Mortgages and Key Terms

Sometimes the world of real estate can feel foreign.  It may even sound like realtors speak a different language.  Here are some important explanations of key words that you will hear all the time if you are a buyer or seller.  We will cover mortgages, down payments, interest rates, terms, amortization period, discount points, and prepayments. 

Mortgages

Simply put, a mortgage is a loan specifically used to buy property.  There are different types of mortgages.  Perhaps you have heard of the terms “fixed mortgage” or “adjustable mortgage.”  Similar to its name, a fixed mortgage is just that – fixed.  The interest rate does not change if the market explodes or crashes.  Adjustable mortgages are risky, as they change depending on the market.  These two are on opposite ends of the spectrum and have different options between them. 

Other Key Terms

Down Payment

This is the amount of money a buyer pays up front.  If there is a home with $250,000, and somebody pays an initial $50,000 before their mortgage, their down payment is $50,000.

Interest Rates

With mortgages come interest rates.  This is what is charged to a buyer for borrowing money.  Though sometimes calculated yearly, it is most often determined monthly. 

Mortgage Term

The mortgage term is typically the amount of time the mortgage (or loan) will be paid to the lender.  Think of this as installments.  If an entire mortgage (or amortization period.  See below.) is 25 years, there may be shorter periods within that time for the homeowner to refinance.  That is a mortgage term.

Amortization Period

Though this can be the same as a mortgage term, there is an important distinction. The amortization period is the entire length of time it will take for the mortgage to be paid in full. 

Discount Points

What happens if the homeowner makes an extra payment to the lender?  Not only does that mean the mortgage is paid off faster, they also qualify to get discount points.  One “point” is one percent of the mortgage.  So, if a home costs $100,000, one-point equals $1,000.  These points mean the interest rate is reduced and the home buyer spends less money on the property than anticipated. 

Prepayment Privilege

The ability to obtain discount points, as described above, is possible because of prepayment privilege.  It is, essentially, the right for the homeowner to pay part or all of the mortgage payments before they are due.