Common Mortgage Terms You Should Know

The mortgage industry is fraught with all sorts of arcane, unsightly terminology. Mortgage professionals throw around all sorts of unusual terms, terms which may be familiar to them but tend to be very unfamiliar to most people. If you’re looking to buy a home in the near future and think you’ll obtain financing, you should take some time and acquaint yourself with a few of the more common terms used in the mortgage industry. Knowing these terms will make the whole process much easier. You will be able to relax better as you won’t feel overwhelmed by any of the specialized lingo you encounter.

Many of the terms used in the mortgage industry are not specific to any location. It doesn’t matter if you buy here in the Greater Seattle area or elsewhere, you’re likely to come across these terms. Let’s look at 3 concepts which you’ll come across anywhere in the U.S. if you obtain financing for a home.

Annual Percentage Rate (APR)

This is a common one, and it’s one which isn’t well understood by the typical layperson. When you obtain a mortgage loan, you will receive a certain interest rate which applies to the loan balance. In other words, your monthly payment will be a function of your rate and the principal you owe. But your monthly payment is not always a function of just these things. This is because you often pay additional fees and other costs which are lumped together with your principal. For instance, you may pay an “origination fee” which is paid to initiate the transaction, as well as other up front fees. Your “annual percentage rate,” or APR, is the interest rate you are effectively paying when all extraneous fees and costs are lumped together with your principal and spread out over the course of your repayment schedule. As an example, you may have an interest rate of 4%, but when you pay your additional fees together with your principal over the course of a year, your APR may be 4.125%. Your APR is highly useful because it reflects what you’re actually going to pay rather than what you might think you’re paying.

Earnest Money

This is another very common one, and it’s actually one which isn’t necessarily tied to the mortgage industry, but is heard throughout the real estate industry as a whole. Earnest money is money given to the seller by the buyer, in advance of the sale, in order to demonstrate that the buyer is serious about purchasing the property. Earnest money is useful because it can provide an advantage against potential competition for a certain property. Earnest money is typically placed in an escrow account and then transferred to the seller upon the close of the sale. The money is applied to the sale price. Earnest money isn’t a necessity, but appears frequently because of its usefulness to both parties involved.

Private Mortgage Insurance

This is another one which you’re very likely to come across during your purchase, especially if you put down less than 20% on your home. Private mortgage insurance (PMI) refers to the insurance which you might be required to obtain on a conventional, non-government backed mortgage loan. Many lenders require PMI whenever you put down less than 20% on your home. The reason for this is simple risk management: PMI protects the lender in the case of default, and a lower down payment is interpreted as a greater risk of default by the lender. However, once your principal balance gets paid off to a certain amount, lenders typically don’t require PMI any longer. In other words, PMI usually isn’t a permanent additional cost, but a temporary additional cost which goes away after a certain number of payments on the loan have been made. PMI can be a substantial cost, however, and so you’ll need to prepare yourself accordingly if you will be required to have it.

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