Homeownership, demystified

Amortization

Amortization is the plan for paying your loan off. Early on, most of each payment goes to interest. Later, most goes to principal. The switch is slow, and it is why the first years feel like little progress.

Also called: amortisation, amortization schedule

Appraisal

An appraiser visits your home and compares it to recent nearby sales. Lenders require one to buy or refinance. You can also pay for one to prove you have enough equity to drop PMI.

APR

APR is the annual percentage rate. It folds points and fees into a single number. It is always a little higher than your interest rate, and it is the fairer way to compare two lenders.

Also called: annual percentage rate

ARM

An ARM is an adjustable-rate mortgage. The rate is locked for a set number of years, then it resets on a schedule. Your payment can rise a lot when it does.

Also called: adjustable-rate mortgage, adjustable rate

Assessed value

Assessed value is the figure your tax bill is based on. It is not the same as market value, and it is often out of date. If it looks too high, you can appeal it.

Balloon payment

A balloon loan has small payments and then one big one at the end. You have to refinance, sell, or find the cash. Most standard home loans do not work this way.

Break-even point

Divide the cost of the refinance by what you save each month. That is how many months until you are ahead. If you plan to move before then, it is not worth doing.

Also called: break-even

Closing costs

Closing costs cover the lender, the title company, the county and prepaid items like taxes. They usually run 2% to 5% of the price. Some can be negotiated, and some cannot.

Closing Disclosure

The Closing Disclosure is a standard five-page form you get at least three days before closing. It lists your rate, term, payment and every fee. Keep it — it is the most useful document you own.

Also called: cd

CLTV

CLTV is combined loan-to-value. It adds your mortgage to any second loan or line of credit. Lenders look at this, not just your first mortgage, when you ask to borrow more.

Also called: combined loan-to-value

Conforming loan

A conforming loan fits the limits set for Fannie Mae and Freddie Mac. Most home loans are conforming. They usually carry lower rates than loans that are not.

Credit score

Your credit score is built from your payment history and how much you owe. A higher score gets you a lower rate. Even a small rise can be worth thousands over a loan.

Also called: fico

Deed

A deed is the paper that moves ownership from the seller to you. It is filed with your county. Deed fraud is when someone files a fake one, which is why watching the record matters.

Down payment

The down payment is the part of the price you pay yourself. Put down 20% or more and you skip PMI. Put down less and you still buy, you just pay for the extra risk.

DTI

DTI is your debt-to-income ratio. Lenders add up your monthly debts and divide by your income before tax. A lower number means you can borrow more.

Also called: debt-to-income, debt to income ratio

Equity

Equity is what your home is worth minus what you still owe. It grows two ways: you pay the loan down, and the home goes up in value. It is the part that is really yours.

Also called: home equity

Escrow

Escrow is a holding account. Part of every payment goes in, and your servicer pays your property tax and insurance bills out of it. You are paying those bills either way, just monthly instead of all at once.

Also called: escrow account, impound account

Escrow analysis

Once a year your servicer works out what your tax and insurance bills will be, and adjusts your monthly escrow to match. This is the single most common reason a mortgage payment changes.

Escrow shortage

A shortage means your bills cost more than your escrow collected. Your servicer raises your monthly payment to refill the account, usually over twelve months. Rising taxes and insurance are the usual cause.

Escrow surplus

A surplus means your account holds more than it needs. If it is over a set amount, your servicer must refund it. Your monthly payment usually drops too.

Escrow waiver

Some lenders let you skip escrow and pay the bills yourself. You keep the cash longer, but you have to save for a large bill on your own. It usually needs a solid down payment.

Extra payment

An extra payment goes against your principal. Because interest is worked out on what you owe, every extra dollar early saves you several later. Tell your servicer to apply it to principal.

Also called: principal-only payment

FHA loan

An FHA loan is insured by the government and can accept a smaller down payment and a lower credit score. The trade-off is mortgage insurance that usually lasts the whole loan.

Fixed-rate mortgage

A fixed-rate loan keeps the same interest rate for the whole term. Your principal and interest never change. Your total payment can still move, because taxes and insurance do.

Forbearance

Forbearance lets you pay less, or nothing, for a while during hardship. The money is not forgiven — you catch it up later. Ask before you miss a payment, not after.

HELOC

A HELOC lets you borrow against your equity and pay it back as you go, like a credit card. The rate usually moves. Your home is the security, so missing payments is serious.

Also called: home equity line of credit

HOA

A homeowners association maintains shared areas and sets rules for the neighborhood. Dues are separate from your mortgage and usually are not escrowed. They can rise, and they can be enforced with a lien.

Also called: homeowners association

Homeowners insurance

Homeowners insurance pays to repair or rebuild your home after damage. It is priced on rebuild cost, not on what you paid, because land cannot burn down. Your lender requires it.

Also called: hazard insurance, ho-3

Homeowners Protection Act

The Homeowners Protection Act sets the rules for removing PMI. You can ask once you owe 80% of the original value. It must come off automatically at 78%, as long as you are current on payments.

