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The Guide to Mortgage Payments: Understanding the Lingo

Posted by South Dakota Housing Authority on Oct 19, 2017 4:20:01 PM

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When venturing into the world of homebuying, it may feel like learning an entirely new language. The lingo and jargon might be totally foreign to you. That's why educating yourself on the basics is so important.

Here are just a few common mortgage-related terms you should know when buying a home.

Mortgage

The first important term to identify—what does the term "mortgage" itself even mean? A mortgage is a form of loan that a bank or credit union or other financial institution provides to a consumer for the purposes of buying a home. It will typically include the required amount left over once the downpayment is subtracted from the sale price. While you reside in the home, you'll pay toward your mortgage on a regular basis—typically on both the interest and the borrowed amount (or "principal"). All told, the "mortgage" is simply the home loan itself.

Escrow

One common misconception about mortgages is the term "escrow." It is not interchangeable with the word "mortgage." In fact, an escrow account is something you pay into on an annual or semi-annual basis to cover the cost of your property taxes as well as your mortgage payment. It's often used as a tool to consolidate the number of bills you're paying to make budgeting for your home costs simpler.

Fixed-Rate vs. Adjustable-Rate

When you're selecting a mortgage, you'll see the terms "fixed-rate" and "adjustable-rate" quite a bit. The basic definition of these terms is that a fixed-rate mortgage sets your interest rate for the life of the loan and an adjustable-rate mortgage's interest rate can vary depending on the market. Generally speaking, a fixed-rate is recommended in most scenarios—particularly for long-term residences. An adjustable-rate is mostly well-suited for households intending to only own the property for a short time. SDHDA, for example, only finances fixed-rate loans—learn more here.

Equity

One piece of mortgage lingo that you'll hear more and more as you pay down your loan is "equity." This references the value of the home that is considered "paid." Basically, it's the difference between the amount left owed in the mortgage and the value of the house. So as your mortgage balance decreases over time, your equity increases. The term "home-equity loan" refers to the process of borrowing against that equity to make home improvements or other budgetary needs. Your equity is an asset, and you're entitled to use it if necessary.

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Topics: Homeownership

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