Mortgage Terminology You Should Know

Mortgage Terminology You Should Know

For any home buyer, the mortgage application process can be intimidating, but Billionhomes is committed to empowering our visitors with knowledge on all things mortgage-related. Here are a few frequently misunderstood mortgage terminology in plain English to help with that.

Initial Amortization

The term "amortization" refers to how your mortgage gets smaller as you pay it off. Each time you make a mortgage payment, a component of the repayment is used to lower the principal, and a different portion is used to pay the interest. For the majority of loans, the initial payments include a higher interest component. A growing percentage of each payment is applied straight to your principle debt as your loan gets older.

2. APR (Annual Percentage Rate)

The APR, or annual percentage rate, which measures charges connected with your mortgage, and the interest rate are sometimes confused by prospective homebuyers. Your monthly payment is based on the interest rate, which is the cost of borrowing the money for your house.

The APR is made up of several expenditures, including discount points, mortgage broker fees, and some closing costs, in addition to the interest rate. The APR is a more comprehensive metric because it determines the whole cost of the mortgage. Interest rates and APR are both presented as percentages. Reviewing the interest rate and APR together will help you compare loans in an appropriate manner.

3. Evaluation

A property's market value is estimated through an appraisal. In order to make sure that the asking price of a home does not exceed its value, lenders need an appraisal when you purchase it. The mortgage provider will pick the appraiser, and you will be charged for their services. The majority of assessments have a price range of $400 to $700 and can be covered by closing fees, while some lenders demand upfront payment.

4. Costs of Closing

These are costs that lenders impose on homebuyers. They can consist of the price of running a credit check, processing paperwork, hiring an attorney, having a house inspection, and more, albeit they might differ greatly depending on the property and its location. These expenses can be covered by either the buyer or the seller, and they might even be discussed during the property sale negotiations.

5. Precaution

A contingency is a requirement that must be satisfied before a contract is legally binding when you and the seller are negotiating the purchase of a home. A home inspection is a typical condition of a home transaction. In this instance, the sales agreement won't become legally enforceable until the buyer conducts a house inspection.

6. Reduction Points

Discount points, sometimes referred to as points, let you "buy down" (or reduce) the interest rate on your mortgage. One discount point normally costs 1% of the loan balance and reduces your interest rate by 0.25 percentage points. One discount point, for instance, would cost $2,500 and bring the interest rate on a loan for $250,000 with a 4 percent rate down to 3.75 percent. Your new interest rate would be 3.25 percent, and you would have to spend $7,500 to purchase 3 points.

(7) Escrow

You can be liable for paying your property taxes, homeowner's insurance, and private mortgage insurance each year. To cover these costs related to your property, lenders may open an escrow account on your behalf. With escrow, you add a specific sum to your monthly mortgage payment to compensate for these additional expenses. Then, when each payment is due, these funds are distributed.

8. Lien

Until the full balance of your mortgage is paid off, your home loan provider has a legal claim against your property known as a lien. Your house is used as security up until the loan is repaid, but as long as you make your payments, it is safe.

9. LTV (Loan-to-Value Ratio)

The amount of your mortgage debt divided by the value of your home gives you your LTV. Your LTV would be 90%, for instance, if you borrowed $90,000 to buy a house with an appraised value of $100,000. This ratio is crucial for both your loan's refinancing and mortgage underwriting (see below).

10. Date of Maturity

This is the deadline for making all principal and interest payments on your mortgage. Also known as the end of the tunnel!

11. PMI (Private Mortgage Insurance)

When you put less than 20% down on a typical mortgage, you will require a private mortgage insurance policy. In the event of your mortgage loan failure, PMI safeguards the lender against loss.


To ensure that a prospective homeowner is qualified for a mortgage and to determine the amount, a lender would "preapprove" them. The lender examines your financial information as part of the preapproval process, including examining your credit report and confirming your income and employment. It doesn't constitute a loan promise, but it shows potential sellers that you are reliable and financially secure enough to qualify for a mortgage. Furthermore, it provides you with a very accurate estimate of the amount and cost of the loan.

Prequalification 13.

Prequalification, like preapproval, is an estimation of the size of a mortgage you can pay based on your financial situation during the last two years. Prequalification, as contrast to preapproval, does not involve a formal mortgage application or a credit report. Many purchasers use this as the initial stage in the home-buying process and as a useful gauge for the price range of the homes they can afford.

14. Title

the official record stating that you are the property's legitimate owner. It represents all you've worked so hard for, so treasure it!

15. Financing

This is how lenders decide whether to approve a specific mortgage loan application. The three C's—credit, capacity, and collateral—comprise a large portion of the factors that underwriters take into account. The underwriter will ultimately decide whether to approve or reject your loan.

You've already gained an advantage over many other prospective homeowners by being familiar with these definitions of mortgage terms. Make a note of this page and contact one of our mortgage specialists to get assistance with the entire mortgage process.

This article was contributed on Jul 31 2022