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Mortgage Jargon in Simple Terms

Updated on June 4, 2012

Mortgage Jargon can be simplified in a number of ways. But, to properly know what is going on with the sale or purchase of your home it is essential to know. I am going to attempt to break down the linguistic barriers of home buying methodology into as simple terms as I can. This should give you a good base for understanding some of the terms and words used in the every changing real estate lingo.

1. Adjustable rate mortgage – This is a type of mortgage that you can apply for. A Mortgage with an adjustable rate is one that will fluctuate with the national percentage rate. For example if the national interest rate is 3.0 percent currently. Then it rises to 3.5 percent your monthly mortgage rate will adjust to make up the difference. In this case it will increase your current monthly payments you make on your home. Usually an adjustable rate mortgage will only change once in three years or once in 5 years depending on the terms of your contract.

2. Amortization – This is the name that is applied to your mortgage payment schedule. Just a fancy term for payment due dates.

3. Credit Score – This is the identified risk level according to FICO, or in other words whether you are worth the risk to give money too. People with lower scores tend not to pay their bills. Lender will look at your payment history and see if you are going to pay your mortgage on time or if they will lose the money they are investing.

4. Equity – this is a term applied to the current value of a property. To calculate the equity in a home you can subtract the current cash value from the outstanding loan balance and that is how much “equity” is in the home. Most people like to have a substantial equity in their home so they make extra mortgage payments each year.

5. Fixed Rate Mortgage- This the most common mortgage It is a fixed monthly payment for the whole term of the loan. For example if a mortgage payment is 500.00 a month it will always be 500.00 a month until the end of the loan.

6. Home Equity Loan – This is a type of loan that people take out on top of their mortgage payment. The home owner uses the cash value minus the loan as collateral. Many people take a equity loan out to pay for college or medical bills.

7. Home equity Line of Credit – same as a home equity loan but it acts as a revolving credit card. If you make a payment on your line of credit you have that much more for future purchases.

8. Interest only mortgage- This is a mortgage where the home buyer only pays on the actual interest on the loan. Usually only set for a small amount of time which then expires and the an increase of payments is schedualed to pay the principal.

9. Loan Origination Fees – These are the fees or cost that the lender charges for setting up and finalizing your loan. These are commonly referred to as “points”

10. Mortgage insurance – This is an insurance policy usually for first time home buyers that is placed as protection in a loan. If, something happens where the homeowner stops paying the mortgage the bank or person that has the loan will not lose any money.

11. Mortgage Points – This is terminology for fees the lender will put in the mortgage for giving you the money. Usually less than 1% of total mortgage.

12. PITI: Pronounced "pity," it is an acronym for principal, interest, taxes and insurance, the four components of a mortgage payment.

13. Pre Payment Penalty – This is a fee that will be paid by the borrow if they pay back the loan within a certain period of time. It is a guaranteed that the loan will approve the lender will receive a interest payment.

14. Principal. This is the base loan amount minus interest that is owed on the loan. You can save money on interest b making extra payments on the interest of the loan.

15. Qualifying ratios- This is a calculation that lenders use to determine the largest mortgage that a home owner can afford. Or that the lender is willing to approve the borrower for.

16. Refinancing- This is when you want to re-borrow and pay off an existing loan. This is usually done to lower payments or extend terms

These are the major terms that you should know before you buy or sell a home. They will effect you one way or the other so save this page and refer to back to it as needed

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