Mortgage Terminology Basics


Decoding the confusion behind mortgage lingo

Purchasing a new home can be one of life’s most exciting events. Trying to understand the terminology you may encounter when looking for the right mortgage, however, can bring more frustration than joy. Here are some of the most common terms that can come up when applying for a mortgage and buying a home; familiarizing yourself with mortgage basics can transform the whole home-buying experience into something you’ll remember for all the right reasons.

“One of the most important, and confusing, decisions that people make is buying a home and taking out a mortgage to pay for the house…finding a mortgage to pay for your home is probably just as important,” according to the experts at “The decisions you make on your mortgage will have financial ramifications for years to come.”

When discussing mortgages with your financial institution, the terminology used can make anyone’s head spin. Here are some of the basics to know:

Adjustable rate mortgage – Also known as an ARM, an adjustable rate mortgage has a fixed rate of interest for a set period of time; typical timeframes are one, three or five years. Initially, the interest rate will start low and after the set period of time, the rate will adjust regularly based on an index.

Annual percentage rate – If you carry a credit card, this term might be more familiar; the annual percentage rate, also commonly referred to as the APR, is the rate of interest to be paid back to your mortgage lender. This rate can be either fixed or adjustable.

Appraisal – A professional appraiser will conduct an appraisal, which is an estimated value of a property based on both physical inspection and comparison to other homes that have been sold recently.

Closing costs – This term covers the variety of costs that are involved in purchasing a home; referred to as closing costs, these include attorney fees, origination fees, title insurance and escrow payments. Typically, both the buyer and the seller will share the closing costs.

Escrow – An escrow is a neutral third party responsible for safely holding money and documents during the home-buying process until the purchase is complete. You will likely also create an escrow account after buying your home to manage your property taxes and insurance monies that are collected with every mortgage payment.

Equity – Equity is the difference between the value of your future home and your mortgage loan. Your home’s equity will increase over time as the value of your home goes up and the amount on your mortgage is paid down.

Private mortgage insurance – Your financial institution from where you’re obtaining your mortgage will require you to purchase Private Mortgage Insurance (PMI) if you’re financing more than 80 percent of the value of your new home. This insurance protects the lender should you default on your mortgage payments. A monthly PMI payment will be added to the cost of your mortgage payment.

To ensure you that you get the right mortgage for you, it’s important to ask the right questions and get the right information. The financial experts at suggest asking your potential lender the following questions:

  • What is the interest rate on the prospective mortgage?
  • How many origination and discount points will you, as the homeowner, have to pay?
  • What are the closing costs and will a good faith estimate of these costs be provided up front?
  • When can the interest rate be locked in and what will it cost?
  • What is the required minimum down payment?
  • What documents will need to be provided?
  • Could anything potentially delay the approval of your loan?

By asking your financial institution the right questions and by doing your own research behind the scenes to better understand the home-buying process, you can focus on enjoying the experience and looking forward to your future in your new home without any worries or confusion.

If you have any questions about mortgage rates or buying a new home, stop by today where a financial professional can help.


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