Common Mortgage Terms Explained
Are you interested in purchasing a new home? Below are the most common terms to know, as you navigate the home buying process.
Ten Common Mortgage Terms:
Annual Income – The amount of money you earn in a year, including yearly salary or wages, bonuses, commissions, overtime, tips, etc. Your annual income is a critical factor in determining how much a mortgage lender can lend you towards the purchase of a home.
Annual Percentage Rate – Known as APR, the annual percentage rate is simply the interest charged on your mortgage loan plus fees and other costs associated with your loan, as determined by the lender.
Earnest Money – In some cases, a buyer will put forth earnest money to show the seller just how committed they are to purchasing a property. The money is typically placed into an escrow account and credited towards the purchase price of the property at closing. In some cases, if the sale falls through due to lack of financing or any other reason, the seller may be allowed to keep 100% of the earnest money.
Down Payment – A down payment is the lump-sum that you owe at closing. Many homeowners strive for a down payment of 20% of the purchase price of their home. Mortgages are available that require a lesser down payment; however, the interest rate may be higher as your down payment decreases.
Principal – The amount of money you owe to the lender (excluding interest) every month after the down payment is made.
Interest – When you borrow money from a lender to purchase a home, you will make payments on the loan with interest (a percentage of the amount borrowed, as determined by the lender).
Equity – As you make monthly mortgage payments, equity grows! Equity is the difference between what you have left to pay on your mortgage and the current market value of your home. According to ATTOM Data Solutions, “Nearly 15 million homes in the U.S. were equity-rich in the fourth quarter of 2019, meaning their mortgages were 50% or less of their estimated market value” (HousingWire.com). As home values rise and equity increases, homeowners gain leverage to make home improvements, payoff debt and assist with major expenses such as helping children through college.
Rate – The amount of money (typically expressed as a percentage) that it will cost you to borrow money. Many factors influence your mortgage rate, including credit history, credit score, type of mortgage loan, amount of down payment, purchase price, etc.
Credit Score – A credit score is a statistical number based on an evaluation of creditworthiness. Scores range anywhere from 300-850 and fluctuate depending upon one’s debt ratio, percentage of credit currently being used, payment history, etc. According to the Ellie Mae Millennial Tracker, “FICO scores have risen among this age group from an average of 721 in December 2018 to 728 in December 2019” (HousingWire.com). Lenders utilize credit scores to determine whether or not to offer credit.
Closing Costs – Once you apply for a mortgage loan, the lender will provide you with a loan estimate that includes the amount due for closing costs – title insurance, escrow fees, lender fees, real estate commission(s), taxes, etc. Closing costs are paid in addition to the down payment at the time of purchase.
Everything you learn at the forefront of the home buying process will enable you to make the best choices for your future, your family, and your finances for years to come.
At GoPrime Mortgage, Inc., it’s more than just a mortgage. We don’t just connect individuals with a loan – we’re connecting families with their dream homes! Find a local lender near you today!