Mortgage Basics: Terms You Should Understand

When you apply for your first mortgage, you’ll hear many new terms that can be confusing. Don’t assume you understand what mortgage terms mean. Take the time to educate yourself so you know what  you’re getting into. Before you ever see the mortgage contract, you’ll be discussing certain terms with the lender.

Interest: a percentage of the loan that you pay monthly on top of the actual loan amount.

APR: An  abbreviation for Annual Percentage Rate. To calculate monthly payments, the figure must be divided by 12.

Principal: This is the amount you borrowed less payments that have been applied the loan. Your loan payments are calculated by multiplying this number by your annual interest rate and dividing by 12, then divided by the total number of years the loan covers.

Amortization: In the first few years of a loan, most of the payment goes to interest. As you pay down the loan, the interest costs less, so more of your payment is applied to the principal.

Points: A point is 1% of the principal. For each 1% you pay to the lender, the lender will drop your annual interest rate by 1/8 of a percent. This strategy may help buyers who intend to stay with the same mortgage for the life of the loan.

Escrow: This is a separate account set up to hold tax and insurance money until the bills come due. Typically, a portion of the mortgage payment is automatically placed in escrow, but some loans allow you to handle such matters yourself.

PMI: This abbreviation stands for Private Mortgage Insurance. When buyers cannot come up with a down payment of more than 20% of the home’s value, banks will require the borrower carry PMI. This insurance guarantees the bank will get paid if you default on the loan. Once your down payment plus payments toward principal exceed 20% , you can stop purchasing PMI.

Mortgagee: This is the person who funded the mortgage, or the lender.

Mortgagor: The is the person the mortgage was given to, or the borrower.

Rate Lock-in:  Some loan programs allow borrowers to “lock in” the rate that was available the day they applied for the loan. Since rates can change from day to day, the helps borrowers know just how much their monthly payments are, even if there are delays between the time the loan was applied for and the time the closing paers are actually signed.

Closing: A closing is a meeting in which the home seller, borrower and lender transfer rights o ownership on a piece of real estate property. The seller will sign a “Quit Claim Deed” which ensures the previous owner cannot claim ownership rights in the future. The borrower will sign documents for the lender, under the supervision of an attorney. The lender’s attorney typically acts on behalf of the lender.

Closing Fees: There are costs associated with taking out a mortgage and these are often paid at the time of closing as amounts added to the mortgage principal. These fees become part of the principal and are paid back over time in the scheduled monthly mortgage payments.

Promissory Note:  The note is a document within the closing papers in which the borrower provides a written promise to pay the loan within the set terms and conditions. This document also spells out the mortgagee’s (lender’s)  rights should the mortgagor (you) default.

Closing Documents: Borrowers sign a great many documents at closing including the promissory note, (Housing and Urban Development) HUD forms required by the federal government, Truth in Lending disclosures and other documents. Some of these documents are mandated by federal law to protect borrowers. Others are required by the lender to protect the company’s interests.

After the closing, the house is yours, but the lender holds a stake in the property as a lienholder. Should you default on the loan, the lender can seize the home and sell it to get back the money it lent.