10 Common Mortgage Terms To Know
If you buy a home, knowing your way around the mortgage industry is essential. You'll want to know the best mortgage terms to ask about and what they mean so that you can shop around for the best deal on your loan. Here are ten common terms used in mortgages.
10 Common Mortgage Terms
Amortization comes from Latin roots meaning "to kill off slowly" In other words, it means gradually paying something off rather than all at once.
Amortization is the process of paying off a loan. It is the total amount of interest and principal payments over the lifetime of a loan. The amortization schedule shows how much you will pay each month and when you'll fully pay off your mortgage.
Annual Percentage Rate (APR)
The APR is the interest rate you will pay over the life of your loan. It's expressed as a yearly rate, but it's actually calculated every month. The annual percentage rate (APR) is the total of all the interest and fees you pay to the lender to use their money for 12 months.
Your principal balance represents the amount you owe a lender. For example, if you take out a $450,000 loan from your lender, your principal balance is $450,000. Your payments to your lender reduce your principal balance over time.
The closing disclosure documents the estimated closing costs, which the law requires. You'll receive this form three business days before closing your mortgage.
Debt-To-Income (DTI) Ratio
The debt-to-income ratio is a tool lenders use to determine whether you are a good candidate for a mortgage loan. The debt-to-income ratio measures your ability to repay your debt and make payments on a new loan.
The lender uses this ratio as one indicator of how likely you are to default on your mortgage payments. The higher your debt-to-income ratio, the more risk the lender assumes when it gives you a mortgage loan.
Discount points are a method of lowering your interest rate. To buy points, you pay the lender a specific amount when you take out your loan. This extra money reduces your interest rate, reducing how much you pay in finance charges over time (often called “points”).
An escrow account allows buyers to make payments toward their home purchase without worrying about losing their earnest money deposit if they later decide not to buy the home. The amount held in an escrow account is typically released to the seller only after all conditions have been met and the title has been transferred.
Seller concessions are clauses in your offer that ask the seller to pay some of the closing costs for the buyer. Sellers may offer seller concessions to help close the gap between the cost of their home and what the buyer can afford.
Title companies handle the legal aspects of purchasing a property. They verify that buyers have the financial means to take on the loan they're requesting, and they ensure that there are no liens against the property. They check to see if there are any complications with ownership rights (such as if a relative has deeded their property to another family member).
The title company also searches through public records to ensure there aren't any outstanding liens on the sold property.
Pre-approval is a letter from your lender stating that you have been approved for a certain amount. It's not a guarantee that you will get the loan, but it does give you the ability to shop around and find the best deal.
When shopping around for a mortgage, always ensure that any pre-approvals or estimates are based on accurate information. If they're not, you could waste time and money when going through your application process.
If you’re buying a home, understanding the terminology will help you make a more informed decision about your purchase.
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