Mortgage Terms: What You Need To Know – DFP Hybrid

The average homeowner lives in a home for 10 years, according to the 2019 Profile of Home Buyers and Sellers from the National Association of Realtors. This means that, not counting refinances, the typical homeowner is exposed to mortgage jargon once each decade.

That’s not enough to become fluent in the language of home finance. But it’s a good idea to learn as much as you can about mortgages. That way, when loan brokers ask, “Do you want to escrow that?” you will have some idea of what they’re talking about.

Below are some of the terms you’ll run across when applying for and taking out a home mortgage loan.

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A Glossary of Common Mortgage Terms

Adjustable rate mortgage. Also called an ARM, this kind of mortgage has an interest rate that changes over time. The change is usually based on a market index.

Amortization. Amortization is the reduction in the amount owed on a mortgage as the payments are made.

Annual percentage rate. Also called the APR, this measures the annual cost of a loan to the borrower and is the best way to compare costs between lenders. It includes mortgage insurance, discount points, loan origination fees and other costs.

Appraisal. An estimate of a property’s value by a professional appraiser, often required by a mortgage lender before making a loan.

Assessed value. The value of a piece of real estate as set by taxing authorities.

Assumable loan. A loan that can be taken over or transferred to a buyer.

Balloon payment. A final, larger than usual payment at the end of a balloon mortgage.

Cash to close. The amount, including down payment and closing costs, a buyer will have to pay at closing.

Cash-out refinance. Also known as a cash-out refi, a mortgage that replaces an existing loan, is larger than the balance on the existing loan and pays out the difference in cash to the borrower.

Closing. The final process, often a meeting in a title company office, during which all documents are signed and fees are paid to consummate the sale of a home.

Closing costs. Fees that the buyer and seller pay during a closing, including origination fees, title search and title insurance premiums.

Closing statement. An itemized list of costs the buyer and seller will pay at closing.

Comps. Recent sales of similar properties used to estimate a property’s fair market value.

Contingency. A clause added to a sales contract that must be satisfied for the transaction to happen. Common contingencies include the house’s passing inspection and the borrower’s getting their loan approved.

Conventional loan. A mortgage that is not guaranteed or insured by the federal government.

Credit Score. A number rating a borrower’s creditworthiness. Higher credit scores are more likely to be approved.

Date of possession. The date a buyer is entitled to move into a purchased home.

Debt-to-income ratio. Abbreviated as DTI, a borrower’s total monthly payments on debts including car loans, credit cards and court-ordered child support payments divided by gross monthly pre-tax income and expressed as a percentage. Many lenders recommend the DTI be no more than 43%.

Deed. The legal document that transfers title to a property from one person to another.

Default. When a buyer doesn’t make regular payments on a loan.

Discount points. Money a borrower may pay in advance to reduce the interest rate on the loan. One discount point is equal to 1 percent of the loan value.

Down payment. A portion of the purchase price the borrower pays up front. The higher the down payment, the less risky the loan. A down payment of less than 20% usually means the borrower will have to pay for mortgage insurance.

Earnest money. A deposit offered by a buyer as a token of good faith when an offer on a home is made. It is normally paid when the purchase agreement is signed by the buyer and seller.

Equity. The difference between the value of a home and the outstanding balance on the mortgage.

Escrow. Money paid by a buyer to cover property taxes and insurance. Payments are made monthly and accumulate in an escrow account held by the lender until the taxes or insurance premiums are due. A buyer may choose to pay these costs directly and annually without using escrow.