Comparing Home Loan Terminology
March 28, 2024
What home loan terms are important for first-time home buyers to know? The answers may surprise you. We aren’t talking about the basic definitions of escrow or loan limits.
Instead, we are reviewing mortgage loan terms that are similar to others, terms that potentially cause initial confusion about how home loans work. We review some of the most important ones below.
Interest Rate vs. Annual Percentage Rate (APR)
Your home loan interest rate is essentially the cost of doing business on the home loan--the lender’s payback for taking the risk of loaning your money to buy your house.
Your mortgage loan interest rate is charged as a percentage of the mortgage amount.
According to NerdWallet, “APR stands for annual percentage rate and illustrates how much you will pay to borrow money over one year, " including the interest plus any applicable fees. So, the APR and your home loan interest rate are NOT the same.
Appraisal vs. Inspection
Some borrowers hear lenders, realtors, and other mortgage industry professionals using these two terms interchangeably but do not be fooled.
An appraisal is NOT an inspection, is not as thorough as an inspection, and is not meant to be used as a tool by the borrower. Always get a home inspection.
Homeowner’s Insurance vs. Mortgage Insurance
Another set of terms some seem to use interchangeably but here is another case of one product being a tool for the lender (mortgage insurance) to protect them against the borrower defaulting on the loan and the other being a tool for the borrower to protect the home and its contents.
Down Payment vs. Earnest Money
Technically speaking, these two terms are separate. The Consumer Financial Protection Bureau notes, “Earnest money is a deposit a buyer pays to show good faith on a signed contract agreement to buy a home.”
When the borrower and seller finalize the contract, earnest money can be put toward closing costs or the down payment, but earnest money is not the downpayment itself. Also, the down payment does not include the amount of other closing costs.
If you encounter loan jargon you need help understanding, ask your participating FHA lender to explain the terms and how that part of your mortgage loan process works.
------------------------------
Learn About the Path to Homeownership
Take the guesswork out of buying and owning a home. Once you know where you want to go, we'll get you there in 9 steps.
Step 1: How Much Can You Afford?
Step 2: Know Your Homebuyer Rights
Step 3: Basic Mortgage Terminology
Step 4: Shopping for a Mortgage
Step 5: Shopping for Your Home
Step 6: Making an Offer to the Seller
Step 7: Getting a Home Inspection
Step 8: Homeowner's Insurance
Step 9: What to Expect at Closing
Instead, we are reviewing mortgage loan terms that are similar to others, terms that potentially cause initial confusion about how home loans work. We review some of the most important ones below.
Interest Rate vs. Annual Percentage Rate (APR)
Your home loan interest rate is essentially the cost of doing business on the home loan--the lender’s payback for taking the risk of loaning your money to buy your house.
Your mortgage loan interest rate is charged as a percentage of the mortgage amount.
According to NerdWallet, “APR stands for annual percentage rate and illustrates how much you will pay to borrow money over one year, " including the interest plus any applicable fees. So, the APR and your home loan interest rate are NOT the same.
Appraisal vs. Inspection
Some borrowers hear lenders, realtors, and other mortgage industry professionals using these two terms interchangeably but do not be fooled.
An appraisal is NOT an inspection, is not as thorough as an inspection, and is not meant to be used as a tool by the borrower. Always get a home inspection.
Homeowner’s Insurance vs. Mortgage Insurance
Another set of terms some seem to use interchangeably but here is another case of one product being a tool for the lender (mortgage insurance) to protect them against the borrower defaulting on the loan and the other being a tool for the borrower to protect the home and its contents.
Down Payment vs. Earnest Money
Technically speaking, these two terms are separate. The Consumer Financial Protection Bureau notes, “Earnest money is a deposit a buyer pays to show good faith on a signed contract agreement to buy a home.”
When the borrower and seller finalize the contract, earnest money can be put toward closing costs or the down payment, but earnest money is not the downpayment itself. Also, the down payment does not include the amount of other closing costs.
If you encounter loan jargon you need help understanding, ask your participating FHA lender to explain the terms and how that part of your mortgage loan process works.
------------------------------
Learn About the Path to Homeownership
Take the guesswork out of buying and owning a home. Once you know where you want to go, we'll get you there in 9 steps.
Step 1: How Much Can You Afford?
Step 2: Know Your Homebuyer Rights
Step 3: Basic Mortgage Terminology
Step 4: Shopping for a Mortgage
Step 5: Shopping for Your Home
Step 6: Making an Offer to the Seller
Step 7: Getting a Home Inspection
Step 8: Homeowner's Insurance
Step 9: What to Expect at Closing
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