Understand Your Mortgage Better With These Financial Terms

Understand Your Mortgage Better With These Financial Terms

Understand Your Mortgage Better With These Financial Terms

One of the single biggest purchases that most people ever make it their lifetimes is that of their very own house. Simply put, buying a house is a big time decision and life investment.

There are very few people in the world that can cover the entire cost of a new house with a check. Luckily for the rest of us, there is such a thing as a mortgage loan.

Getting a mortgage loan is a very complicated process but also one that is essential to go through. Going through the whole loopy process is made a whole lot easier when you understand how the process works and what many of the primary mortgage and financial terms mean. Having a thorough understanding of this all is essential to your success in this area.

Mortgage Interest Rates

Though there are many terms that related to mortgages, one of the most important to understand is interest rates. Interest rates are one of the most basic aspects of any loan and also apply to mortgages.

There are two main types of interest rates that apply to mortgages. They are:

  • Fixed interest rates. These interest rates are generally more common when the interest rates on a mortgage are low. The best thing about a fixed rate is that you will know from the get go how much you are expected to make for each payment.
  • Variable interest rates. Also known as ARM (Adjustable Mortgage Rate), a variable interest rate is packed with an index and an added margin. These interest rates have an initial fixed rate period which then begins to fluctuate in constant intervals. The specific fluctuations depend on the specific mortgage and the terms that apply to it. Obviously, these interest rates are more complicated than fixed rate interest rates.

Mortgage Fee

Another basic term that is essential to understand for the sake of your mortgage is mortgage fee. A mortgage fee is simply an extra fee that is associated with a mortgage loan. Unfortunately, there are many different kinds of these fees. They include:

  • Lender fees. These include things such as application fees, origination fees, and discount fees.
  • Third party fees. These don’t have to do with the lender and include things like appraisal fees, title search fees, and title insurance fees.
  • Escrow (and pre-paid) fees. These include property tax fees and property insurance fees.

Before finalizing your mortgage, make sure that you sit down with a loan professional and talk through the different types of mortgage fees. Your lender is, in fact, legally obligated to provide you with an estimate for every included fee and other information surrounding them.

Payment Schedule

Payment schedule is another commonly heard term that is essential to be familiar with to understand your mortgage as a whole.

Simply put, mortgage loans come with a present (and constant) payment schedule. You make the same sized payments for the entirety of the loan period. Though payments on ARMs tend to change (because of their interest rates), payments on fixed rate mortgages stay the same.

It is also of note that some borrowers can receive special types of mortgage payments. This is especially the case for borrowers with unique financial situations. An example of this is an Interest Only (I/O) loan.

Principal, Term, Monthly Payment, Other Payments

Payment schedules also have several sub-terms that are essential to understand. These are discussed briefly below.

  • Principal. The principal is the amount of money that you borrow for your mortgage. In some instances, it can refer to the amount of money that is the current balance of the loan.
  • Term. The term is the length of your mortgage loan as you agreed to beforehand. It is the amount of time that your mortgage will last. The terms for mortgage loans can be for many different lengths of time. 30 year terms are among the very most common for purchase loans with refinance loans being at 15 years.
  • Monthly payment. Each monthly payment for your loan will consist of two parts. These parts are principal and interest. The principal part of your mortgage payment will reduce the sum of money that you still have to pay. On the other hand, the interest part will decline over the length (or term) of the loan, but only if your interest is fixed.
  • Other payments. In addition to the monthly payments discussed above (principal and inters), you might also have to make a handful of other payments relating to your mortgage loan. One of the most common of these is mortgage insurance. This is a very common extra payment for borrowers who had to borrow a large percentage of the money needed to purchase their house. Property taxes and property insurance payments are other payments that you might have to take into consideration that involve mortgages.

Understand Your Loan

In addition to understanding the financial terms that surround your mortgage loan, it is also of utmost importance that you understand the loan itself. Getting a mortgage loan can be a difficult and time-consuming process. It definitely takes the right frame of mind and some patience. Things are made even trickier when a term comes up that you are unfamiliar with.

If you ever come across something that you don’t understand, be sure to ask about it! It is absolutely essential that you are clear on everything relating to your mortgage loan. Your loan officer should be more than willing to explain the specifics of a term to you.


There is no denying that understanding a mortgage loan is tricky business. But it is also necessary. Take as much time as you need when getting your new mortgage loan to fully understand it, in and out. In addition to reviewing the terms discussed above, ask your loan officer any questions that you have and don’t be afraid to consult an outside source if you need. At the end of the day, the things that matters the most is that you know what you are getting into when it comes to your mortgage.

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