I was nervous the first time I reached out to a lender in hopes of borrowing money. So nervous that I tried to do some homework before our meeting, that way I might at least sound like I knew what I was doing. If you’re like I was and think principal is referring to the office you went to when you were bad in school and escrow sounds like a type of black bird, consider brushing up on this list of commonly used lending terminology.
Amortization– a method of repaying a loan with payments that include both principal and interest.
APR– or Annual Percentage Rate, is the annual cost of a loan, including fees, presented as a percentage. Since it includes fees, it is higher than the interest rate.
Appraisal– a professional estimate of the market value of a property.
ARM– or Adjustable Rate Mortgage, is a loan in which the interest rates changes periodically based upon an index rate.
Closing– the time when all mortgage documents will be finalized and signed, and the purchase of the property will be finalized.
Closing Costs– expenses incurred when transferring ownership of a property, which usually include origination fees, taxes, escrow payments, attorney fees, and title insurance.
Closing Disclosure – a final disclosure evidencing the actual terms of the transaction. (Only applies to specific transactions.)
Collateral– assets or property used as security for payment on the loan.
Conventional Loan– any mortgage not insured or guaranteed by the federal government.
Down Payment– an upfront payment made toward an asset that is being bought on credit.
Escrow Account – an account set up by or controlled by the servicer to pay for property-related expenses, such as insurance and taxes, on a mortgage loan.
Fixed-Rate Loan– a loan in which the interest rate remains the same over the term of the loan.
Loan Estimate– a good faith estimate disclosure of the costs associated with the transaction. (Only applies to specific transactions.)
LTV– or Loan to Value, is the amount of the loan when compared to the value of the property. For example, an $80,000 loan on a $100,000 property is an 80% LTV.
Origination Fee– a fee, charged by the lender, for processing and originating the loan.
Points– Equal to 1 percent of the principal amount of a loan, often paid to reduce the loan’s interest rate.
Principal– the amount of debt, excluding interest, remaining on the loan.
PMI– or private mortgage insurance, is a policy to protect the lender if a borrower defaults on their loan obligation.
Title Insurance– a type of indemnity insurance that protects the buyer and lender against losses from a title defect.
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By Adam Lucas Adam Lucas holds a Finance degree and an MBA from the University of Kentucky. His work has appeared in many major outlets including Yahoo, AARP.org, and GoBankingRates.com.
Monday on the Money is a weekly commentary from Bank of the Ozarks providing financial advice and solutions important to you and your family.