Loan Term Definitions

Navigating the mortgage application process can be challenging for both new and seasoned homeowners. Our guide on Mortgage Loan Term Definitions is here to simplify the process and help you grasp essential terms and concepts.

Just as legal professionals have their own complex jargon, those in the mortgage industry use specialized terminology that may seem confusing at first. Mastering these terms is crucial for understanding how your mortgage works and what to expect during the application process.

Buying a home is a significant milestone, and understanding your mortgage shouldn’t be daunting. New Century Mortgage is dedicated to educating borrowers and guiding them through the complexities of securing a mortgage.

By the end of this guide, you’ll be familiar with the key terms and concepts related to mortgage loans, from the initial application to final approval.

Understanding the components of a mortgage payment is essential. Often referred to as the PITIA payment, it includes:

• Principal: The remaining balance of your loan that you owe.
• Interest: The cost of borrowing, expressed as a percentage, which accrues on the principal.
• Taxes: Your property tax expense, divided into monthly payments.
• Insurance: Your homeowner’s insurance premium, also divided into monthly payments. This protects the lender’s interest in your property in case of damage or loss.
• Association Dues: Fees for homeowner associations or planned developments, included in your payment for qualification but billed separately.

It’s important to distinguish between your interest rate and the APR:

• Interest Rate: The annual cost of your mortgage expressed as a percentage, excluding fees.
• APR: The total annual cost of your loan, including interest, fees, and other charges. The APR provides a more comprehensive view of your loan’s cost and is required by the Federal Truth in Lending Act for comparison purposes.

Choosing between a fixed-rate and adjustable-rate mortgage depends on your financial goals:

• Fixed-Rate Mortgage: The interest rate remains constant for the life of the loan, offering predictable payments.
• Adjustable-Rate Mortgage (ARM): The interest rate can vary based on market conditions after an initial fixed-rate period. This might start with a lower rate but can fluctuate over time.

• Term: The length of time to repay your mortgage, typically ranging from 10 to 30 years. A shorter term usually means higher monthly payments but less interest over time.
• Amortization: The process of paying off your mortgage through regular payments. Early payments primarily cover interest, with a gradual shift toward paying down the principal.

It’s crucial to review all loan disclosures carefully:

• Loan Estimate (LE): Provided within three business days of your application, this document outlines estimated loan terms, including interest rates and costs. It helps you understand what to expect if you proceed with the loan.
• Closing Disclosure (CD): Received at least three business days before closing, this document provides a detailed breakdown of your final loan terms, including closing costs. It allows you to compare with your initial Loan Estimate and prepare for closing.

For reverse mortgages, you will receive the HUD-1 Settlement Statement and a final Truth in Lending Disclosure instead of the Closing Disclosure.

Have questions or need more information on specific loan terms? Mortgage Quote can help clarify any mortgage-related inquiries.