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Mortgage Terminology for Buyers and Sellers

Are you in the market for a dream home, or just looking to refinance your current mortgage? Either way, your objective as the borrower is to negotiate a mortgage with the most advantageous terms. And, the easiest way to do this is to learn to speak the language of the mortgage professional.

It is a fact that it is easier to grasp financial concepts if a borrower has mastered basic mortgage terminology. Many of the following terms are interchangeable between a mortgage that is used to purchase a property and a mortgage used for a refinance. Understanding these terms helps you make educated decisions.

Key Terminology

The Principal – not to be confused with the purchase price, the principal is the amount of money borrowed. The principal amount is reduced over the life of loan by each monthly payment.

Amortization – is a traditional financing technique that allows borrowers to pay off both the interest and loan balance simultaneously, over the life of the loan. Near the beginning of the loan, the borrower pays larger interest payments, while at the end of the loan; the monthly payments reduce the balance in an accelerated way.

The Interest Rate – is the amount lenders charge for the use of the borrowed monies collateralized by the subject property. An interest rate is expressed as a percentage of the loan amount. Paying ‘points’ upfront at the time of loan origination can reduce interest rates.

A Point – is equal to 1% of principle loan amount. Buyers have the option paying points upfront for a lower interest rate. For a $100,000 loan, a point will be equal to $1,000.
Escrow – is an account created by a lender to maintain monthly contributions from existing borrowers to meet their property’s insurance or tax obligations, when due.

The Closing – is a meeting where buyer and seller, plus their representatives, complete the sales transaction. This is the moment in time where both buyers and sellers are given a breakdown of the fees paid by both. The closing is the final step that conveys title from the seller to the borrower.

Title Insurance – is an important protection for both the lender (and owner, if they opt for it) from unexpected claims on title. Title insurance should be further researched with a title expert due to its complexity.

Private Mortgage Insurance (PMI) – plays a role when underwriting a mortgage application for borrowers who plan to purchase with less than a 20% down payment. This is not permanent and ends when a borrower’s equity reaches a minimum of a 20% equity position.

Use the concepts noted above to find a mortgage that meets or exceeds your needs. These terms, while somewhat unfamiliar, can be mastered by those eager to learn. If you have any questions, please contact us!