Home loan vocabulary

Being familiar with these terms will help you understand the home loan process.

Mortgage

A mortgage is a loan to help you purchase a home. In return for lending you the money to purchase the home, you promise the lender to pay back the funds over a certain time period at a certain cost.

Each mortgage payment you make includes principal and interest. Principal means the amount you borrow based on the sale price of the home. Interest is the cost of borrowing money — the amount the lender is charging you for the loan. Some mortgage payments also include property taxes and insurance.

A mortgage loan is secured by the real estate being purchased. This means that the property backs up your promise to repay. Should you default, or stop repaying the loan, the lender could foreclose.

Many banks offer home loans, and some lenders specialize in mortgage lending.

Lenders must provide borrowers with a document that lists all of the estimated costs associated with getting the mortgage loan. This is called a Good Faith Estimate.

A realtor handing house keys to a couple.

Interest rate

The amount of interest paid per year divided by the principal amount (that is, the amount loaned). For example, if you paid $5,000 in interest per year for a loan of $100,000, the interest rate is 5,000 divided by 100,000, or five percent (5%).

A fixed-rate mortgage is a loan with an interest rate that remains the same over the life of the loan.

An adjustable-rate mortgage (ARM) is a mortgage with an interest rate that changes at scheduled dates to reflect market conditions.

Term

A period of time over which a loan is scheduled to be repaid. For example, a home mortgage may have a 30-year term, meaning it must be repaid within 30 years.

Loan to value (LTV)

The amount of a loan in relation to the value of the property. For example: an $80,000 loan on a property worth $100,000 would be 80% LTV. If there is more than one loan, this is called the “combined” loan to value.

Appraisal

A professional estimate of a property’s market value at a certain point in time. (The market value is the price a property will realistically sell for based on recent selling prices of similar properties in the same area.)

Closing

The day and time when all final mortgage documents are signed and all necessary payments are transferred to complete the purchase of a house. Also known as the settlement date.

Underwriting

The process by which a lender decides whether to lend money based on: the value of the property, the borrower’s creditworthiness and ability to pay, and the lender’s lending guidelines and practices.

Check with a mortgage financing expert for details about financing options.

View a chart that describes the types of mortgage programs that are most widely available.

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