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Terminology you should know when getting a mortgage

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Let’s break down some key terminology for anyone stepping into the world of mortgage loans:

1. Down Payment:

  • Definition: The initial amount of money you pay upfront when buying a home.
  • In Simple Terms: It’s like a deposit to show you’re serious about buying the house.

2. Principal:

  • Definition: The actual amount of money you borrow for your mortgage.
  • In Simple Terms: It’s the total loan amount you need to pay back.

3. Interest Rate:

  • Definition: The cost of borrowing money, expressed as a percentage.
  • In Simple Terms: It’s what the lender charges you for the loan. Think of it as the rent for borrowing.

4. Loan Term:

  • Definition: The period over which you’ll be repaying the mortgage.
  • In Simple Terms: How long you’re on the hook for paying back the loan. Common terms are 15, 20, or 30 years.

5. Fixed-Rate Mortgage:

  • Definition: A mortgage with a stable interest rate that doesn’t change over time.
  • In Simple Terms: Your interest rate stays the same, providing predictability.

6. Adjustable-Rate Mortgage (ARM):

  • Definition: A mortgage with an interest rate that can change periodically.
  • In Simple Terms: Your interest rate can go up or down, adding an element of risk.

7. Amortization:

  • Definition: The process of paying off the loan through regular, scheduled payments.
  • In Simple Terms: It’s the plan for repaying the loan over time.

8. Closing Costs:

  • Definition: Additional fees and charges paid at the closing of the real estate transaction.
  • In Simple Terms: Extra costs to finalize the deal, covering legal stuff and paperwork.

9. Escrow:

  • Definition: An account held by a third party to manage and disburse funds for certain expenses.
  • In Simple Terms: It’s like a middleman holding onto some of your money for things like property taxes and insurance.

10. Pre-approval:

  • Definition: A lender’s official commitment to lend you a specific amount for a home purchase.
  • In Simple Terms: It’s like getting a thumbs-up from the bank saying, “You’re good for this much.”

11. Appraisal:

  • Definition: An assessment of the property’s value conducted by a professional appraiser.
  • In Simple Terms: Figuring out how much the house is worth.

12. Closing Disclosure:

  • Definition: A document outlining the final terms of the mortgage loan.
  • In Simple Terms: The last bit of paperwork before sealing the deal.

Understanding these terms is like having a solid strategy in a game. They’re your moves in the home-buying chessboard!