When you apply for a mortgage you are probably going to hear some words or abbreviations that you might not know how to define. Terms like “APR” and “closing costs” are enough to make anyone ask Google for a definition. We’re here to help clear up any confusion around words associated with home loans so you can feel confident when you apply for a mortgage. Continue reading for definitions of common mortgage terms explained in plain language.
What is a mortgage?
A mortgage is a loan that can be used to buy or repair a house. Some mortgages can be used to buy AND fix a house. Borrowers repay their mortgage in monthly installments that are split into principal and interest. A mortgage payment calculator can help show you how your potential mortgage payment might look.
Below are some key words that may come up when you talk to a lender about a mortgage.
Principal
The original amount of money borrowed for a loan. As you make mortgage payments, the principal amount will get smaller and may also reduce your interest payment.
Interest
The cost to borrow money and is charged as a percentage of the original amount borrowed. This can appear as an additional cost to your principal payment.
Annual Percentage Rate (APR)
The yearly cost of borrowing money which is shown as a percentage. This includes fees and the interest rate on your loan.
Closing Costs
The fees you pay when you finalize (also called “close”) your home loan. Common closing costs can include taxes, insurance, and record filing, among other fees.
Down Payment
The amount of money you pay at the beginning of your mortgage process that is part of the total cost of the loan. Sometimes, if you make a larger down payment you may be able to save money.
Debt-To-Income Ratio (DTI)
How much of what you earn each month (before taxes) that goes to paying your debt like credit cards, rent, or other loans. Your DTI can show if a mortgage will work with your budget.
Adjustable-Rate Mortgage (ARM)
A mortgage option that has an interest rate that changes over time. The interest rate on your mortgage will change (up or down) based on what Federal interest rates do.
Fixed-Rate Mortgage
A loan option with a set interest rate that does not change. You will always know what your payment will be each month with a fixed-rate mortgage.
Try this fixed- vs. adjustable-rate mortgage calculator to compare how the cost of these mortgages are different.
Approval1
A official document that tells you how much you can afford on a mortgage. When you know the mortgage amount you can afford you can shop for homes near that number.
Qualification2
An estimate of what you might be able to borrow for a mortgage. This is not the same thing as an approval but it can still help you shop for houses that you could afford.
If you are getting ready to buy a home, it is important to tell your loan officer if you need more information and to ask them to explain any part of the mortgage process you might not fully understand. Our loan officers are always available to answer any mortgage questions that you may have. Find your local PrimeLending loan officer here.
1All loans are subject to credit approval and identification of acceptable property. Conditions and restrictions apply.
2All loans subject to credit approval. A qualification is not an approval of credit and does not signify that underwriting requirements have been met. Conditions and restrictions apply.
