Despite being a common financial tool, mortgages can be complicated. Whether you’re looking to purchase your first home, or you’re looking to refinance the mortgage you currently have—there are some terms that you may know, and some you may not. Let’s break down some of the most common terminology you need to know to traverse your mortgage search.
An appraisal is an unbiased valuation of a property performed by a certified real estate appraiser to determine a property’s market value. An appraisal is utilized to assure the lender that the mortgage loan amount being contracted to the borrower is appropriate given the value of the home.
Annual Percentage Rates (APR)
Annual percentage rate, or “APR”, is the annual cost of the mortgage loan to the borrower including fees.
This differs from the interest rate in that it includes the interest a borrower is paying, as well as other charges or fees such as mortgage insurance, closing costs, discount points, loan origination fees, among other inclusions. For this reason, the APR is usually higher than your interest rate.
The APR of a mortgage loan is used to provide borrowers a better idea of what they’ll be paying annually for their mortgage loan, and is more all encompassing than just the interest percentage.
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In regards to mortgages, an asset is anything that you currently own that holds cash value. This could include bank accounts, a 401(k), stocks, and more. During the mortgage application process, the lender will verify your assets to ensure that you have sufficient funds to close.
Amortization is the process of which you’ll pay your mortgage over the term of its life. Thus, your amortization schedule will determine how much you’ll pay towards both your principal and interest through the years you are paying it. For example, depending on your mortgage, your payments towards your mortgage in the beginning of your loan will go more so towards interest with a smaller portion of your payments going towards the principal, but the portion and their allotment may change after a predetermined amount of years paying your monthly payments on time.
The term of your mortgage is the agreed upon length of your mortgage loan. Common terms include 15-year terms and 30-year terms. Both the lender and the borrower agree that upon full payment of the mortgage loan at the conclusion of the term, the contract will be fulfilled and the property will belong solely to the borrower.
The principal is the loan amount the lender is agreeing to loan the borrower. For example, if you purchase a home with a $300,000 mortgage, your principal balance will be $300,000. As you make payments towards your mortgage, your principal balance will decrease until it is $0 at the end of your term.
The down payment is the first payment you’ll make towards your home purchase, typically represented as a percentage of the value or sales price. For example, if you buy a home for $100,000 with a 20% down payment–you’ll provide $20,000 at the closing of that home purchase as your down payment.
A pre-approval is a lender’s determination that you will likely get approved for a specific mortgage loan amount. This is determined after the lender assesses your assets, liabilities, income, and credit score. For example, you may be pre-approved by a lender for a $300,000 mortgage loan, so the lender will provide you a letter confirming that you are pre-approved to purchase a home up to that budget. Real estate agents prefer showing properties to buyers with a pre-approval letter, because it shows that the buyer is financially capable of purchasing the property.
The Title is the legal proof of ownership for a home or property. It will typically include a description of the property, the name of the owner, and any liens that are on the property. When purchasing a home with a mortgage loan, your name will be on the Title of the home and the mortgage lender will typically have a copy of that Title. As you are on the Title of that property, you can access the land and potentially modify it as you see fit.
The Deed is the physical written document that transfers the title of the property from its former owner to its new owner. Sometimes the Deed is referred to as the vehicle of the property interest transfer. A deed represents the right of the owner to claim the property as its owner.
These are only some of the important terms that surround taking out a mortgage. Though some sound more complicated than others, they have simpler explanations once you dig into them. With how complicated mortgages can get, you can save yourself some stress by using Fiona to compare mortgages from premium lenders in one easy place. Try it out—it’s quick and easy!