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10 Mortgage Terms: What Homeowners Need to Know

Mortgage lenders will need to do more to romance homebuyers, according to Valentine’s Day data released by the Mortgage Bankers Association. In its report of mortgage activity, applications dropped 2.3 percent for the week ending February 9. The association’s Refinance Index also fell 2 percent in the same period. Still, getting a mortgage remains the most likely option for real estate funding. Here’s what homeowners need to know about the vocabulary that will come up when you apply for and repay a mortgage loan.

Annual percentage rate

In shopping mortgage loans you’ll see both an interest rate and an annual percentage rate (APR). The APR is typically higher because it reflects not only the interest rate you’ll pay but also any points, mortgage broker fees, and other charges you’ll pay as part of your loan.


Few of us can afford to pay a home off in full when we buy it. So, homeowners need to understand that they will be paying both principal and interest (P&I) off over time.  Amortization spreads out the cost of your P&I over the specified term of your loan to determine the regular payment amounts over the life of the loan.

Closing costs

In addition to the purchase price you negotiate on the home, you’ll typically encounter several other costs that are paid at closing. Closing costs generally include appraisal fees, title insurance, attorney fees, and other fees you pay the service providers who helped you in the home-buying process.

Down payment

The initial payment you make to purchase your home is your down payment. You’ll usually pay a percentage of the home price. If you don’t meet a certain threshold, your lender could also charge you private mortgage insurance (PMI), which they’ll include in your monthly payment. PMI is insurance lenders required for borrowers who pay less than 20% of the home’s purchase price when they buy.


Your escrow account is maintained by a third party who holds your funds until certain conditions are met. You can encounter two types of escrow during your process:

  • Homebuyers use escrow accounts to hold their earnest money and down payment until the purchase closes.
  • Lenders often hold homeownership costs (e.g., property taxes and home insurance) in escrow accounts they manage for their borrowers.

Loan terms

When selecting a mortgage from various lenders, you’ll want to compare the terms. This includes the APR as well as the loan term, which refers to the length of time over which you’ll repay the loan. A 30-year mortgage is common, but you can find 15-year and 3-, 5-, 7-, and 10-year loans.

You’ll also need to weigh whether what type of loan you want. The main options include:

  • Fixed-Rate mortgage: Your interest rate remains constant throughout the entire term of the loan.
  • Adjustable-Rate mortgage (ARM): Your interest rate may change periodically based on changes in a specified index, typically after an initial fixed-rate period.
  • Government-backed: You may be eligible for a Federal Housing Administration (FHA) loan, a loan backed by the U.S. Department of Agriculture, or one guaranteed by the U.S. Department of Veteran Affairs.

Monthly mortgage payment

This is the amount of money due to your lender each month to repay your principal, interest, taxes, and insurance (often abbreviated as PITI).

 When making your monthly mortgage payment, pay attention to late fees and the grace period. The grace period is the period after the due date when you can still make a payment without incurring penalties. After that period expires the lender will charge a fee.


Some lenders let you make tradeoffs between your upfront costs and monthly payments in the form of points. For example, if you paid one point equaling 1% on a $100,000 loan, you’d pay $1,000 upfront to receive a lower interest rate. The $1,000 is added to your closing costs, but you end up paying less over the life of the loan since you’ve cut down your overall interest.


It helps to begin your home buying process with a mortgage pre-approval. This is a lender’s preliminary assessment of how much money you can expect to be loaned for your home purchase. It’s important to keep in mind, though, that this is not a binding offer.

Principal & interest

Your principal is the amount of money you borrowed in your mortgage loan. The interest is a percentage rate your lender will charge you on that principal loan amount. You may hear this referred to as your “P&I.”

Note: your monthly payment is often more than just your P&I. You may have your mortgage lender pay your homeowners insurance and property taxes. The mortgage company typically holds this money in escrow for you until the bills are due.

Boost your mortgage know-how

Knowing these key terms relating to mortgages can help your financial literacy. After all, this is one of the biggest financial commitments you’ll make in your lifetime. You can make more informed decisions, and better plan your budget, when you understand your full legal and contractual obligations.

Without understanding what homeowners need to know about mortgage terms you risk falling behind on payments, missing out on savings, incurring unnecessary fees, or being unaware of the consequences of certain loan terms. Being knowledge about this vocabulary can also help you negotiate and advocate for yourself more effectively.

Have questions about navigating the complexities of homeownership? One of our preferred partners at Highland Mortgage could help answer your questions. Our own agents also have a good understanding of mortgage terms and can explain various aspects of the home buying process along the way. Contact us today!

Saussy Burbank

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