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Mortgage Terms You Should Know

Mortgage Dictionary Definition

Like playing a sport or working in a restaurant, buying real estate has its own terminology and lingo that can be quite confusing if you’re not familiar with the background. Don’t let these phrases trip you up in the midst of this major life event — here’s a handy guide that will help you navigate negotiations like a pro.

Adjustable-Rate Mortgage (ARM)

An ARM is a type of home loan where the interest rate changes over time. While this kind of mortgage can offer many benefits, it’s best to ask your real estate team if this is the best choice for you before signing on the dotted line. The average mortgage “lifespan” is about eight to ten years (moving or refinancing are common terminators), so there may be some savings to be had. 

Closing Costs

This is an umbrella term for a variety of fees and payments that are due before you can get the keys to your new home. Both buyers and sellers can be responsible for these, and closing costs typically range from 2-6% of the purchase price. They can include application fees, escrow deposits, FHA and other insurance premiums, HOA costs, inspections, and more. 

Contingencies

There can be various different types of contingencies in your home purchase contract, especially in a seller’s market. Common ones include giving buyers time to sell their previous home, the right to cancel depending on the inspection, or the right to back out if a higher offer is received within a certain time frame. 

Conventional loan

A mortgage is deemed “conventional” because it’s not guaranteed by the government, like an FHA, VA, or USDA loan. Conventional loans are either conforming, as in they conform to the financial limits set for a single-family home in most of the country ($647,200), or non-conforming, in which case your interest rates may be a bit higher. 

Debt-to-Income Ratio

Your DTI number shows your bank that your gross monthly income is higher than your monthly outgoing debt payments in a big enough way that you’ll have no trouble paying your mortgage in a timely manner. You might hear a lender talk about your “front-end ratio” (the ratio of housing costs to income) and your “back-end ratio”, which is your total debt, including housing costs, as a percentage of your income. An underwriter will consider both in qualifying a home buyer. 

Down Payment

Money talks and a down payment shows buyers and lenders that you’re financially invested and committed to paying for your home for the long haul. A twenty percent down payment used to be the norm, but these days there are many programs that require much less. What’s more, it may be financially and/or strategically advantageous to put down less than 20%. Talk to your lender!

Earnest Money

While similar to a down payment, earnest money is not exactly the same. Your down payment will go directly to your bottom line as part of the overall purchase price and the earnest money parks in an escrow account as a commitment — and enticement — to the property seller. It shows that you’re serious and not likely to waste their time, which is a big consideration in this volatile market. Ultimately your earnest money will be applied as a part of your down payment or to your closing costs. 

Escrow Account vs Closing Escrow

This one can be a little confusing, because the same word, “escrow,” is used in different contexts in the real estate industry. 

 An escrow account is essentially a safe place, administered by a trusted third party, where important documents and funds relating can be held. Your earnest money will be held in an escrow account before closing. Your loan servicer may hold your future property taxes and homeowners insurance in a different one. 

The term “escrow” can also be used to describe the time between the signing of a real estate contract and the actual closing or consummation of the deal. In some states, this term is used extensively, and in other places, you’ll hear the term more sparingly. At the time of closing, a buyer’s down payment, the funds of the buyer’s mortgage, real estate agent commissions, transfer taxes, and other obligations are all put into escrow, to be dispersed (paid) when the paperwork is all signed and the deal is official. 

Fixed-Rate Mortgage

The opposite of an adjustable-rate mortgage, this is the most popular kind of home loan in the United States, as the interest rate stays the same throughout the life of the loan, and the predictability of your monthly mortgage payment makes budgeting decisions easier. Fixed-rate mortgages are commonly thirty years (or 360 months) in duration, but other lengths – 15-year, 10-year – are increasingly common. 

Home Appraisal

Conducted by an independent, experienced, and licensed professional, a home appraisal is a thorough evaluation of a property and determination of the value. Typically costing around $400 – $600, an appraisal takes many factors into account including research into comparable properties in the area, and it’s generally a requirement for a mortgage loan. When an underwriter has an abundance of data about the property being purchased (e.g. a condo in a building where there are many recent transactions), occasionally the lender will be able to issue an appraisal waiver, sometimes called a desktop appraisal, where an opinion of value is documented, but no appraiser visits the property. 

Home Inspection

A home inspection, on the other hand, is not concerned with value as much as it is safety. An inspection will cover the physical structure and systems of a house, from the roof to the foundation. Faulty wiring, roof damage, missing or insufficient insulation, and major plumbing issues may all be discovered during a home inspection. While it may not be required as a condition of your mortgage, almost all real estate professionals recommend that you should have one. 

Homeowner’s Insurance

Another must-have, this policy will protect you and your family against losses in the case of a catastrophic event like a fire. Mortgage lenders almost always require proof of this type of insurance, and it’s totally worth investing in robust coverage, especially if you live in a region with wild weather. Insurance premiums are much less expensive than having to pay out-of-pocket. 

Loan Estimate

One of the first things you’ll need when embarking on your home-buying journey is this document. It has all the pertinent info from each mortgage lender you’ve applied to, such as your approved loan amount, your interest rate, your monthly payment, closing costs, and your APR. Once you receive your loan estimates, you’ll be able to clearly see which mortgage lender is right for you. As of 2015, when the TRID (TILA-RESPA Integrated Disclosure) rule took effect, your lender has three business days to provide you with an accurate Loan Estimate Disclosure from the day you apply for a mortgage 

Loan Modification

SImply, a change to the terms of your loan. Many lenders offer modifications to your mortgage in case of medical issues, temporary unemployment, or if you want to reduce your balance and shorten the terms of your loan. Ask your lender if you need assistance with requesting a loan modification.

PITI — Principal, Interest, Taxes, and Insurance

These are the four basic elements of your monthly mortgage payment.

Private Mortgage insurance

For a conventional loan, this policy protects your lender if you are unable to make the payments. If you don’t have a substantial down payment, you’ll probably be required to purchase mortgage insurance. The premiums are not expensive, and you only have to pay them until you accumulate 20% of the home’s value in equity. Government-back loans, like an FHA loan, also have mortgage insurance, paid as both an upfront and monthly premium. 

Property Taxes

An unavoidable fact of life, your property taxes are determined by your local municipality and go to things like schools and roads. They’re collected as part of your monthly mortgage payment and held in escrow until the time to pay the jurisdiction.

Survey

A land survey is a detailed report that includes research and detailed measurements regarding a piece of property’s exact location and boundaries, and any existing buildings, structures, or features. 

Title Insurance

Yes, more insurance. This will be included in your closing costs and ensures you have the right to own the property free and clear. It protects you against undiscovered liens, late lawsuits, clerical errors, and other mishaps that can turn into expensive headaches without this inexpensive coverage. 

VA Loan

The “VA” stands for Veterans Affairs, and this is a loan program specifically designed for our servicemembers, veterans, and their eligible dependents to build generational wealth with homeownership. For more information and to apply for a VA home loan, visit their website.

The Bottom Line

These are only some of the many words and turns of phrase that real estate professionals and mortgage brokers like to throw around in front of prospective homeowners. Don’t feel intimidated — I’m here to help you learn the lingo and feel in control on the journey to homeownership. 

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