Understanding a mortgage ultimately necessitates knowing a few fundamental mortgage terms, including:
- Annual percentage rate
- Closing fees
- Earnest money
- Loan estimate
- Mortgage insurance
Amortization is the term that describes your mortgage payments each month. When you make each monthly mortgage payment, some of the money pays off the interest, while some of your payment reduces the loan balance. Most of the earlier payments on your mortgage cover your interest rates.
Annual Percentage Rate (APR) is one of two sets of numbers that you’ll see when you make a loan payment. APR includes interest, one-time fees, and other costs associated with your loan. APR is also valuable in comparing lenders, as each lender has a different interest rate and overall loan cost.
Closing fees, or settlement costs, are required to close a deal on a home. Closing costs may include several different items, including escrow fees, real estate commissions, transfer taxes, recording fees, and lender charges. Closing costs might also include an origination fee, which is the fee a lender charges to process your application.
Earnest money is the amount you pay to show that you are serious about purchasing a home. You will put your earnest money into an escrow account until you finalize financing for your home. Most homeowners put 3% to 5% of the home’s price aside as earnest money. One caveat to note is that if the sale does not go through on the home, the seller usually gets to keep the money saved as earnest funds.
The term “escrow” refers to a neutral third party in a real estate transaction. The escrow is in charge of handling finances for the buyer and seller. An earnest money payment, for instance, gets put into escrow until you purchase your home.
A loan estimate is provided by the lender. It describes the lender’s duty for providing consumers with an easy way to understand the full cost of their mortgage. In turn, that helps consumers shop around for the best loan to meet their needs.
Mortgage insurance protects the lender in case a borrower defaults on the loan. Mortgage insurance is often required if borrowers pay less than 20% for their initial loan payments. Mortgage insurance is more common with certain types of loans, such as government-backed loans.
Pre-approval, or pre-qualification, refers to the information that you have provided to a lender. Lenders use the basic information that you provide to decide on the mortgage that you may qualify for. Different information might be required by lenders based on the loan you are applying for. They might check your credit score, income, job history, and more.
Principal is the amount of money that you borrow for a loan. Whenever you make a payment on your loan each month, part of the payment is applied towards paying off the principal. Equity in your home grows as you continue to pay off the principal. While you need to make minimum principal payments each month, you can also make higher payments to reduce your interest payments.
Rate is the amount of money that you pay when borrowing funds to pay off your loan. The rate, or “interest rate,” may either be fixed or subject to change depending on the conditions of your particular loan. If you have an adjustable-rate loan, Las Vegas mortgage rates can change daily.
Underwriting is a comprehensive review of your loan application. It helps a lender determine whether or not to approve your application. Underwriting is usually part of a lender’s origination fee. Lenders consider several different factors for underwriting, including your income, credit history, assets, and liabilities. A lender will either approve or deny your loan based on the underwriting findings. If a lender denies your application, you have a right to ask why. The lender must provide a written explanation of the loan’s denial within 60 days of receiving your request.