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De-coding Home Loan Lingo

GreenPath Financial Wellness
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If you’re like most people, it may take a while to fully understand (or remember)  the terminology that’s involved with re-financing a home. Below are simple definitions that can help you decode the home loan jargon you might encounter. Of course, our home loan experts are always here to help, too!

A mortgage is a loan to pay for a home. The lender pays for the house and you pay them back through a mortgage.

The principal is the amount you actually borrow to purchase the home.

Interest is the amount the lender charges you to borrow their money.

A mortgage usually takes 15-30 years to pay back the lender. This amount of time is called the loan’s term.

Your monthly payment consists of the principal, interest, taxes and insurance.

The total is then divided into equal payments over the life of the loan using a process called amortization. Your payments mostly pay toward interest early in the loan. More goes toward the principal as time passes.

The balance is the total amount due on the loan.

 

Amortization Example

PaymentAmountInterestPrincipalBalance
First Payment $665 $583 $82 $99,118
At 5 years $665 $550 $115 $94,132
At 10 years $665 $501 $164 $85,812
At 20 years $665 $336 $329 $57,300
Last Payment $665 $4 $661 $0

In this example, after 30 years you would have paid off the $100,000 you originally borrowed, but you also would have paid an additional $139,509 in interest.

Escrow. If you put less than 20 percent down on the loan, the lender considers the situation a little riskier and typically requires an escrow account. They pay your insurance and taxes from this account.

Private Mortgage Insurance (PMI). If your down payment is less than 20 percent of the purchase price, your lender will almost always require you to purchase PMI on your loan. PMI protects the lender in case of default. An additional amount is added into your monthly payment to account for PMI. When you have accrued 20% equity in your home, which means you have paid off 20% of the principal, you may request to have PMI removed.

 

This article is shared by our partners at GreenPath Financial Wellness, a trusted national non-profit.