable.


Source: The Ascent

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