Understand the Language of Mortgage Lenders
By Deena Smith
Vice President, Mortgage Loan Officer
I don’t speak any foreign languages, but with terms like “amortization” and “escrow” part of my everyday language, you might think those of us in the mortgage loan business have our own secret language. I don’t want the home-buying process to feel like it’s taking place in a foreign language, so let’s take a look at some of the key terms and phrases so you can start the process with a good, basic understanding of the mortgage loan language.
Equity refers to the amount of value you have in your property, or what you actually own. When you make your down payment, this gives you equity in your home.
When your bank talks about points, this refers to the prepaid interest assessed by the lender when your loan closes. One point is equal to one percent of the loan amount.
To get a fixed-rate mortgage, your interest rate is set for the term of the loan and will not be adjusted. Conversely, an adjustable rate mortgage means your interest rate can increase or decrease at various points during the life of the loan.
Mortgage insurance is money paid to insure your mortgage when your down payment is less than 20 percent. Some people opt for a second mortgage instead of mortgage insurance.
Amortization means the period of time in which you’ll owe money to your lender. Most commonly, loans are amortized over 15, 20 or 30 years, and your monthly payments of principal (the amount of your loan) and interest are calculated based on this time period.
When you hear the term escrow, it is referring to an account used to collect and hold funds to pay your property taxes, homeowner’s insurance premiums or other charges when they become due. The account is often established for you when you take out your mortgage. Real estate taxes and insurance premiums must be paid regularly — typically, payments are due once or twice a year — and failure to pay these bills on time may cost you money in tax penalties or result in cancellation of your insurance coverage.
An appraisal is performed by a certified appraiser and is an estimate of the value of a home based on the sale price of comparable properties in a market area; it’s required for a mortgage loan. The appraisal fee is disclosed during the loan process and is generally charged to the borrower.
After an appraisal, you may hear the term “loan-to-value ratio.” Also known as LTV, this is the ratio between the amount of the mortgage loan and the appraised value of your property.
Upon transfer of the property from the seller to the buyer, there will be closing costs involved, which include title costs, taxes and other fees incurred during this process. (A title gives proof of property ownership.)
Your banker should be able to explain each part of the mortgage process to you, including all of the legal and financial terms that you may not have heard before, so don’t be afraid to ask if you need clarification about something. Your home may possibly be the biggest purchase you’ll ever make, so it’s essential to understand the contract you’re agreeing to uphold.