Also called: hpa

Homestead exemption

Most states cut the taxable value of your main home if you apply. The seller's exemption ends when you buy, so you have to file your own. Many buyers never do, and quietly overpay for years.

In arrears

Your payment covers the month that has just ended, not the month ahead. Mortgages work this way, unlike rent. It is why your first payment is not due until a month or two after you close.

Interest

Interest is the fee you pay to borrow. It is worked out from what you still owe, so it is highest at the start. This is why paying extra early saves so much.

Interest rate

Your interest rate sets what you pay to borrow. It is not the same as APR, which also includes fees. The rate is what drives your principal and interest payment.

Also called: note rate

Jumbo loan

A jumbo loan is above the conforming limit for your area. Lenders keep more of the risk, so they ask for a stronger credit score and a bigger down payment.

Lien

A lien lets someone be paid from your home before you are. Your mortgage is one. So is an unpaid contractor or tax bill. Liens have to be cleared before you can sell.

Loan Estimate

A Loan Estimate arrives within three days of applying. It is designed so you can lay two lenders side by side. Compare the estimates, not the sales pitch.

Loan term

The term is the length of your loan. A 30-year term gives you a smaller payment. A 15-year term costs more each month but far less in total interest.

Also called: loan length

LTV

LTV is loan-to-value. Owe $160,000 on a $200,000 home and your LTV is 80%. It is the number that decides when PMI can go, and whether you can refinance.

Also called: loan-to-value, loan to value

Millage rate

A mill is one dollar of tax for every thousand dollars of value. Your county adds up the mills for schools, roads and services. That total, times your assessed value, is your bill.

Also called: mill rate

MIP

MIP is the mortgage insurance premium on an FHA loan. Unlike PMI, it usually cannot be canceled by building equity. Many people refinance out of an FHA loan just to end it.

Also called: mortgage insurance premium

Mortgage

A mortgage is a loan you use to buy a home. The home is the security for the loan, so the lender can take it if you stop paying. Most run for 15 or 30 years.

Occupancy

Lenders and tax offices treat a main home differently from a second home or a rental. Main homes get the best rates and most tax breaks. Your loan says which one you agreed to.

Also called: primary residence

Origination fee

The origination fee pays the lender for processing the loan. It is often around 1% of the amount you borrow. It is one of the fees worth asking about.

PITI

PITI stands for principal, interest, taxes and insurance. It is the whole housing payment, not just the loan. Lenders use it to decide what you can afford, and it is the number that actually leaves your account.

Also called: principal interest taxes insurance

PMI

PMI is private mortgage insurance. Lenders require it when you put down less than 20%. It protects them, not you, and it can be removed once you have enough equity. Getting rid of it is often the fastest saving a homeowner can make.

Also called: private mortgage insurance

Points

One point costs 1% of your loan and buys a small rate cut. It pays off only if you keep the loan long enough. Work out the break-even before you agree.

Also called: discount points, mortgage points

Prepayment penalty

A prepayment penalty is a charge for paying your loan off ahead of time. Most modern home loans do not have one. Check your note before you make a large extra payment.

Principal

Principal is the money you borrowed and have not paid back yet. Every payment chips away at it. The smaller it gets, the less interest you are charged.

Property tax

Your county values your home and taxes it at a set rate. The bill usually goes through your escrow account. It can rise sharply after a sale, because the sale resets the value.

Also called: real estate tax

Rate lock

A rate lock freezes your rate while your loan is processed, usually for 30 to 60 days. If rates rise, you are protected. If the lock runs out before you close, you may have to pay to extend it.

Recast

A recast keeps your rate and term but lowers your payment after a large payment toward principal. It costs far less than a refinance. Not every lender offers it.

Also called: loan recast, re-amortization

Refinance

A refinance pays off your current loan with a new one. People do it to cut the rate, shorten the term, or drop mortgage insurance. It costs money to do, so the saving has to be worth it.

Also called: refi

Servicer

The servicer collects your payment, runs your escrow account, and answers your questions. It is often not the lender you started with. Your loan can be sold to a new servicer at any time.

Also called: loan servicer, mortgage servicer

Title

Title is your legal ownership of the property. A title search before closing checks nobody else has a claim. Problems with title are rare, and expensive when they happen.

Title insurance

Title insurance covers you if an old ownership claim, lien or error turns up after you buy. You pay for it once, at closing. The lender gets its own policy, which does not protect you.

Underwriting

An underwriter reviews your income, debts, credit and the home itself. This is the stage where extra paperwork gets asked for. Answer quickly and closing stays on track.

USDA loan

A USDA loan helps buyers in qualifying rural and some suburban areas. It can need no down payment. There are income limits, and the home has to be in an eligible area.

VA loan

A VA loan is backed by the Department of Veterans Affairs. Many need no down payment and none carry monthly mortgage insurance. There is a one-time funding fee instead.