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The Five Minute Guide to Understanding Mortgage 'Lingo'

Posted by Sara MacLennan on Thursday, October 16th, 2014 at 10:07pm.

For first-time homebuyers, applying for a mortgage can be a confusing and overwhelming experience, with many new terms and concepts to learn and understand. Even for previous homeowners, applying for a new mortgage when you've been out of the 'mortgage world' for a while can be a learning curve, and it's largely in part to the mortgage terms and mortgage 'lingo' used in the industry but nowhere else. Here's your five minute guide to understanding the most popular mortgage terms so that you can become fluent in speaking 'mortgage-ese.'

Lingo For Getting Approved

"Loan-to-value ratio" is a term that will certainly come up once or twice during your mortgage application, which in writing is expressed as a percentage, and in real life represents the amount of the loan divided by the value of the property. For example, a 60% loan-to-value means you might have a $120,000 loan on a home worth $200,000.

The word "underwriting" refers specifically to the process in which your lender looks at your mortgage application and analyzes your risk as a borrower by utilizing information such as your credit score and credit history.

You might also hear your mortgage broker talk about "points," which is simply an easy way to say "one percent" in the mortgage industry. Usually attributed towards the principal of the mortgage amount, points can be charged as a fee to the borrower. For example, a two-point fee on a $100,000 mortgage would be a $2,000 fee.

Types of Mortgages: Variable vs. Fixed

Considered by many to be the 'riskier' of the two, a variable-rate mortgage does not ensure a specific interest rate for the term of the mortgage, but varies monthly depending on the fluctuation of market interest rates. A variable-rate mortgage is also known as an adjustable-rate mortgage.

A fixed-rate mortgage has a fixed interest rate for the term of the mortgage, which is determined at the time of the purchase, and offers pre-determined, monthly mortgage payments of equal amounts.

Lingo for Closing the Deal, Moving in, and Moving on

Eventually you may wish to "refinance" your home. Refinancing is a means used to take out a new loan in order to pay off an existing mortgage. Homeowners sometimes use this tactic in order to take advantage of a lower interest rate.

At the time of selling, your "home equity" will be a very important figure. This is the difference between the value of your home and the amount owing on it through an existing mortgage, i.e. your possible financial gain or loss.

Now that you've been filled in on the most popular mortgage terms used in the world of finance, you'll certainly have an easier time understanding and speaking 'mortgage-ese' with your broker. If you don't understand anything further, just be sure to ask for clarification! Next Up: Do you really need to hire an agent? Find out why you need to consider it here.

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