Anyone buying a home should understand a handful of important terms before they embark on this important purchase. Whether you are a beginner or an expert (or somewhere in between) when it comes to home mortgage loans and home buying, taking a quick refresher course on important mortgage terms is always a good idea.
Even if your knowledge of mortgage terms is good, a quick refresher in what these mortgage terms mean can't hurt.
Amortization
Amortization involves the systematic payment of the mortgage debt until it is paid in full.
Amortization Schedule
It includes a breakdown of each payment in regard to the portion of the payment that goes to the principal amount of the loan as well as the portion of the payment that goes to the interest due on the loan.
Adjustable Rate Mortgage
An adjustable rate mortgage is one that involves a variable interest rate that changes according to a predetermined schedule.
Balloon Mortgage
A balloon mortgage is one that includes fixed mortgage payments for a specified term until one final payment becomes due and payable. This final payment is typically a large amount.
Closing Costs
The closing costs are the fees that are associated with the finalization of the home purchase. These costs can include such fees as points, recording fees and documents, the cost of the title insurance, the origination fee, charges for surveys, attorney fees, real estate taxes, and the payment of the homeowner's insurance policy as required by the lender.
Down Payment
The down payment is the amount of money that the buyer is placing on the home at the time of the purchase.
Escrow Account
An escrow account is one in which the lender holds the money that is collected with the mortgage payment to pay for future property taxes and insurance.
Fixed Rate Mortgage
A fixed rate mortgage is one that charges the same interest rate throughout the mortgage term. It leads to fixed payments that do not increase over time.
Good Faith Estimate
The good faith estimate provides a guess as to what the settlement costs will be at the time that the home purchase is finalized.
Homeowner's Insurance
Homeowner's insurance is required by most lenders to protect their financial interest in the home. In the event that the home is damaged, destroyed or beset by a liability claim, the lender is listed on the insurance policy so that he does not suffer a loss.
Interest-Only Mortgage
An interest-only mortgage is one in which only the interest portion of the mortgage is collected for a predetermined period of time. After that term has passed, the mortgage payments begin to include payment toward both the principal and the interest portion of the mortgage.
Lien
Liens are created whenever an individual borrows money against a property. This claim goes away once the debt is repaid.
Points
Points are fees charged by some lenders during the issuance of a mortgage. Points can be used to lower the interest rate charged. For example, the payment of three points might lead to a lower interest rate than the payment of one point. A point is usually equal to one percent of the loan amount.
Origination Fee
The origination fee is the amount that the lender charges for completing the loan application.
Private Mortgage Insurance
Private mortgage insurance is a secondary form of financial protection for lenders. It is usually charged when the borrower places less than 20 percent down for the down payment on the acquisition of a home.
Recording Fee
The recording fee is the amount charged to record the legal documents that relate to the purchase of the home.
Understanding these mortgage-related terms should give you a better idea as to what to expect when buying a home. Since these are only a sampling of what you need to know, keep in mind that there are a number of other important terms to know, as well.
See also: Comprehensive loan glossary