11 Important Home Loan Terms & Definitions, Explained

11 Important Home Loan Terms & Definitions, Explained

The jargon surrounding mortgage loans can seem overly complex at times. There are several types of mortgages from the government to conventional loans, along with associated terms such as amortization and escrow.

Most people already know what down payments are, although there are other, lesser-known words and phrases that are essential to understanding your mortgage. Here are 11 important home loan terms explained.

1. Conforming Mortgage

If you’ve been researching different types of home loan terms, you have probably encountered the words conforming and nonconforming in relation to loans.

Conforming mortgages are loans that abide by the funding size limit of Freddie Mac and Fannie Mae.

2. Jumbo Loan

Unlike conforming mortgages, jumbo loans exceed the size of a conforming loan. Mortgage loans that are $548,250 and above are jumbo loans.

Jumbo mortgages are good for homebuyers who are purchasing particularly expensive houses.

3. Fixed-rate Mortgage

Mortgage loans that include an unchanging interest rate are fixed-rate mortgages. Since the monthly payments included in a fixed-rate mortgage plan are steady, the majority of home buyers choose this type of loan.

Many fixed-rate mortgages feature a 15 to 30-year term, which gives buyers a lot of time to pay off their loans. Fix-rate mortgages are typically the most affordable loan types.

4. Adjustable-rate Mortgage

Also known as an ARM, adjustable-rate mortgages follow a rising or falling base interest rate throughout the duration of each loan.

An advantage that adjustable-rate mortgages offer is a low initial fixed-interest rate for the first three to five years. Since an adjustable interest rate may go up a lot in the future, ARM loans are best for buyers who plan to pay off their homes quickly.

5. Prequalification

To be on the safe side, many home buyers opt for mortgage prequalification when shopping for a home. Lenders complete this useful process by looking into information such as your employment status, amount of savings, and credit score.

If you prequalify for a loan, negotiating with a seller and getting a mortgage will be much easier.

6. Debt-To-Income Ratio

Your debt-to-income ratio is one of the top deciding factors that influence whether or not you will qualify for a mortgage.

Debt-to-income (DTI) is the ratio of all your monthly debts against your total monthly income. The majority of lenders prefer a DTI ratio that is lower than 50%.

7. Appraisal

Most lenders require a home appraisal before they provide a buyer with a mortgage. A qualified appraiser will determine the total value of a house and property. Once lenders know how much homes are worth, they will decide on what loan size to give to respective home buyers.

Home appraisal fees usually cost homebuyers $300 to $400.

8. Amortization

Amortization is a term that confuses a lot of new homebuyers. What this word represents is simply the process of how principal and interest rate payments will gradually reduce a mortgage loan.

Amortization schedules are important to understand, as they will tell you ahead of time what size monthly payments you will make to pay off your loan in time.

9. Escrow

As part of the home buying process, escrow is when a third-party account holds funds for brokers and lenders. Escrow accounts hold home insurance and tax money as well as closing cost deposits.

If you ever accidentally overpay into escrow, you will receive a refund of the extra money by the year’s end.

10 PITI

PITI is an abbreviation for principal, interest, taxes, and insurance. These are the four types of fees that are included in a monthly mortgage payment. PITI payments keep loans much simpler so that you can pay off your home in single monthly payments instead of considering each category fee separately.

Escrow accounts hold PITI payments until the lender needs them.

11. Closing Costs

When you are almost finished with the initial process of buying a home, there is still more to come. Even after you qualify for a mortgage and make a down payment, there are still closing costs that are due when you sign the required paperwork.

Closing costs range from 2% to 6% of your home’s total value. Appraisal fees, title insurance, and loan origination fees are a few fees that closing costs include. 

If you develop a good understanding of these 11 important home loan terms, choosing a mortgage will be much easier. Unraveling the complexities of different mortgage options will help you avoid many costly, time-wasting mistakes in the future.

Supreme Lending helps people from all walks of life get great mortgage deals when in the market for a house. Find out everything you need to know here about available loan programs now.

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