Mortgage Glossary: Decoding Home Financing
Navigating the world of mortgages and home loans can sometimes feel like deciphering a foreign language. This glossary is your comprehensive guide to understanding the terms and jargon you’ll encounter along your home financing journey. Whether you’re a first-time homebuyer or looking to refinance, arm yourself with knowledge to make informed decisions with confidence.
Amortization
The process of paying off a loan over time through regular payments. An amortization schedule details how much of each payment goes toward the loan principal and how much goes toward interest.
Escrow
An account held by a third party to manage the payment of property taxes and insurance. During a home purchase, escrow also refers to the period when the buyer’s earnest money is held until the sale is finalized.
Adjustable-Rate Mortgage (ARM)
A mortgage with an interest rate that can change periodically based on an underlying benchmark interest rate or index.
Fixed-Rate Mortgage
A mortgage where the interest rate remains the same for the entire term of the loan.
Private Mortgage Insurance (PMI)
Insurance that protects the lender if the borrower defaults on the loan. Typically required for loans where the down payment is less than 20%.
Equity
The difference between the home’s current market value and the amount the homeowner owes on the mortgage.
Closing Costs
Fees and expenses, beyond the price of the property, that buyers and sellers incur to complete a real estate transaction.
Debt-to-Income Ratio (DTI)
A measure lenders use to assess a borrower’s financial health. It’s calculated by dividing total monthly debt payments by gross monthly income. This ratio helps lenders determine how well you can manage monthly debts and whether you can afford to repay a loan.
Pre-Qualification vs. Pre-Approval
Pre-qualification is an initial assessment of how much you might be eligible to borrow based on self-reported financial information. Pre-approval is a more in-depth evaluation, where the lender verifies your financials and offers a tentative commitment to lend a specific amount.
Underwriting
The process lenders use to evaluate the risk of offering a loan to a borrower and to determine the terms of the loan.
Points
Fees paid to the lender at closing in exchange for a reduced interest rate. One point is typically equal to 1% of the loan amount.
Refinancing
Replacing an existing loan with a new one, often to get a better interest rate or to switch from an adjustable-rate to a fixed-rate loan.
Loan-to-Value Ratio (LTV)
A calculation that compares the amount you owe on your mortgage with the home’s value. It’s used by lenders to assess the risk of a loan.
Origination Fee
A fee charged by a lender to cover the administrative costs of processing a loan.
Rate Lock
A guarantee from a lender that they will give the homebuyer a specific interest rate, for a specific period, while the loan application is processed.
Title Insurance
A policy that protects lenders and homeowners against legal claims or disputes over the ownership of a property.