Mortgage terms: Key definitions you should know when financing a home
When you’re considering buying a home, there are a number of financial terms that come with the territory. Here’s a quick vocabulary lesson of some of the most important terms you’ll need to know.
When you start speaking to a lender or real estate agent, it’s easy to get confused if you don’t already speak the language. Watch and learn for a brief overview of some of the financial terms you should know when buying a home:
Principal — The amount you borrow to buy your home.
Interest — The cost of borrowing money that is charged by a lender, stated in a percentage. Why pay interest? A few reasons:
• The risk of principal loss by the lender, called credit risk.
• Lender forgoing other investments that could have been made with the loaned amount, known as the opportunity cost.
Amortization — The process by which loan principal decreases over the life of a loan. As explained by Ja Yung, a mortgage banker: “Amortization is the relationship between the principal and interest portion of your payment. As the time goes on, you pay less interest and more principal.”
PITI or Principal Interest Taxes Insurance — These are the four components that make up PITI:
• Principal — Money used to pay down the balance of your loan.
• Interest — The amount you pay to the lender for borrowing money.
• Taxes — Property taxes you pay to own your home.
• Insurance — Refers to homeowners insurance and private mortgage insurance.
Escrow account — A separate account that is setup to pay your property taxes and homeowners insurance.
JA YUNG: Principal is the monies that’s being applied to pay off the loan.
JA YUNG: Interest is the portion of the payment that’s being given to the mortgage company essentially. Because of the fact that they’re lending you the money, that’s the portion you’re paying back to them for that ability.
JA YUNG: Amortization is the relationship between the principal and interest portion of your payment. As the time goes on, you pay less interest and more principal.
JA YUNG: Amortization is important to keep in mind because of the fact that you have to remember that you do pay a larger portion of the interest in the beginning of the loan.
JA YUNG: The principal interest tax and insurance, so industry acronym would be PITI, P-I-T-I, but the principal interest tax and insurance is essentially your total housing payment broken down by your principal and interest payment, which is one piece, and then the property tax and any homeowner’s insurance payments that you would have and collectively, that’s what makes your total housing payment.
JONATHAN: An escrow account is a separate account that the bank sets up to pay your property taxes and your homeowner’s insurance. It’s budgeted every month, so instead of having to make one lump sum payment, to the county tax bill or their homeowners insurance, we’re just going to collect it on a monthly basis, and then the lender will go ahead and disburse the funds when the bill is due.