Basic Mortgage Terms

If it's your first time applying for a mortgage, understanding key terms is essential for making informed decisions. Educating yourself on these terms will help you navigate the process and select the best home for your needs. Here are some fundamental terms you should know:

Principal: This is the amount of money you borrow to purchase your home. Before the principal is provided, you'll need to make a down payment, which is a percentage of the home's cost. The size of the down payment often depends on the home's price. Once you have paid off the principal, the home is fully yours.

Interest: This is the percentage charged by the lender for borrowing money. Interest rates can vary, and lenders may also charge points, which are a portion of the total funds financed. The principal and interest together make up your monthly mortgage payments. This process, known as amortization, involves reducing your loan balance over time. Initially, payments mostly cover interest, while later payments focus more on reducing the principal.

Escrow Account: A portion of your mortgage payments may be placed into an escrow account to cover expenses like insurance and property taxes.

Taxes: Property taxes are payments made to your local or state government to fund public projects such as roads and schools. All homeowners are required to pay these taxes.

Insurance: Home insurance is required to close on your mortgage and covers your home against potential damages such as fire, theft, or floods. In flood-prone areas, federal laws may mandate flood insurance. If your down payment is less than 20% of the home's value, you might face additional insurance premiums. However, once you have paid off about 78% of the home, these premiums may no longer be required.

Understanding these terms will help you avoid common pitfalls and make more informed choices about your mortgage. Look for a low interest rate and consider a fixed interest rate if possible, as this can help you focus on paying off the principal and potentially pay off your loan faster. A mortgage is a significant financial commitment, so it's crucial to choose a home you can afford and ensure timely payments to avoid losing your property..