Mortgage Glossary

When you shop for a home, you might hear a bit of industry lingo you’re not familiar with. We’ve created an easy-to-understand directory of the most common mortgage terms.

Amortization

Part of each monthly mortgage payment will go toward paying interest to your lender or mortgage investor, while another part goes toward paying down your loan balance (also known as your loan’s principal). Amortization refers to how those payments are broken up over the life of the loan. During the earlier years, a higher portion of your payment goes toward interest. As time goes on, more of your payment goes toward paying down the balance of your loan.

Down Payment

The down payment is the money you pay upfront to purchase a home. In most cases, you have to put money down to get a mortgage.

The size of the down payment you’ll need will vary based on the type of loan you’re getting, but a larger down payment generally means better loan terms and a cheaper monthly payment. For example, conventional loans require as little as 3% down, but you’ll have to pay a monthly PMI fee to compensate for the small down payment. On the other hand, if you put 20% down, you’d likely get a better interest rate, and you wouldn’t have to pay for PMI.

A mortgage calculator can help you see how your down payment amount affects your monthly payments.

Escrow

Part of owning a home is paying for property taxes and homeowners insurance. To make it easy for you, lenders set up an escrow account to pay these expenses. Your escrow account is managed by your lender and functions kind of like a checking account. No one earns interest on the funds held there, but the account is used to collect money so your lender can send payments for your taxes and insurance on your behalf. To fund your account, escrow payments are added to your monthly mortgage payment.

Not all mortgages come with an escrow account. If your loan doesn’t have one, you have to pay your property taxes and homeowners insurance bills yourself. However, most lenders offer this option because it allows them to make sure the property tax and insurance bills get paid. If your down payment is less than 20%, an escrow account is required. If you make a down payment of 20% or more, you may opt to pay these expenses on your own or pay them as part of your monthly mortgage payment.

Keep in mind that the amount of money you need in your escrow account is dependent on how much your insurance and property taxes are each year. Since these expenses may change year to year, your escrow payment will change, too. That means your monthly mortgage payment may increase or decrease.

Interest Rate

An interest rate is a percentage that shows how much you’ll pay your lender each month as a fee for borrowing money. The interest rate you’ll pay is determined both by macroeconomic factors like the current Fed funds rate as well as your personal circumstances, like your credit score, income and assets.

Mortgage Note

A promissory note is a written document that details the agreed-upon terms for the repayment of the loan being used to purchase a property. In real estate, it’s called a mortgage note. It’s like an IOU that includes all of the guidelines for repayment. These terms include:

  • Interest rate type (adjustable or fixed)
  • Interest rate percentage
  • Amount of time to pay back the loan (loan term)
  • Amount borrowed to be paid back in full

Once the loan is paid in full, the promissory note is given back to the borrower. If you fail to uphold the responsibilities outlined in the promissory note (for example, pay back the money you borrowed), the lender can take ownership of the property.

Loan Servicer

The loan servicer is the company that’s in charge of providing monthly mortgage statements, processing payments, managing your escrow account and responding to your inquiries.

Your servicer is sometimes the same company that you got the mortgage from, but not always. Lenders may sell the servicing rights of your loan and you may not get to choose who services your loan.

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