Home Mortgage Terms: What Borrowers Need to Know
Getting a first home mortgage can be stressful and nerve-wracking, especially if you need to deal with legalese. The knowledge that one wrong interpretation of the word can cause you undue problems contributes to the anxiety of getting a home loan mortgage.
The following are some mortgage-related words and their definitions to help borrowers understand the process, terms and conditions before they apply for a loan.
- Down payment – is a portion or percentage of the total sale price of the property that buyers should pay in cash.
- Mortgage insurance – A type of insurance that protects home loan lenders from financial loss in the event that borrowers default on their home mortgage payments. The insurance is required by lenders if the borrower’s down payment is less than one fifth of the total purchase price.
- Credit report – This is a summary of the borrower’s credit history which helps lenders to determine if he is creditworthy.
- Adjustable-rate mortgage (ARM) – This type of mortgage does not have a fix interest rate. Both ARM and hybrid mortgage are popular when interest rate is higher in the home mortgage market.
- Negative amortization –means an increase in the principal loan balance caused by payments that fail to cover the interest owed. The unpaid interest due will be included in the principal balance which makes it harder for a borrower to pay off his loan despite paying on time.
- Prequalification letter – This is a letter from a home mortgage lender informing that a borrower is eligible to receive a mortgage. On the other, a preapproval letter states that documents submitted by the borrower have been verified and a professional estimation of the property will follow.
- Impound account or lender’s escrow – An additional money paid by the borrower every month for his property taxes and hazard insurance premiums.
- Principal, interest, taxes and insurance (PITI) – are components of a monthly mortgage payment.
