Amortization. Equity. Escrow. ARMs. If just reading these words makes your eyes glaze over, brain go fuzzy, and head begin to spin, you’re not alone! Whether you’re a first time homebuyer or have been through the mortgage process before, nothing can take the wind out of your sails and the fun out of buying like a bunch of confusing financial jargon. But fret not! Here at Delmar Financial, we compiled a list of some of the most common mortgage terms and their definitions so it’s nothing but smooth sailing into your new home!
Adjustable Rate Mortgage – A home loan in which the interest rate changes periodically based on a standard financial index. Most ARMs have caps on how much an interest rate may increase.
Amortization – Amortization is a schedule for how the loan is to be repaid. For example, a typical amortization schedule for a 15-year loan will include the amount borrowed, interest rate paid and term. The result will be a month breakdown of how much interest you pay and how much is paid on the amount borrowed.
Appraisal – A professional appraiser will look at a property and give an estimated value based on physical inspection and comparable houses that have been sold in recent times.
Collateral — Property pledged as security to a debt. If the borrower fails to repay the loan, the lender may gain ownership of the collateral and sell it to recover the money.
Closing Costs – Costs the buyer must pay during the mortgage process.
Down Payment – The amount of the purchase price the buyer is paying. Generally, lenders require a specific down payment in order to qualify for the mortgage.
Equity – The difference between the value of the home and the mortgage loan. Over time, as the value of the home increases and the amount of the loan decreases, the equity of the home increases.
Escrow – At the closing of the mortgage, borrowers are generally required to set aside a percentage of yearly taxes and home insurance to be held by the lender called an escrow account. On a monthly basis, the lender will also collect an equal amount as part of the monthly mortgage payment to be used to pay taxes and home insurance when the billing is due. The lender maintains this escrow account.
Fixed Rate Mortgage – A mortgage where the interest rate and the term of the loan is negotiated and set for the life of the loan.
Closing Disclosure– Discloses APR and the final details about the mortgage loan you have selected. It includes loan terms, projected monthly payments, and closing costs.
Homeowners Insurance – An insurance policy that includes hazard coverage, covering loss or damage to property, as well as coverage for personal liability and theft.
Debt to Income Ratio (DTI) – Calculated by dividing total recurring monthly debt by gross monthly income, expressed as a percentage.
Loan to Value Ratio (LTV) – Calculated as the amount of the mortgage lien divided by the appraised value of the property, expressed as a percentage.
Principal – The term used to describe the amount of money that is borrowed for the mortgage. The principal amount owed goes down as borrowers make payments.
Still have questions or ready to take the next step? Contact one of our mortgage loan experts today at (314) 434-7000 or get the ball rolling with this free secure online application!