Mortgage Terminology 101 - Understanding the Basics
Everyone wants to make responsible choices when it comes to their mortgage, but so few people accept mortgage terms aligned with their best interest.
Why is that?
In many cases it's as simple as a homeowner not truly understanding what their options are. There are now laws in place to protect the homeowner from those who wish to take advantage of them, but that doesn't mean that homeowners needn't be responsible for understanding the process and their options.
To help you make the best possible decision when taking out your home loan we’ve compiled some of the mortgage industry’s most often used terms along with simple, easy-to-understand definitions of each.
Without further ado, here’s Mortgage Terminology 101:
ARM: An acronym standing for Adjustable Rate Mortgage. If you sign up for an ARM the interest rate on your loan with go up or down from time to time, depending on what’s going on in the economy at large. Agreeing to an Adjustable Rate Mortgage is a good idea if your interest rates are high when you take on your mortgage.
Fixed Rate Mortgage: Unlike an ARM, a Fixed Rate Mortgage uses a single unchanging interest rate- a rate set down according to economic conditions when you take on your loan. If interest rates are low when you apply for a mortgage it’s a good idea to choose a Fixed Rate Mortgage on the assumption rates will be higher in the future.
Principal: This is the total amount borrowed. If you are refinancing a loan, mortgage principal will be assessed based upon an appraisal of your home. If you are purchasing a new home, the amount borrowed will be negotiated between the buyer and seller, and approved by the bank as an acceptable amount.
APR: Your Annual Percentage Rate. Contrary to popular belief your APR isn’t equal to just your loan’s interest rate, it also takes into account additional costs attached to your loan, including origination fees. This explains why your APR will always be higher than the market’s current interest rates.
Closing Costs: In addition to the actual value of your house you will also need to get the money together to pay various fees before you can finish the process. These costs may include escrow payments, attorneys fees and loan origination fees.
LTV: Refers to the Loan to Value of your new home. If your home is worth $100,000 and you take out a $50,000 mortgage to buy it, then the LTV of your mortgage is 50%, as $50,000 is 50% of $100,000. Even if you have multiple mortgages on a single property each of those mortgages will have its own LTV. Different LTV rates have different regulations applying to them, for example a mortgage with a LTV higher than 80% requires private mortgage insurance attached to it.
Points: There are two different types of points that can be assigned to your mortgage- discount points (which decrease your loan’s interest rate) and origination points (which tack on to the loan to cover miscellaneous expenses related to processing the loan). In both cases a point is equal to one percent of your total loan amount. So if your $100,000 loan receives 2 origination points you will owe an additional $2,000, conversely if your loan receives 5 discount points you will pay $5,000 less than you expected.
Title Insurance: A required form of insurance that guarantees that the property’s seller is legally able to transfer the title to your name, even if some sort of legal issue crops up during the process by covering any legal fees associated with straightening out the unforeseen mess. You should receive an owner's policy, for your protection, and the bank will receive a lender's policy, for its protection.
While understanding mortgage terminology 101 is invaluable when you are seeking to purchase a new house or refinance an existing loan, a home mortgage calculator is a tool that can help you wrap your mind around what a monthly mortgage may end up costing once you figure in all of the "extras." Our useful guide can help you understand all what goes into this process so that you can enter into a contract with your eyes wide open.