10 key mortgage terms you should know before buying a house
Want to be prepared for the next time you buy a house? This guide provides definitions and explanations of ten mortgage-related terms that may come in handy during your home search.
Your simple guide to mortgage terms
As a prospective homebuyer, you should know a few key mortgage terms! By understanding these terms, you will make the best decision for you and your financial future.
So what are the key mortgage terms you need to know? Keep reading to find out ten terms frequently used in home loans.
10 must-know mortgage terms for homebuyers
By definition, a mortgage is “a conveyance of an estate in land, for a term of years or for life, granted by one person to another.”
I know! This definition might have seemed a bit complicated. But simply put, a mortgage means you can borrow money to buy a home and pay it back at an interest rate.
And if you’re starting your homebuying journey but don’t know how mortgages work, it is time for you to become fluent in this new language.
Then let’s start with ten mortgage terms you must know if you want to apply to become a homeowner.
Annual Percentage Rate (APR)
Annual Percentage Rate, or APR, refers to the interest rate you’ll pay on your loan amount. The APR also includes any additional lender fees.
When researching or applying for a home loan, you might also come across terms like percentage or interest rate. Also, APR can come in two forms on mortgage: Fixed or Adjustable-rates.
Fixed-rate Mortgages are often the go-to option for those who want stability and predictability. This home loan allows borrowers to negotiate and set a fixed interest rate for that loan.
This way, borrowers will be making the same monthly payment throughout the life of the loan. Fixed-rate mortgage terms can usually vary from 10 to 40 years.
Adjustable-rate mortgages are home loans with an interest rate that will vary depending on the market’s current rates.
Still, firstly, you’ll get a short introductory period with a fixed interest rate.
Additionally, you might also come across the terms variable or floating interest rate. Since it is adjustable, it will rise or decrease based on the market.
But you don’t need to worry. Adjustable-rate mortgages set limits to the total amount, which your interest rate can rise or fall during the life of the loan.
The mortgage term is the time you’ll have to pay back your home loan. Most lenders and types of home loans have set mortgage terms, which can vary from 15 to 30 years.
The term closing costs refers to any costs buyers must pay throughout the mortgage process. These will vary depending on the borrower’s location and property type.
Closing costs can include appraisal fees, loan origination fees, attorney fees, recording fees, and more.
Debt-to-income ratio (DTI)
Your debt-to-income ratio is an important factor in the lender’s decision.
It is calculated by dividing your monthly debt payments for your total payments by your gross monthly income.
The DTI will tell lenders if you can pay back your home loan. Therefore, the lower the percentage, the better you’ll look for potential lenders.
The down payment is the amount of the property price the homebuyers will pay upfront. Lenders usually require a minimum down payment of as little as 3% of the property price.
However, less than 20% will trigger a Private Mortgage Insurance (PMI). Also, making a larger down payment will help borrowers to qualify for lower interest rates.
The prepayment penalty is a fee that lenders charge if you pay off your mortgage earlier.
Not all lenders will charge this fee; if they do, you’ll have to agree to it when signing up for your home loan.
Most lenders allow borrowers to get preapproved for a mortgage. The preapproval letter indicates that the bank or mortgage company accepts you as a borrower.
The preapproval won’t guarantee the borrower will qualify for a loan, but the letter can be shown to the home seller as a demonstration that the buyer will have enough funds for the purchase.
Refinancing can be a great way to save money on interest rates, shorten your mortgage term and pay off the balance faster.
However, only people who already have a mortgage can refinance it.
Additionally, borrowers won’t need to refinance with the same lender. This way, you will be trading the original mortgage debt for a new one.
Refinancing a mortgage allows you to negotiate for more convenient repayment terms, lower interest rates, or different repayment terms.
Ready to start your homebuying journey? Buying a new home is a major decision that will involve a lot of financial matters.
But with the right tips, you’ll be able to achieve homeownership easily.
We hope this article has been helpful and given you the knowledge you need to start your homebuying journey today.
And keep reading in case you want some additional information. The following post will give you some tips on how to choose your mortgage! Check out and learn more.
About the author / Beatriz Vieira
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