Financial Advice Category
Financial Advice Category

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This is a free financial education resource. Some of the products mentioned may not be offered by Horizon Credit Union at this time

Key Mortgage Terms

Key Mortgage Terms

Choosing to buy a home is a straightforward decision, but navigating the home loan process can be intricate, with many mortgage terms that might be new to you. We've simplified and explained some frequently encountered mortgage terms to empower you during the homebuying journey.

Below is a glossary of essential home loan terms you'll want to familiarize yourself with:

Adjustable-rate mortgage (ARM)

An adjustable-rate mortgage has an interest rate that can fluctuate during the loan's lifetime. The borrower may pay a lower initial interest rate. Still, the interest can climb (or drop) to match lending conditions after a few years.

Amortization

Amortization refers to paying off a mortgage loan following a specific schedule. This schedule outlines how much each payment applies to the mortgage principal—the amount borrowed—and how much covers the interest—the cost of borrowing.

Annual percentage rate (APR)

The annual percentage rate is the interest rate expressed as a yearly value. It includes the interest rate and any lender fees associated with the loan.

Appraisal

An appraisal is a third-party inspection and value determination of the value of a home. It allows the lender to ensure the home is worth the purchase price based on factors such as area comps, real estate trends, and property condition.

Closing costs

Closing costs are those fees paid to apply for, get approved for, and set up the mortgage loan. It includes origination fees, title insurance, survey, appraisal, and other costs, often accounting for between 2% and 6% of the total loan value.

Closing disclosure

The closing disclosure outlines the loan details, including the annual percentage rate and the interest rate. It will include the lender fees, closing costs, and projected monthly payments the borrower must pay.

Commission

The commission describes the fee a real estate agent charges to sell the home. The home seller typically pays this fee from 5% to 6% of the sale price.

Conforming Loan

A conforming loan is one in which the home's value is under the figure set by the Federal Housing Finance Agency. The value is location-specific, but by comparison, these are not jumbo loans.

Contingency

A contingency is a specific rule within a contract, usually a purchase offer that provides for particular circumstances. For example, the offer on the home may be contingent on the buyer obtaining financing or on the results of a home inspection. If the contingency fails, the buyer can back out of the loan.

Conventional loan

A conventional loan is any loan not backed by a government agency, such as the VA and FHA loans available. The lender sets these loan terms.

Counteroffer

A counteroffer is a secondary offer, often from the seller, after the buyer places an initial offer. The counteroffer may include different terms and conditions and value than what the buyer added in the initial offer.

Debt-to-income ratio (DTI)

The debt-to-income ratio compares the monthly debt payments a person has every month to the amount of income coming in. Debt-to-income ratios look at how much money is available to the borrower to make payments on the loan comfortably each month.

Deed

A deed is a legal document that records ownership of real estate. It outlines the home’s ownership at any given point. When a person purchases a home with a mortgage, the lender places a lien on the property to secure the mortgage. It allows the lender to seize the property through foreclosure if the borrower defaults.

Discount points

Discount points allow you to prepay mortgage interest. Typically, 1 point equals 1% of the loan amount. By purchasing these points, you can reduce the interest rate and pay less interest over the life of the loan.

Down payment

The down payment on a home loan is the amount put down by the home buyer, in cash or other assets, that is not a mortgage. It is the initial cash-based investment in the property. The higher the down payment is, the less the home buyer needs to finance.

Earnest money

Earnest money is a deposit you make when submitting a home offer. This deposit shows the seller that you're serious about buying the property. It usually ranges between 1% and 2% of the home's listing price.

Equity

Equity is the home's value not under a mortgage but the portion you own outright. To determine equity, first estimate the home's current value and then subtract the amount owed on a mortgage loan. The difference in equity.

Escrow

Escrow is a term used to hold money for various purposes. Earnest money, for example, is held in an escrow account until the transaction moves forward. At that time, the funds move to the seller. Also, after the mortgage is in place, the lender will collect property taxes and insurance payments with each mortgage payment and put those funds into an escrow account until the debt is due.

