Common Mortgage Terms to Know Before Buying a Home
Your real estate agent, escrow officer and other experts who are guiding you along the way can help a lot. It can also help to know some mortgage terms ahead of time, which can make shopping for an agent and a home a little easier.
Here are some common mortgage terms you’re likely to hear during the home-buying process, and what they mean:
Amortization:
The gradual reduction of the mortgage debt through regularly scheduled payments over the term of the loan.
Annual percentage rate:
Abbreviated as APR, this measures the cost of credit in a yearly rate. It includes the stated interest rate and certain charges.
Appraisal:
Written estimate or opinion of a property’s value prepared by a qualified appraiser. The appraisal amount should be close to the cost you’re paying for the home to help make getting a loan easier.
Debt-to-income ratio:
Relationship between borrower’s total monthly debt payments, including new housing expenses and gross monthly income. It’s used to determine how much of a mortgage a borrower qualifies for. The less debt, the better. The maximum ratio is 43 percent, though below 36 percent is preferable. That means that 36 percent of your income goes toward debt and living expenses.
Escrow:
Something of value (money or documents) that is deposited with a third party to be delivered when the condition of the contract is delivered. Escrow can be used, for example, to deposit funds with an attorney or escrow agent to be disbursed upon the closing of a real estate sale.
Mortgage insurance:
Insurance that protects lenders against losses if a borrower defaults on a home loan. It’s typically required if the down payment is less than 20 percent of the purchase price.
Prequalification:
A preliminary assessment by a lender of the amount it will lend to a potential buyer. It isn’t an approval of credit and doesn’t signify that underwriting requirements have been met.
Principal:
Amount of money owed on a loan, excluding interest. Making this monthly payment reduces the balance of the mortgage.
Underwriting:
Part of the loan process where it’s decided if a loan will be provided to a potential homebuyer. It is based on credit, employment, assets and other factors to assess risk and match it to an appropriate rate and loan amount.
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