Whether you are a first-time buyer or you’ve been there before, there is a lot of terminology specific to mortgages that you may be unfamiliar with. Here is a handy reference glossary to help.
Pre-approval is a process in which a lender determines how much money it is willing to potentially lend you (though it is not a guarantee that your loan will be approved). Lenders, in a pre-approval process, will look at factors like credit score, debt to income ratio, and other financial information.
While not required, pre-approval in the mortgage process can make the process faster and smoother for buyers and help in determining what houses to look at. The information in your pre-approval letter will expire after a set amount of time and will need to be renewed if you haven’t yet found the perfect home.
A credit score is calculated by taking into account credit factors like borrowing history, account age, amount of credit available to you, utilization of credit and if you have any delinquencies. It represents the risk of loaning money to a person, and can impact the ability to get a mortgage and the interest rate of that loan. Lenders will take into consideration a variety of factors that can impact your credit.
This is one of two common types of mortgages. With an adjustable-rate mortgage, the initial interest rate is lower and locked in for a set period of time, but the rate will change after that set period of time to whatever the current market rate is at the time the loan resets. This may be higher, or lower, than current rates.
For example, a Rockland Trust Adjustable Rate Mortgage (ARM) lets you lock into an interest rate for three, five or seven years. After this initial period, your rate is reset annually (based on a corresponding financial index) over the remainder of the 30-year term.
The most popular type of mortgage, a fixed-rate mortgage charges a set amount of interest throughout the life of the loan. The monthly payment in a fixed-rate mortgage remains consistent throughout the loan term, though the amount going toward the principal versus interest may change – this is called amortization.
Talk with one of our mortgage lending experts about what type of mortgage is best for your unique situation
The mortgage principal is the amount of money borrowed to purchase a home, whereas interest is the money paid to the lender for the use of the principal funds. Mortgage principal can be calculated by the selling price of the home minus the down payment.
Amortization simply means equal payments over the life of a loan. Early on with a fixed-rate mortgage, a bigger chunk of the payment goes toward paying interest on the loan. Over time, the chunk that pays down the principal of the loan increases but the monthly payment amount stays consistent. With a fixed-rate loan, an amortization schedule can help you budget your expenses.
Annual percentage rate (APR)
APR is how much it will cost to borrow money over the course of a year, expressed as a percentage. Because it takes into account a variety of charges and fees, it will be higher than the interest rate to help give a person applying for a loan more information about how much a loan may cost them over the life of the loan.
A down payment is the chunk of money that you can put toward the purchase of a home. The amount can impact interest rate, mortgage payments and the fees and interest a buyer pays over the life of a loan. While 20% of the purchase price was once the standard, this has changed over time and there are a number of different loan options and programs to support buyers. Depending on the amount of a down payment, the buyer may be required to pay private mortgage insurance (PMI).
Because your situation is unique, we recommend chatting with a mortgage specialist about the right option for you.
Earnest money is money paid to a seller when an offer is put in that indicates to a seller how serious a buyer is about purchasing the property. This money, typically kept in an escrow account, goes toward the down payment and closing costs should the sale go through. Earnest money should be discussed with your real estate agent.
An escrow account, typically set up by the mortgage lender, is used to pay homeowner’s insurance premiums and property taxes. The mortgage lender takes a portion of a mortgage payment to put aside for these purposes until those bills are due.
The home appraisal happens when a real estate appraiser determines the fair market value of the home. You need an appraisal to buy or sell a home, as well as for mortgage refinancing. If the appraisal is too low (or significantly under the agreed upon purchase price), it may impact your ability to finance the house you intend to buy. You may choose to work in an appraisal contingency to your sales contract. Typically, the buyer pays for appraisal, but you may be able to negotiate for the seller to cover the costs.
Home inspectors can help identify issues that either need to be repaired before you purchase a home or that impact the price you may be willing to pay. A home inspection contingency essentially means that the buyer may be able to back out of the deal pending the inspection results. For buyers, this contingency can help protect your earnest money. You may also hear this called a due diligence contingency.
In addition to the down payment, closing costs are a typical part of the mortgage process. This fee is a processing fee paid to the lender that covers home appraisal, searches on the home’s title and other fees associated with creating a loan. In some instances, the seller may cover a portion of closing costs. The amount varies depending on a number of factors, but typically closing costs are between 3% and 6% of the loan amount.
Private mortgage insurance (PMI)
PMI protects a lender if the buyer stops making payments. Depending on the type of mortgage, down payment and other factors, a buyer may be required to pay PMI. The amount for PMI may be added as a premium to monthly mortgage payments, but there may be an option to pay fully up-front. If you have questions about PMI, discuss with your mortgage lender.
We’re Experts in Mortgages So You Don’t Have to Be
Buying a home is an exciting time and we want to help you focus on those parts of the process, instead of studying up on everything mortgage. Our expert mortgage loan officers have years of experience helping those shopping for homes in Massachusetts and Rhode Island find the right mortgage solution that fits their short and long term financial needs and goals.
Check out our Learning Center for more helpful advice about purchasing and owning a home.
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