Are you in the midst of securing a mortgage and need clarity on essential terms? This glossary covers everything you should know.
Mortgage lenders and real estate professionals often use complex terminology. If you're gearing up to purchase your first home or returning to the market, you'll likely encounter some unfamiliar jargon.
Here's a helpful summary of important terms.
Prequalification: This initial step involves sharing your basic financial details—like income, debts, and assets—with a lender over the phone. Based on this info, the lender can estimate the mortgage amount you might qualify for. No credit check is included at this stage, but it allows lenders to outline various options and make suggestions.
Preapproval: This process is more comprehensive than prequalification. You'll submit a formal loan application along with proof of income and assets. The lender will conduct a credit check to assess your eligibility. Following this, you'll receive a written conditional commitment for a specific loan amount, enhancing your position when negotiating with sellers.
Private mortgage insurance: Commonly known as PMI, this insurance is typically required when your down payment is less than 20% of the home's price. PMI costs around 0.25% to 2% of your loan balance annually, depending on various factors. You'll pay this as part of your monthly mortgage until you gain 20% equity in your property.
Appraised value: This refers to the estimated worth of a home, determined by a professional appraiser during the mortgage process. Most lenders mandate an appraisal by a third party to confirm the property's value aligns with the purchase price. While the borrower pays for the appraisal, the lender selects the appraiser. If the appraisal value falls short or surpasses the agreed price, mortgage approval may be jeopardized.
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Loan points: A point represents a fee equivalent to 1% of the loan amount. Lenders often charge points as part of their profit model, although you might negotiate for fewer or no points. For instance, a $150,000 mortgage at 4.5% interest could incur a one-point charge of $1,500.
Origination fee: This is an upfront cost charged by the lender for processing your mortgage application.
Down payment: This refers to the upfront amount a buyer contributes toward purchasing a home. Traditionally, lenders expect around 20%, but many now accept down payments as low as 3%. The earnest money you provide when making an offer is usually credited toward your down payment at closing.
Earnest money: When you decide to make an offer, earnest money acts as a deposit, demonstrating your seriousness and persuading the seller to hold the property for you. This deposit is typically held in a trust or escrow account until the contract is fulfilled, allowing the buyer more time to secure financing.
Escrow: This refers to funds held by a neutral third party, like an attorney, until specific conditions are met. For example, earnest money is placed in escrow upon submitting a purchase contract and is released to the seller at closing.
Title: A legal document, such as a deed, that proves ownership. Before buying a property, you usually need to pay for title research to confirm that no other entity has rights to the property, ensuring you obtain a clear title.
Title research: This involves a title professional gathering documents that record historical events related to a property, like past purchases and construction, to establish any interests or regulations affecting the property.
Balloon payment: Some mortgage loans do not amortize the full loan amount over their duration, requiring only interest payments until a substantial payment of the remaining balance is due at the end. This final amount is known as a balloon payment.
Amortize: This means gradually paying off a loan through periodic principal and interest payments or contributions to a sinking fund.
Adjustable-rate mortgage: A mortgage with an interest rate that fluctuates over time based on market conditions.
Fixed-rate mortgage: A mortgage that maintains the same interest rate throughout the entire loan term.