FHA loan

A private lender, such as a bank or credit union, issues an FHA loan, but the Federal Housing Administration backs it. FHA loans typically require a 3.5% down payment. They are often accessible to those with lower credit scores than conventional loans.

Fixed-rate mortgage

A fixed-rate mortgage has an interest rate that stays constant for the duration of the loan. Since the interest rate doesn't change, the borrower's monthly payment remains consistent until they repay the loan in full.

Home appraisal

A home appraisal is an inspection provided by a third-party licensed appraiser that considers the condition, location, and recent local home sales to estimate the value of real estate.

Home inspection

Home inspections are a thorough evaluation, often for safety and condition considerations. The buyer has a home inspection to find any risks or conditions that may impact the value, integrity, or safety of a home before closing the sale transaction.

Interest rate

The interest rate on a home loan is the fee paid to borrow the money to buy the home, expressed as a percentage. Interest rates do not include other fees but represent the interest rate charged.

Jumbo loan

A jumbo loan, also known as a non-conforming loan, is one in which the value of the mortgage loan is above the limits set by the Federal Housing Finance Agency. This figure is location-based and changes annually.

Listing Agent

The listing agent is the real estate agent who has the right to list the home for sale on behalf of the seller.

Loan estimate

A loan estimate is a document that outlines specific details about a proposed home loan, including the estimated interest rate, closing costs, and taxes and insurance. It also includes the estimated monthly payment and whether it is a fixed-rate or adjustable-rate loan.

Loan-to-value ratio (LTV)

The loan-to-value ratio compares the amount a home buyer borrows to the home's value, considering the buyer's down payment. For instance, if a home buyer buys a $100,000 home, borrows $80,000, and makes a $20,000 down payment, the loan-to-value ratio stands at 80%.

Origination Fee

The origination fee is the cost charged to the borrower for creating the mortgage loan. It typically includes the application, underwriting, and funding costs related to the loan.

Pre-approval

A lender pre-approves a loan application after reviewing and verifying all the provided data. While the lender can still deny the application later if circumstances change, such denials are rare.

Prequalification

Prequalification is the first step in the mortgage application process. The lender gathers the borrower's information and determines the borrower's potential eligibility for the loan based on that preliminary data. However, the lender must verify the information and formally approve the loan.

Principal

The principal is the amount of money borrowed to buy a home.

Private mortgage insurance (PMI)

Private mortgage insurance is a requirement for those who put less than 20% down to purchase a home, meaning they owe more than 80% of the home’s value to the lender. PMI protects the lender should a buyer default.

Purchase Agreement

The purchase agreement serves as the home's sale contract. This legally binding document specifies the home's price and condition, details any down payments, provides the property's address and description, sets closing dates, lists contingencies, and notes the earnest money paid.

Rate Lock

A lender may offer a rate lock for a specific period. During that time, the interest rate on the loan offered will remain in place. After the lock expires, the rate may change based on market conditions.

Realtor

A realtor is a real estate agent associated with the National Association of Realtors, a professional organization.

Real Estate Agent

A real estate agent is a licensed professional representing the home buyer or seller during transactions. The agent often manages marketing, conducts negotiations, and oversees the legal procedures of buying or selling a home.

Seller concessions

Seller concessions refer to the portion of closing fees, usually borne by the buyer, that the seller agrees to cover to finalize the sale. These concessions can also encompass any reductions in the home's sale price that the seller offers, often due to required repairs.

Term length

The term length is the length of the mortgage loan. Typical lengths include 10, 15, 30, and 40-year loans.

Title

The title is the formal document filed in the court and county that shows the ownership of the property and describes that property in detail.

Title insurance

Title insurance protects against claims challenging the legal ownership of a property. It ensures that the borrower remains safeguarded if someone attempts to assert ownership over the home they're purchasing.

USDA loan

The U.S. Department of Agriculture backs a USDA loan and is a part of the Rural Housing Service. This type of loan typically does not require a down payment. It offers a lower interest rate to those who buy a home in rural areas and meet specific requirements.

VA loan

A VA loan is one backed by the U.S. Department of Veterans Affairs. It typically does not require a down payment, and interest rates are lower. It is available only to service members, veterans, and their surviving, eligible spouses.