Understanding Mortgage Terms

Author: Ryann Cairns

Understanding mortgage terminology can be one of the most frustrating parts of purchasing a home. Not only are you nervous about making the right decision in which home will best suit the needs of you and your family, you also have the stress of committing to a long term loan.

In addition, to all that you oftentimes feel as though you’re functioning in a foreign land where everyone speaks a different language. Taking a few moments to understand mortgage terminology can go a long way in reducing your stress as you make your way through the mortgage maze.

Acceleration Clause – This is a clause used in a mortgage that can be enforced to make the entire amount of the loan and any interest due immediately. This is usually stipulated if you default on a specified number of installment payments (in some cases, just one payment.)

ARM (Adjustable Rate Mortgage) – A loan in which the interest rate may fluctuate, increasing or decreasing, during the course of the loan.

Alienation Clause – This is a clause in a mortgage that states the entire balance of the loan becomes immediately due if the property is sold.

Amortization – This is the process by which the interest on a loan is payable in periodic installments over the course of the loan.

Buy-down – This usually refers to a payment a borrower will make to a lender in exchange for lowering the interest rate on a mortgage loan.

Equity – Refers to the value a homeowner builds into their property that is above and beyond the outstanding balance on the property.

Escrow – This is a special account or transaction where funds (and sometimes documents) are placed. There are usually specific circumstances attached to the placement of funds and documents into escrow.

Fixed Rate Mortgage – A type of loan where the interest rate remains the same throughout the course of the loan.

Foreclosure – A legal process by which property that was used to secure a debt is sold in order to satisfy the debt. This occurs when there has been a default in payment on the debt.

Fully Ammortized Loan – This is a loan in which both the principal and the interest are paid in specified installments. The loan is reduced to a zero balance at the end of the loan term.

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