Common Mortgage Definitions
There are a number of different terms that are specific to the mortgage industry. Here are some basic definitions to help you as you navigate the process of home loan financing. If you have questions or need a more thorough explanation, please call Larry--He'll be glad to help.
The principal is the amount of money borrowed. When a borrower makes their monthly mortgage payment a small portion of that money is used to repay a matching portion of the principal amount. Over the life of the mortgage, the portion of the monthly payment going towards the principal will increase and the portion going towards interest will decrease.
Interest is the cost of borrowing the principal amount. It is usually stated as an annual percentage rate or APR. A portion of your monthly payment goes towards paying off the interest accrued on the principal amount.
These are taxes levied by local governments and are typically expressed as a percentage. Lenders will collect the taxes through the monthly mortgage payment that they then use to pay the property taxes when they are due.
All lenders require that the borrower have hazard insurance, commonly known as Home Owners insurance, which protects the borrower against costs associated with damage to the property, such as fire, flood, tornado, and others. The insurance policy must be paid in full for one year at the time of closing.
Mortgage insurance is an insurance policy that pays mortgage lenders for their financial loss if a borrower fails to repay the loan. This type of insurance makes it possible for borrowers to purchase a home with less than twenty percent down payment.
Assessments are charges levied by condominium and townhouse associations for the upkeep and maintenance of the common areas associated with them. The borrower must pay the associations directly. The dues levied by the associations are not part of the monthly mortgage payment to the lender.