For both unversed and veteran homeowners, the mortgage application process can be both frustrating and confusing, look towards our Mortgage Loan Term Definitions for further guidance. This especially happens when it comes to understanding key mortgage loan term definitions to know and understand.
Much like lawyers who seem to have their own cryptic legalese jargon, professionals within the mortgage industry also have their own subset of terms and phrases that may seem foreign to the average borrower.
Deciphering this code and understanding key terms is crucial to better understanding how your mortgage will function and what you can expect as you move forward throughout the application process.
Buying a new house can be a bit intimidating all on its own. Your mortgage process shouldn’t be. New Century Mortgage takes great care in educating and navigating borrowers just like yourself throughout the complexities of the mortgage application process.
By the end of this article, you will be more familiar with jargon that you may encounter when discussing loan basics. From origination through approval, you should get familiar with the following mortgage terms definitions and concepts.
Getting Down to Basics -Mortgage Loan Term Definitions
Having a solid foundation and understanding basic mortgage terms definitions and concepts is essential to understanding more complex terminology. Here are some concepts to understand related to your payment, rate, and product type.
Understanding Your Payment – Mortgage Loan Term Definitions
There are several pieces that make up a mortgage payment. You may have heard a mortgage payment referred to as the PITIA payment. PITIA refers to:
Principal: This refers to the unpaid portion or balance of your loan still outstanding
Interest: This references the money that accrues and is charged by your lender for the financing, beyond the principal balance borrowed. The rate at which you are charged is referred to as the interest rate. This is usually delineated as a percentage.
Taxes: This portion of your payment accounts for your annual real estate tax expense, broken down into a monthly figure. This is what you would owe for owning your piece of real estate.
Insurance: This portion of your payment, similar to taxes, accounts for your annual homeowner’s insurance expense. This is generally broken down into a monthly figure. Your lender will require homeowner’s insurance to protect the lender’s interest in your home in the event of serious storm, fire, or other natural disaster.
Association Dues: This expense accounts for any applicable dues that may be owed if your real estate is a part of a homeowner’s association or special planned development. While they are included in your payment for qualification purposes, they are often billed separately by the managing entity.
Understanding Your Rate
It is important to understand how the interest rate for your mortgage can impact your overall payment. Equally important is differentiating your interest rate from the annual percentage rate (APR). This is a must know mortgage terms definitions you should be aware of.
Interest Rate vs. Annual Percentage Rate – Mortgage Loan Term Definitions
Your interest rate refers to the annual cost of the mortgage that a borrower must pay, generally expressed as a rate. It does not account for any fees or other charges. The payment is calculated based on the interest rate.
Comparatively similar, the annual percentage rate (APR) denotes the annual cost of a loan to a borrower but accounts for all applicable fees. Usually expressed as a percent.
Other applicable fees or charges include things such as mortgage insurance or closing costs. APR also includes any discounted points or origination fees that are associated with obtaining the loan.
The Federal Truth in Lending Act requires lenders to disclose the APR so that borrowers can uniformly use it to compare loan costs across multiple lenders.
To learn more about interest rates check out the Consumer Financial Protection Bureau’s interest rate tools.
Fixed Rate vs. Adjustable Rate Mortgages (ARM) – Mortgage Loan Term Definitions
When you go to apply for a mortgage, most lenders can offer both fixed rate and adjustable rate mortgages (ARM). Depending on your overarching financing goals, one type of mortgage may be better than the other.
The Consumer Financial Protection Bureau defines the main difference between a fixed rate and adjustable rate. An adjustable rate is sometimes referred to as a variable rate mortgage. Fixed rates, “for fixed rates the interest rate is set when you take out the loan and will not change”. With an adjustable rate mortgage, the interest rate may go up or down.”2
In general, adjustable rate mortgages may start with a lower interest rate compared to fixed rate mortgages, as a way to entice consumers. For this reason, borrowers who know they may want to sell within a short time horizon may elect for an adjustable rate mortgage.
The initial rate can be fixed over an introductory period. This can span a couple of months or even up to a few years. After the introductory period is over, your payment could increase or decrease based upon a set schedule.
On the other hand, the interest rate for fixed rate mortgages never changes. The means the loan is locked in to that given rate for the life of the loan. This can provide more stability in the long term, making it easier to budget your payment.
Understanding Your Term – Mortgage Loan Term Definitions
It’s important to understand what a lender means when they reference a loan’s term. The mortgage loan’s term of your loan is one of the bigger factors used to calculate your monthly mortgage payment.
Term – Mortgage Loan Term Definitions
Each loan has a single given term. This is the length of time it would take to pay off your loan entirely. The length of time assumes you are only making the minimum required payment. It does not factor in any adjustments for excess principal payments or one-time reductions.
Typical loan terms are between 10 and 30 years. In general, the shorter the term the larger your monthly payment and vice versa.
Amortization – Mortgage Loan Term Definitions
Another term you might hear in conjunction with a mortgage loan’s term is amortization.
Amortization or a mortgage loan’s amortization schedule identifies the amount of principal and interest paid every given month over the entire life or your loan.
The schedule, or breakdown of all your minimum payments by date and allocation. This assumes you make normal minimum principal and interest payments and outlines how much each of your payments is allocated toward the unpaid principal balance of your loan and the accruing interest.
Most consumers don’t realize that early on, less of your monthly mortgage payment goes towards principal and more towards interest.
As you continue to make payments, the portion of your payment shifts, gradually applying more and more of the payment towards the unpaid principal balance and less towards interest.
Disclosures You Will Want to Review – Mortgage Loan Term Definitions
While it’s important to review all your loan disclosures and documentation, realistically not all borrowers will read through everything. If you decide to skim over some of the fine print, make sure to at least pay close attention to your Loan Estimate and your Closing Disclosure.
In October of 2015, the TILA-RESPA Integrated Disclosure (TRID) rules went into effect to help consumers better understand their loan options, compare mortgage terms, and avoid surprises prior to the consummation of a new mortgage loan.
Loan Estimate (LE)
The Loan Estimate is part of a set of initial disclosures that you will receive after submitting your mortgage application.
This estimate is a snapshot of the loan details that you have requested and should include your estimated interest rate, payment information, and costs.
It should also highlight if there are any special features or provisions associated with the loan including but not limited to prepayment penalties or negative amortization3.
Lenders must provide this to you within three business days of receiving a formal application. It is important to note that when you receive a Loan Estimate, it does not mean your loan has been approved or even denied. It merely discloses loan terms to expect should you move forward with the transaction3.
Closing Disclosure (CD)
The Closing Disclosure is another important mortgage terms definitions regarding disclosure that includes monthly payment projections and details on closing costs and other fees associated with your mortgage application.
Lenders are required to provide this disclosure to you at least three business days before you close on a new mortgage loan. This is so that borrowers can prepare for closing, as well as review and compare the final terms to their original Loan Estimate4.
Have questions about specific loan concepts or want to learn more about how a mortgage works? New Century Mortgage can answer all your mortgage related questions.