Step : Working with a Mortgage Lender Mortgage terms to know

Mortgage terms to know

Many mortgage-related terms may be confusing, especially as you start talking to lenders?. Knowing some of these terms ahead of time can make you feel more at ease throughout the process, more confident asking questions, and more comfortable comparing options.

Annual percentage rate

An annual percentage rate (APR)?  is an even “bigger picture” view of the total cost of borrowing money and can be useful when comparing mortgages? that look similar. It reflects many, but not all, of your costs as an annualized rate. It can include the interest rate?, points, mortgage broker fees, and closing costs?, as well as other fees you may pay for the loan. Since these costs are included in your APR, your APR is typically higher than your interest rate. Two lenders could be charging the same interest rate, but the lender that is charging more for other fees will have the higher APR. That’s why it’s always important when comparing lenders to look at the APRs quoted and not just the interest rate.



Points come in two forms: origination points and discount points. Origination points are applied toward costs that lenders incur for processing, underwriting?, and approving your loan. These points can be a percentage of the loan amount or be a flat fee. Keep in mind, if you include your closing costs in your loan, you will be paying interest on those costs over the life of the loan. On the other hand, mortgage discount points? are purchased to lower the mortgage interest rate. The cost of a point is usually calculated in relation to your loan amount; typically, one point equals one percent of your loan amount. For example, if your mortgage amount is going to be $125,000, then one point would equal $1,250. If you are considering applying points to your loan, be sure to talk to your lender to determine if it is the right approach.


Loan amortization

Amortizing a loan means paying it off in regular installments over a period of time. With each installment, a percentage of that amount goes toward paying off your principal? and the rest toward interest. Your lender will most likely create an amortization schedule that shows how much of each payment goes toward the principal and how much goes toward interest. Typically, more goes toward interest in the beginning, with less money going toward the principal. Then, eventually, more of your payment will go toward paying off the principal and less toward interest.

Private mortgage insurance

If your down payment? is less than 20 percent of the home purchase price?, you may need to get mortgage insurance?. Mortgage insurance protects the lender in case you stop paying your home loan, and it’s typically paid along with your monthly mortgage payment. If you fail to make payments, even with mortgage insurance, your credit score? could suffer, and you could lose your home to foreclosure?. While it’s an additional cost, it may help you get a mortgage with a lower down payment. Depending on the terms of your loan and mortgage insurance, some loans allow you to cancel the insurance once you’ve reached 20 percent equity?, which could mean extra savings down the line.


While it’s an additional cost, it may help you get a mortgage with a lower down payment.

Mortgage payment

Your monthly mortgage payment is typically made up of four components: principal?, interest, taxes, and insurance. The principal is the money you borrowed, or the amount financed. The interest is what the lender charges you to borrow the money used to purchase the home. Taxes are what you pay in property taxes to your local city/municipality and sometimes county. Insurance is what you pay to insure your home from damages, such as fire or natural disasters. For conventional loans, depending on your loan terms, if you put less than 20 percent down, then Private Mortgage Insurance(PMI) will also be included in your monthly payment until you reach the 20 percent equity? threshold.

Your monthly mortgage payment includes:

  • Principal

  • Taxes

  • Interest

  • Insurance

Many lenders help borrowers to set up a separate escrow? account to pay for estimated taxes and insurance. This alleviates borrowers from having to remember to pay their real estate taxes and homeowner insurance premiums. Since the amount is estimated, borrowers may be billed if there is a shortage. This amount will normally adjust through the life of the loan.