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Demystifying Mortgage – 10 Terms You Should Know

6/06/2024

Buying a home is one of the biggest financial decisions you’ll ever make – and it’s one you should be well-prepared for. But when the process comes with its own unique set of unique terms and jargon, it can be overwhelming to try to learn everything all at once. You can get ahead of the curve by getting to know some of the most common mortgage terms, and maybe impress your realtor along the way. 

Annual Percentage Rate (APR) 

The annual percentage rate (APR) is a broad measure of the cost of borrowing. It includes the interest rate on your loan, plus any extra lender fees or charges. 

Credit Score

A credit score is a number that assesses your creditworthiness based on factors like your credit history and current financial situation. Your credit score can tell a mortgage lender how likely you are to repay a loan on time, so maintaining a high credit score could help you in securing a loan. 

Down Payment 

A down payment is the amount that you pay toward a home upfront. There are different options when it comes to what you can use to make a down payment – personal savings, proceeds from the sale of your existing home, a gift from friends or family, or even down payment assistance programs can help fund your dream home. 

Debt-to-Income (DTI) 

Your debt-to-income (DTI) ratio consists of all your monthly debt payments – think loans, credit card bills, etc. – divided by your gross monthly income. Lenders will use this number to measure how well you’ll be able to keep up with loan payments, meaning you’ll want to keep your DTI low. 

Equity 

Home equity is the difference between your property’s current value and the amount you still owe on your mortgage. You can determine how much equity you have by subtracting your remaining mortgage balance from the property’s market value.  

Escrow 

An escrow account is used to pay for certain property-related expenses, like property taxes or homeowners insurance. These are set up by mortgage lenders, and a portion of your monthly payments will go into the account. If your loan doesn’t have an escrow account, you’ll pay property-related expenses directly. 

Interest Rate 

The interest rate on a mortgage loan is a percentage rate that indicates how much you’ll pay each year to borrow funds. Interest rates can be fixed or variable, depending on what kind of loan you take out. 

Loan-to-Value (LTV) 

A loan-to-value (LTV) ratio compares a loan amount to the value of the property. A higher down payment will result in a lower LTV. Lenders use this kind of ratio to determine whether you’ll have to pay private mortgage insurance (PMI). 

Private Mortgage Insurance (PMI) 

Private mortgage insurance (PMI) is a type of insurance that protects the lender. You may be required to pay PMI if your down payment is less than 20% of the property’s value on a conventional loan. The good news? You may be able to remove PMI from your loan once you accumulate a certain amount of equity in your property. 

Principal 

Principal is the amount of a mortgage loan that you are required to pay back – essentially, the amount you take out in the loan. Your principal will shrink over time as you make payments. 

Have more questions? Talking with an expert might help. Our team of mortgage lenders is experienced, savvy, and happy to walk you through the parts of the home buying process that might seem daunting. Take the first steps toward buying a home today!

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