Get the 411 on mortgage lingo

Congratulations, you’ve made the big decision to become a homeowner!

Before you start looking at houses, here are a few key mortgage terms you need to understand before you look into financing the home of your dreams.

Principal: This the original total amount borrowed from your lender, before interest.

Interest: Interest is the cost of borrowing money. You repay the principal amount of the loan, plus interest.

Interest rate: This is the rate you are charged for borrowing the principal. The percentage rate, whether high or low, depends a variety of factors that include your credit score, the size of your downpayment, the length of your loan and the current economy. Interest rate is very important because the higher your interest rate, the higher your monthly mortgage payment will be. Plus, a high interest rate means you’ll end up paying more over the lifetime of the loan.

Private Mortgage Insurance: This extra fee is designed to protect your lender if you aren’t able to make your mortgage payment. Most lenders require PMI if you your down payment is less than 20% of the value of the home.

Down Payment: You’ll probably be required to pay a certain percentage of your home’s total sale price upfront – this is called a down payment. In general, the larger the down payment, the lower your monthly payments. Traditionally, lenders have asked for a 20% down payment. So for a $350,000 house, you are looking at a 20% down payment of $70,000 upfront. Depending on your credit score and the economy, lenders may let you buy the home with as little as 5% down. However, if you don’t have enough saved to make a 20% down payment, you’ll need to pay PMI.

Term: The term of your loan means how long your lender will give you to pay back your loan. Most mortgages have 30-year or 15-year terms. The longer the term, the lower the monthly payments, but you’ll pay more over the lifetime of the loan because of interest.

Monthly payment:Your monthly payment will be the same every month, and it will include of a portion of the loan principal, interest, mortgage insurance (if you put less than 20% down) and a portion of your annual cost of property taxes and homeowners’ insurance – both are mandatory.

Purchase points:  Points are a fee paid to the lender up front as a way to lower your interest rate. Each “point” is equal to 1% of your mortgage principal and generally represents a .25% drop in your mortgage rate. So if you have a $300,000 mortgage with a 5.00% interest rate, you could pay an additional $3,000 up front and reduce your interest rate to 4.75%. Points can produce big savings down the road if you have the money saved up.

Fees: There are many fees you’ll need to cover when you begin the mortgage process and at closing, when you finalize the loan. Specific amounts will vary based on the lender and other factors. It can feel overwhelming, but the good news is that lenders are required by law to provide a loan estimate and fee disclosure up front that breaks down all costs, fees and details regarding your mortgage. Here are a few fees that are typically part of your mortgage costs:

  • Lender charges/origination fees: Including application fees, underwriting fees, processing fees, administrative fees and others.
  • Third-party closing costs: These are charges for services you need to get your mortgage, like a home appraisal and title insurance.
  • Taxes/Government fees: This is based on the real estate portion and related local government charges.
  • Prepaid expenses and deposits: These costs are paid up front and held in an escrow account to cover things like your first homeowners insurance and property tax payments.


Myriam DiGiovanni

Myriam DiGiovanni

After writing for Credit Union Times and The Financial Brand, Myriam DiGiovanni covers financial literacy for FinancialFeed. She is also a storytelling expert and works with credit unions to help ... Web: Details