Mortgages 101: The Vocabulary

Here’s a guide to the basics of getting a mortgage. Now you can focus more on your new home and less on trying to decipher fine print.

Published 10/19/20 • Updated 10/19/20

Anthony Bayardelle

Broker, Realtor, & SoCal Keys CEO

Realtor, Broker, Loan Officer, 20+ Years of Real Estate Expertise

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The last thing anyone wants to do when looking at their dream home is to delve into the complicated field of mortgage rates. Here's a brief overview of the vocabulary you're going to encounter when choosing a mortgage and some important tips to ensure the process goes smoothly.

The Basics

Mortgage

A mortgage is a loan that is specifically for real estate. The homebuyer borrows money (usually from a bank) using their newly-purchased home as collateral under the agreement that they will pay it back (with interest, of course) over a period of time (that’s what they mean when you hear about 15- or 30-year mortgages).

Interest Rate (aka APR)

This is a number that describes how much interest you’ll have to pay on top of the principal you borrowed, expressed as a percentage of the amount you still have to pay back. If you have a 4% interest rate and you have $100,000 left to pay off. 4% of $100,000 is $4,000, so if you make a monthly payment of $5,000, $4,000 will be paid as interest to the bank and only $1,000 will actually go towards paying off your debt.

Points (aka Mortgage Points or Discount Points)

The practice using points of “buying down the rate” entails a homebuyer paying extra money to the lender (the bank or whatever institution is providing the mortgage) at the time of closing in exchange for a lower interest rate. For example, you could pay an extra $2,000 for 1 point. This could lower your APR from 4.5% to 4.25%, which would save you a total of $10,616.40 across a 30-year mortgage.

Types of Mortgages

Fixed-Rate Mortgage

A fixed-rate mortgage or a “traditional” is one where the interest rate you pay does not change throughout the entire term of the mortgage. These are most beneficial to homebuyers when they think interest rates will rise within the term of their mortgage so they can “lock in” a low interest rate. If you have a fixed-rate mortgage and the market interest rate goes down, you would have to refinance your home (get a new mortgage with different terms) to take advantage of the lower mortgage rate.

Adjustable-Rate Mortgage (ARM)

An adjustable-rate mortgage has an initial interest rate, which is fixed for a period of time, then the interest rate will change with the market. This is a good idea when you are buying a home but you think interest rates are going to go down in the near future. One thing to be cautious about with an ARM is the fact that the initial interest rate is sometimes lower than market rate, which could make your mortgage look easier to afford than it actually will be in the long run. Be aware that after your initial interest rate ends, your monthly payment will fluctuate with market conditions.

Getting a Mortgage

Both pre-qualification and pre-approval involve you giving information to a potential lender in exchange for an estimate of how much you could (not should) spend on a house. As a buyer, you should get pre-qualified and pre-approved before starting your housing search. Here’s the difference between pre-qualification and pre-approval.

Pre-Qualification (Step 1)

This is the first step towards getting a mortgage. You can get pre-qualified online or over the phone. These are usually free, so beware if someone charges you for a pre-qualification Basically, you provide basic information about your financial situation (debt, income, assets, etc.) and you are given a dollar amount for the mortgage you could safely afford. For example, you might get a pre-qualification stating you could comfortably get a loan for $450,000, meaning that should be the upward limit for your housing search.

Pre-Approval (Step 2)

This is the next, more serious step in the mortgage application process. You pay an application fee, fill out a mortgage application, provide more comprehensive information than you did during the pre-qualification process (including a financial background check and a look at your credit score), and get a specific amount you are approved to borrow.

Having a pre-approval will give you an advantage in dealing with a seller because they will know you have the guaranteed money to spend on the house and, therefore, that the deal is less likely to fall through for financial reasons. It is also possible that a pre-approval could make your closing process faster than the typical 60 days between signing the contract and actually closing the house.