Terminology

January 14, 2021

Amortization

Amortization is the process of paying down a mortgage in regular payments composed of both interest and principal.

Annual Percentage Rate (APR)

Annual Percentage Rate (APR) refers to the annual rate of interest charged to borrowers and paid to investors. An APR may not show the actual cost of borrowing because of the fees that are included or excluded.

Closing Costs

Closing Costs are fees and expenses you pay when you close on your house, separate to the down payment. These costs can run 3% to 5% of the loan amount and may include title insurance, attorney fees, appraisals, taxes and more.

Earnest Money

Earnest Money is a deposit made to a seller that represents a buyer's good faith to buy a home. The money gives the buyer extra time to get financing and conduct the title search, property appraisal, and inspections before closing.

Equity

Equity represents the amount of money that would be returned to a company's shareholders if all of the assets were liquidated and all of the company's debt was paid off.

Escrow

Escrow is a legal concept describing a financial instrument whereby an asset or escrow money is held by a third party on behalf of two other parties that are in the process of completing a transaction. Money, securities, funds, and other assets can all be held in escrow.

Loan Estimate

Loan Estimates tell you important details about the loan you have requested. The form provides you with important information, including the estimated interest rate, monthly payment, and total closing costs for the loan as well as how the interest rate and payments may change in the future.

Mortgage Insurance

Mortgage Insurance is an insurance policy that protects a mortgage lender or titleholder if the borrower defaults on payments, passes away, or is otherwise unable to meet the contractual obligations of the mortgage. Three types of mortgage insurance include private mortgage insurance, qualified mortgage insurance premium, and mortgage title insurance.

Pre-approval/Pre-qualification

Pre-qualifying is just the first step. It gives you an idea of how large a loan you'll likely qualify for. Pre-approval is the second step, a conditional commitment to actually grant you the mortgage. The pre-qualified amount isn’t a sure thing, because it's based only on information provided. Getting pre-approved is the second step. The borrower must complete an official mortgage application to get pre-approved, as well as supply the lender with all the necessary documentation to perform an extensive credit and financial background check. The lender will then offer pre-approval up to a specified amount.

Principal

Principal is the amount borrowed from the lender, minus the amounts repaid to the lender, and which have been applied to the reduction of principal. As monthly mortgage payments are made, the mortgage principal is reduced.

Rate Lock

Rate Lock is an agreement between a borrower and a lender that allows the borrower to lock in the interest rate on a mortgage for a specified time period at the prevailing market interest rate. A loan lock provides the borrower with protection against a rise in interest rates during the lock period.

Underwriting

Underwriting is the process through which an individual or institution takes on financial risk for a fee. This risk most typically involves loans, insurance, or investments.

Points

Points can be a percentage of a number or a measurement of the change in a number. Points are used in various contexts in financial matters. They may indicate the interest rate on a mortgage in relation to the prime lending rate or the total size of the fees attached to a mortgage. They indicate the percentage of change in the return on a bond. They also are used to report the price movements up or down of stocks. A point always equals one.