You probably know there is a mortgage language, and if that’s confusing to you, you’re not alone. That’s why we’ve compiled this handy list of commonly-used mortgage language must-knows. Now you can familiarize yourself before you even set foot in your first open house. Think of it as mortgage lingo 101–but don’t worry, we’ll go easy on you.
Mortgage Language 101
Fixed Rate Mortgage: A mortgage in which the interest rate on the home loan doesn’t change over the entire life of the loan. This means that whatever interest rate you locked in with your lender is the same interest rate you’ll pay from your first payment all the way until your last payment.
Adjustable Rate Mortgage (ARM): A mortgage in which the interest rate is locked in for a specific time period (usually five years), but can then fluctuate annually depending on the federal prime rate after the locked rate period expires. The fluctuating interest rate can increase or decrease the amount of your monthly mortgage payment.
Pre-Qualification: A brief statement from your lender that states that you meet some initial mortgage approval criteria and have the potential to obtain home financing.
Pre-Approval: A statement from a lender that states that you’ve met all eligibility criteria and can obtain a mortgage loan up to a specific amount. Some lenders may also use the terms “pre-approval” and “pre-qualification” interchangeably.
Conventional Loan: Most homeowners choose a conventional loan to finance their homes. Conventional loans are privately insured have somewhat strict credit standards.
FHA Loan: A type of federally insured mortgage loan that fall under the domain of the Federal Housing Administration. FHA loans typically have less stringent credit and down payment requirements than do conventional loans, making them a popular choice among those with limited down payment resources and/or less-than-perfect credit.
VA Loan: VA loans are type of mortgage loan reserved for active military members and veterans. Low up-front costs make this a popular home financing choice for eligible home buyers.
USDA Loan: A type of mortgage loan used to finance homes in rural areas throughout the country.
Private Mortgage Insurance (PMI): A monthly insurance premium charged on conventional mortgage loans in which the buyer put a down payment of less than 20% of the cost of the home. PMI premiums can be removed once you’ve paid off 20% of your loan including interest.
Mortgage Insurance Premium (MIP): The same thing as a PMI, except MIP applies to FHA loans instead of conventional loans. The only difference is that MIP is a federally-backed mortgage insurance program instead of a private one.
Closing Costs: The fees associated with buying a home, which can range from 2-5% of the total value of the home.
Points: A point is a pre-paid interest charge that is equal to 1% of the loan amount.
Escrow: A neutral third party that handles financial transactions during the home buying process. When you make a deposit or pay costs at closing, a third party puts your funds in an escrow account that is distributed to the appropriate parties. You may continue to use your escrow account if you have decided to have your property taxes and homeowner’s insurance premiums paid as part of your monthly mortgage payment as well. The amounts paid in escrow are then paid to your local government and insurance company, respectively.
Ready? Set? Go!
Think you’ve got mortgage language mastered? If so, you might just be ready to take the next step toward buying your first home. Call one of our friendly Personal Mortgage Advisors today at 1-877-480-8050 for a free, no-obligation home buying consultation and you’ll be well on your way to experiencing what buying your home should feel like.