Mortgage terms you should know
Principal is the amount of money applied to your loan balance when you make a payment.
Curtailment is any additional funds that are applied to your principal balance after the normal principal payment is applied. Making curtailment payments can help you pay off your loan ahead of schedule.
For example: Your total mortgage payment is $1500 with taxes and insurance included. $1000 of that goes to your principal balance. You make a payment of $2000.00. The extra $500.00 goes to curtailment, making the total amount of what is applied toward your principal balance $1500.
The amount of money you are charged for the loan, calculated by your interest rate. On bills for Home Equity Lines of Credit you will see the interest listed as “Finance Charge.”
APR (Annual Percentage Rate)
Your annual percentage rate is the yearly interest rate you’ll be charged for your loan. It calculates what percentage of the principal you’ll pay each year by taking things such as monthly payments and fees into account.
Private mortgage insurance (PMI)
Visit our What is PMI? page for an in-depth explanation.
Real estate taxes
Real estate taxes are funds you pay to the town which go to services like your fire station, police station, schools, public libraries, and sometimes garbage collection. They are typically included in your mortgage payment and are paid out to the town/city by your lender when they are due.
When you make a partial payment to your mortgage it cannot be applied to the balance until the rest of the funds are received by the credit union. Until then, the partial funds will sit in an unapplied account, and the mortgage servicer will take them out and apply them to your mortgage when they have a full payment.
Visit our What is an Escrow Account? page for an in-depth explanation.
Your Loan Estimate is a summary of your loan details including an estimate of your monthly payment amount, interest rate, and closing costs which must be provided to you three business days after we received your application. An application is considered “received” when we have the following information:
- Social Security Number/Taxpayer Identification Number
- Property address
- Estimated property value
- Loan amount
When you receive a loan estimate the loan has not yet been approved or denied, but it is meant to show the terms we expect to offer if you decide to move forward. These numbers are not locked in and will change.
See this sample to know what your loan estimate will look like.
Your Closing Disclosure is the document you receive when you are ready to close on your loan which summarizes the same information as the Loan Estimate but with finalized numbers. This must be signed by you three business days before your closing date, but we try to deliver it to you ahead of that day to give ample time. The three-day window will give you time to compare your numbers with what was on the loan estimate and ask your loan officer any additional questions before signing at your closing. Once you sign your closing disclosure the numbers are locked in. A closing disclosure for a home purchase will need to be signed by the seller as well as the buyer.
See this sample for a detailed guide of what you will see on your closing disclosure.
Appraisal – Full and Drive-By
Your appraisal is what determines the value of your home. You will need an appraisal for a home purchase, a refinance, and a home equity loan/line of credit. An appraiser will determine the value of your home by looking at the homes condition, number of rooms, and comparing it to other similar home values in the area. A full appraisal means the appraiser goes inside the home to take photos, while a drive-by appraisal means the appraiser only views and takes photos of the outside. Drive-by appraisals are typically only used on home equity loans and home equity lines of credit that are less than $150,000.
Earnest money is a deposit given to the seller when the buyer makes an offer on the home. It is used to show that the buyer is serious about purchasing, and can also be known as a good faith deposit. If the sale goes through, this money will be added to your total down payment. If you were to back out of the sale, you could lose your earnest money unless your offer to purchase has contingencies in place.
Your liabilities are any loans or lines of credit that are open in your name and show up on your credit report. Essentially all of your debt.
Note: If you are an authorized signer on a credit card, that is not considered a liability as it is the main borrower’s responsibility to make those payments.
Your assets are items you own with monetary value such as homes owned and vehicles owned. Other common assets can be retirement accounts, stocks, bonds, mutual funds, or life insurance cash value.
Debt-to-Income Ratio (DTI)
Your Debt-to-Income ratio or DTI is a calculation used to compare how much you earn each month to how much you owe in debt on loans and credit cards each month. To calculate it we take your minimum monthly payments divided by your gross monthly pay to equal a percentage. This percentage is one of the factors used by underwriters to determine whether or not you’ll be approved for the mortgage. For example: if your monthly debt payments are $500 and your gross monthly pay is $2000, your DTI would be 25%.
Loan-to-Value Ratio (LTV)
Your LTV measures your loan amount against the value of your home. To calculate it we divide your loan amount by the appraised value. For example: if your loan is for $250,000 and your home is appraised at $350,000, your LTV would be 71.43%. The higher your down payment is, the lower your LTV will be. If you have a second lien on your home, that will also be included in the LTV calculation.
Right of Recession
The Right of Recession is a borrower’s right to cancel or rescind a mortgage refinance or home equity. It is a three-day period that begins after the day you sign your Promissory Note. Only banking days count for this. Home purchases do not have this right.
Example: If you sign your Note on Wednesday, you have until Monday to rescind.
Title insurance is insurance that can be taken out both by the lender and borrower of a mortgage. Lender’s title insurance protects the credit union against problems with the title to your property such as title defects, fraud, or if someone sues to say they have a claim against the home. Lender’s title insurance is mandatory and does not protect the homeowner.
Owner’s title insurance protects you from things like liens that come up from the previous owner’s unpaid property taxes, unpaid homeowner association dues, or unpaid contractors. These claims are known as Mechanic’s Liens. It can also protect you from fraud and forgery. For example: if someone forged a deed to your house and then sold it, the insurance would cover those damages so that you can stay in your home. Owner’s title is optional but highly recommended.
Recording fees are fees paid to the state to record your mortgage, deed, mortgage discharge, and other documents at the Registry of Deeds. Recording these documents helps trace the history of ownership on a home. These documents are accessible to the public after they’ve been recorded.
Water/sewer liens are the result of charges that were unpaid to the city/town for over 30 days (in some towns 90 days). Your water/sewer bill is separate from your property taxes, but if they remain unpaid for too long you will see them added onto your property tax bill, and you may see an additional fee as well. Different towns have different rules, so check with yours to find out when unpaid water/sewer bills could be added to your property tax bill.
Note: When these liens are attached to your property tax bill the credit will pay the lien, however it could result in a negative balance in your escrow account.