Getting a mortgage can be confusing enough as a home buyer without the complex language getting in the way – we break down some of the most common things for you.
Getting a mortgage is a complicated process, with a lot of terminology that many people don’t understand when they first start searching for a home. To make things a little bit easier, we have a list of common mortgage terms that new buyers are often confused by.
- This is how long it will take to pay off the mortgage over the loan’s lifetime – most often this is between 15 and 30 years.
- This is conducted by a professional real estate appraiser who will examine the property and give an estimated value based on the house itself and recently sold comparable houses.
- This is the ‘Annual Percentage Rate’ of the loan. This represents the actual annual cost of the loan over its term, and is used because certain lenders may use different interest rate calculations. This gives borrowers a single number they can use to judge the cost of two loans on an annual basis.
- A closed mortgage has specific stipulations for when a borrower can make additional payments, referred to as ‘prepayment privileges’. Payments outside of the existing privileges will incur penalties, but the benefit is that closed mortgages almost always have a lower rate than their open mortgage counterparts.
- These are costs required to ‘close’ the mortgage. Usually these include attorney or notary fees, and other administrative fees needed to process the loan.
- Usually this term is used in the context of an appraisal, and refers to the houses that the subject property is being compared to.
- The difference between the value of a property and any debts held against it. For example, a borrower that owns a home worth $500,000 with a $400,000 mortgage currently holds $100,00 in equity.
Fixed Rate Mortgage
- A fixed rate mortgage is a loan whose interest rate does not change over the term. These are the most common type of mortgage.
- This is the rate at which the borrower must make payments on the mortgage loan. Most often this is a monthly payment, though other payment schedules exist such as bi-weekly payments.
Loan to Value (LTV)
- This is the ratio of equity in the home compared to the amount of debt against it. Using the previous example of a borrower with a $500,000 home with a $400,000 mortgage gives a loan to value ratio of 20%.
- A loan used to finance the ownership of a real estate property, with the property being used as collateral.
- The opposite of a closed mortgage, an open mortgage allows the borrower to make additional payments – or pay the loan off completely – at any time. Though they usually carry a higher interest rate, open mortgages do give borrowers more flexibility and control than a closed mortgage.
- This is part of the fine print of the mortgage document, which outlines when a borrower can make additional payments against the principal value of the loan, and when. Typically payments made outside of these privileges will incur significant penalties, making prepayment privileges an important part of the loan.
- This is the value of the mortgage loan – the amount of money borrowed from the lender. Over time this is paid off through monthly installments, with potentially additional payments as allowed by the loan’s prepayment privileges.
- This is the property that is being mortgaged – the property that is subject to the loan.
- This is special insurance that ensures the subject property is clear of any liens or judgments. Most lenders will require borrowers to have title insurance, due to the lender using the property as collateral for the loan.
- Different from a fixed rate mortgage, a variable rate mortgage’s interest rate changes based on an index used by the lender, which will be evaluated at set intervals. Variable rate mortgages can potentially be less expensive than fixed rate mortgages if the index rate goes down, but can also end up increasing in cost.