Key Mortgage Terms

Navigating the world of mortgages can be daunting, especially for first-time homebuyers. With so many terms to decipher, it's crucial to understand the key concepts before diving into homeownership. We’ve put together a brief guide of some of the essential mortgage terms you need to know:   

1. Principal

The principal is the amount of money borrowed to purchase a home, excluding interest and other fees. Each mortgage payment typically consists of both principal and interest, with a portion of the payment going towards reducing the loan balance. 

2. Interest Rate 

The interest rate is the percentage charged by the lender for borrowing the principal amount. It determines the cost of borrowing and directly impacts the monthly mortgage payment. Interest rates can be fixed, meaning they remain constant throughout the loan term, or variable, where they fluctuate based on market conditions. 

3. Down Payment

The down payment is the initial upfront payment made towards the purchase price of the home. It's typically expressed as a percentage of the total purchase price, with common down payment amounts ranging from 3% to 20% or more. A larger down payment often leads to lower monthly payments and reduced interest costs over the life of the loan. 

4. Amortization

Amortization refers to the process of paying off a mortgage loan over time through regular payments. Each payment is divided between principal and interest, with the proportion of each changing over the life of the loan. Amortization schedules outline the breakdown of payments over the term of the mortgage. 

5. Closing Costs

Closing costs are fees associated with finalizing the mortgage transaction and transferring ownership of the property. They typically include expenses such as appraisal fees, title insurance, attorney fees, and loan origination fees. Closing costs are typically paid at the time of closing and can vary depending on the lender and location. 

6. Private Mortgage Insurance (PMI)

PMI is insurance that lenders may require borrowers to purchase if their down payment is less than 20% of the home's purchase price. PMI protects the lender in case the borrower defaults on the loan. The cost of PMI is typically added to the monthly mortgage payment until the borrower reaches a certain level of equity in the home. 

7. Escrow

Escrow refers to a third-party account used to hold funds, such as property taxes and homeowners' insurance, on behalf of the borrower. Lenders often require borrowers to contribute to an escrow account as part of their monthly mortgage payment to ensure that these expenses are paid on time. 

Understanding these key mortgage terms is essential for making informed decisions when purchasing a home.

As always, our team of mortgage bankers are here to help you navigate the mortgage process and secure the right financing for your homeownership journey.