With all of the various rules and stipulations, the mortgage industry can be very confusing for many homeowners, especially first-time homeowners. According to data from Sept. 2016, 59% of homeowners wish that they had a better understanding of their mortgage loans’ terms and details. By knowing the definitions of these common terms, you’ll start your journey to more easily understanding your mortgage.

  • Adjustable Rate Mortgage: Known as an ARM, this type of mortgage has a fixed rate of interest for a set period of time. This period is typically one, three or five years. The interest rate is lower during that period, but after the period ends it will adjust based on an index.
  • Amortization: The amortization is simply the schedule of how the loan is intended to be repaid. For mortgage loans, it typically includes a monthly breakdown of the amount of interest you pay and how much is paid on the amount borrowed.
  • Closing Costs: Any homebuyer must pay costs and fees during the mortgage process. These costs typically include attorney fees, recording fees, and more.
  • Escrow: The mortgage lender maintains an escrow account for a borrower that collects money that is used to pay the taxes on the home. Upon the initial closing of the mortgage, the borrowers typically need to set aside a percentage of the yearly taxes and this is held in the escrow account.
  • Good Faith Estimate: This is an estimate made by the mortgage lender of the closing costs from the mortgage. As the name implies, a good faith estimate is not an exact amount, but rather a way for lenders to inform buyers what they will likely need to pay at the closing of the loan.
  • Loan-to-value Ratio: A financial calculation common for mortgage loans, the loan-to-value ratio is determined by dividing the amount of the mortgage by the value of the home. In order to qualify for a mortgage, lenders typically require this rato to be at least 80%.
  • Origination Fee: Borrowers often need to pay an origination fee to the lender when they apply for a mortgage fee. The origination fee can encapsulate an application fee, appraisal fees, and fees for follow-up work.
  • Points: The points are the percentage points of the loan amount. Lenders often allow borrowers to buy down their interest rate by paying points. If borrowers stay in the home for the duration of the loan, paying a percentage point up front is usually a good way to save.

A mortgage loan is a complicated, but necessary part of homeownership. By knowing these basic terms, you can have a more active role in determining your financial wellbeing.