Trying to analyze numbers can be confusing enough if you’re planning on buying a home. The last thing you should have to worry about is unfamiliar words, too, but there are lots of them when it comes to getting a mortgage. So, we’ve got you covered – here’s a list of important terms that you may hear throughout the homebuying process, along with what they actually mean.
- Amortization – The gradual reduction of the mortgage debt through regularly scheduled payments over the term of the loan.
- Annual percentage rate (APR) – The measure of the cost of credit stated as a yearly rate; includes such items as the stated interest rate, plus certain charges.
- Appraisal – A written estimate or opinion of a property’s value prepared by a qualified appraiser.
- Debt-to-income ratio – The relationship between a borrower’s total monthly debt payments (including proposed housing expenses) and his or her gross monthly income; this calculation is used in determining the mortgage amount that a borrower qualifies for.
- Discount point (or point) – A fee paid by the borrower at closing to reduce the interest rate. A point equals 1 percent of the loan amount.
- Escrow – An item of value, money, or documents deposited with a third party to be delivered upon the fulfillment of a condition. For example, the deposit by a borrower with the lender of funds to pay taxes and insurance premiums when they become due, or the deposit of funds or documents with an attorney or escrow agent to be disbursed upon the closing of a sale of real estate.
- Mortgage insurance – Insurance that protects lenders against losses caused by a borrower’s default on a mortgage loan. MI typically is required if the borrower’s down payment is less than 20% of the purchase price.
- Prequalification* – A preliminary assessment by a lender of the amount it will lend to a potential homebuyer. The process of determining how much money a prospective home buyer may be eligible to borrow before he or she applies for a loan.
- Principal – The amount of money owed on a loan, excluding interest. Also, the part of the monthly payment that reduces the remaining balance of a mortgage.
- Underwriting – A step in the loan process where it is decided if a loan will be provided to a potential homebuyer; this decision is based on credit, employment, assets, and other factors and the matching of this risk to an appropriate rate and term or loan amount.
If you have questions about any additional terms you don’t see on this list, get in touch with one of our home loan experts.
*A prequalification is not an approval of credit, and does not signify that underwriting requirements have been met.