Home Loan Terminology: Words You Should Be Aware About

Home Loan Terminology: Words You Should Be Aware About

Demystifying some of the terminology or jargon used while taking a home loan

Sheetal S PatilUpdated: Thursday, November 23, 2023, 08:20 PM IST
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A mortgage is an agreement between you and a lender that allows you to borrow money to purchase or refinance a home and gives the lender the right to take your property if you fail to repay the money you've borrowed.

Mortgage term: The term of your mortgage loan is how long you have to repay the loan. For most types of homes, mortgage terms are typically 15, 20 or 30 years.

Principal: The principal is the amount of a mortgage loan that you have to pay back. Your monthly payment includes a portion of that principal. When a payment on the principal is made, the borrower owes less, and will pay less interest based upon a lower loan size.

Interest rate: An interest rate on a mortgage loan is the cost you will pay each year to borrow the money, expressed as a percentage rate. It does not reflect fees or any other charges you may have to pay for the loan.

Prepayment penalty: A prepayment penalty is a fee that some lenders charge if you pay off all or part of your mortgage early. If you have a prepayment penalty, you would have agreed to this when you closed on your home. Not all mortgages have a prepayment penalty.

Mortgage refinance: Mortgage refinance is when you take out a new loan to pay off and replace your old loan. Common reasons to refinance are to lower the monthly interest rate, lower the mortgage payment, or to borrow additional money. When you refinance, you usually have to pay closing costs and fees. If you refinance and get a lower monthly payment, make sure you understand how much of the reduction is from a lower interest rate and how much is because your loan term is longer.

Loan-to-value ratio: The loan-to-value (LTV) ratio is a measure comparing the amount of your mortgage with the appraised value of the property. The higher your down payment, the lower your LTV ratio. Mortgage lenders may use the LTV in deciding whether to lend to you.

(Source: Consumer Financial Protection Bureau)

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