15 Mortgage Terms First Time Buyers Should Know

And while it should be as simple as saying “hey, how much will you give me so I can buy this house,” the real world, unfortunately, doesn’t work that way.

You’re going to come face to face with mortgage terms that can be:

  1. Frustrating and/or
  2. Costing you money that you shouldn’t have to pay

Do yourself a favor and get at least a basic understanding of the finance world’s lingo and specifically mortgage terms. This well let you know whether or not you’re getting a good deal…before you sign on the dotted line!

1. Amortization

An amortization schedule shows a breakdown of the balance of your home loan over time. 

It shows how much of your loan payment goes towards the loan (principal) and how much of your payment is going towards the interest charged for the loan.

When the loan is new, more money goes towards the interest, but as the principal (amount you initially borrowed) gets smaller over time, the amount of interest you pay will shrink too.


  • ⬥ Mortgage – $200,000
  • ⬥ Interest rate – 5%
  • ⬥ Monthly payment (excluding taxes and insurance) – $1,073.64

You make the first payment of $1,073.64. And you’d pay $833.33 towards the interest and reduce your loan by $240.31.

Next month, your new loan balance would be $199,759.69 so your lender will calculate interest on this new number instead of the original $200k.

This means you’d only pay $823.33 in interest payments.

As you can see, it takes time to knock down the principal but there are ways you can do it that are outside of the scope of this article.

2. Annual percentage rate

Not to be mistaken for “interest rate”, the APR defines the total cost to you, as a borrower, for taking out a loan with a lender.

It includes the following:

  • ⬥ Amount of interest you’re paying
  • ⬥ Any points you pay (see below)
  • ⬥ Prepaid interest
  • ⬥ Loan processing fees
  • ⬥ Document preparation fees
  • ⬥ Private mortgage interest

The APR is a more useful number because you can use it to compare offers between different lenders.

3. Closing costs

As you might imagine, this figure represents the entire amount of money that you will pay at the time of closing to transfer the property.

On average, closing costs will range anywhere from 2% to 5% of the purchase price.

Fees charged can vary, depending on the home and its location, but typically it will include the following costs:

  • ⬥ Points
  • ⬥ Appraisal
  • ⬥ Credit Report
  • ⬥ Pre-Paid items (e.g. homeowners’ insurance or taxes)
  • ⬥ Title Insurance
  • ⬥ Loan Processing (Underwriting) fees
  • ⬥ Recording fees (cost to file documents with the county where the home resides)
  • ⬥ Attorney fees
  • ⬥ Transfer fees. 

Some of these are expenses that you may have paid before closing. The settlement statement lists these items as a credit. This ensures that the settlement (closing) statement reflects all costs in connection with the closing.

Depending on the laws in the state wherein the property resides, some of these costs are incurred by the seller. It’s also possible to negotiate for the seller to pay some of these costs as well.

4. Down payment

This represents the money you pay toward the purchase of the home and is the difference between the loan amount and the sales price.

For example, if you are buying a home for $200,000 and the lender stipulates that they will only lend 80% of the purchase price ($160,000) your down payment will be $40,000 dollars. (20%)

(Note: This figure is not the same as “earnest money” – see below)

5. Earnest money

Unlike a down payment – which is between you and the lender – earnest money shows the seller that you’re serious about wanting to buy their home.

Typically, this figure can be anywhere from 3% to 5% of the purchase price, however in a seller’s market (where there are more home buyers than sellers) people have been known to put down significantly more.

If the sale falls through due to no fault of your own, your earnest money is typically returned to you.

6. Escrow

A term that means to “place in trust or in the custody of”.

In connection with real estate it typically refers to money that’s held aside for the purchase of a home that’s placed with a neutral third party such as a realtor or title company. 

For example, the earnest money you put towards a home purchase will be held in escrow until closing.

Another kind of escrow would be the money that your lender collects and sets aside from your mortgage payment to cover the homeowners’ insurance and property taxes on the home.

7. Interest rate

An interest rate is expressed as a certain percentage of the loan you’re borrowing. Obviously this means that the higher the rate the higher your monthly loan payments. 

8. Loan estimate

An estimate of all costs you will incur when borrowing from a lender.

Lenders are required to deliver a loan estimate within 3 business days to any loan applicant. The document should reflect:

  • ⬥ Loan amount
  • ⬥ Interest rate (including the APR)

Estimates of:

  • ⬥ Monthly payments
  • ⬥ Assessments
  • ⬥ Insurance
  • ⬥ Taxes
  • ⬥ Cash needed to close

9. Origination fee

The costs to process your mortgage application from the time you submit it, to the time of closing.

It can be anywhere from 1% to 6% of your loan amount.

Note: Within 3 business days of applying for your home loan, you should receive an estimate of costs from your lender.

10. PMI (Private mortgage insurance) or MIP (Mortgage insurance premium)

If you take out a conventional (non-governmental) mortgage private mortgage insurance (PMI) is usually required if you borrow more than eighty percent of the purchase price.

For governmental loans (FHA, VA, USDA), the term is “mortgage insurance premium” (MIP).

Note that both PMI and MIP were created to protect the lender – not you – in the event that you default on repayment of the mortgage.

11. Points

A point is calculated as 1% of the mortgage amount. 

Paying one or more points will allow you to reduce your interest rate, which will reduce the amount you pay in total over time.

12. Preapproval, pre-qualification

The meaning of these terms can vary, depending on the lender, so it’s important to understand what your lender means when they say you’re “pre-approved” or “pre-qualified”.

When you provide basic information, such as how much you plan to put down, your income, debts, etc., but don’t actually fill out paperwork and apply for a particular loan, lenders will typically give you a “pre-qualification”.

All this really means is that if your information checks out, they MAY lend you money on a home. 

In reality, pre-qualifications only let you know that you might be able to get a loan…that’s all.

A pre-approval, however, may mean that the lender ordered – and reviewed – your credit report and verified the information you submitted.

13. Principal

How much money you borrowed.

14. Rate lock

Interest rates fluctuate all of the time…sometimes even hourly…so a rate lock means that the lender agrees to guarantee a particular interest rate for your home loan.

The term can be anywhere from 30 to 60 days until it expires or the loan is processed.

15. Title insurance

When a home or land is bought and sold, documents are filed in the county wherein the property resides. 

Title companies review these documents filed in the public records, looking for any interests which haven’t been released, problems with legal access to the property, unpaid taxes, etc.

Then, once any problems have been resolved, the title insurance company will issue a commitment to insure against any claims made against the property.

This protects both you as a borrower and the lender, from any legal claims made against ownership (or in the case of the lender, ability to hold a lien).

Finally, don’t be afraid to ask questions about mortgage terms if you’re unclear about something…any reputable lender will be more than happy to answer any and all of your questions.