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Understanding Mortgage Terminology – Part 1

11/11/2010

The mortgage industry contains many of its own unique terms and concepts, and you'd better be able to speak the language if you plan to apply for a home purchase or refinance mortgage.  This is especially true if you're a first time home buyer.

Don't let your lender talk you into something you don't understand.  Educate yourself with our three-part series on mortgage terminology.  This is Mortgage Terminology Part One.  We'll start with the basics.

•    Adjustable Rate Mortgage – An adjustable rate mortgage comes at a low initial rate for a set period of time.  After this period, the rate may adjust up or down depending on the current market rates in the area.  Rates almost always adjust upward, which can cost homeowners significant unexpected money.

•    Fixed Rate Mortgage – A fixed rate mortgage is a "simple" mortgage.  The rate you start with remains fixed, set in stone, for the entire length of the mortgage term.  It doesn't adjust up or down.

•    Equity – Equity refers to the portion of the value of a property that the homeowner actually owns rather than the portion of that property that is owned by the bank.  Take the total value of the home and subtract the remaining mortgage balance.  The result is the equity.

•    Escrow – When a home is "going through escrow" or "under escrow," it often means money has been placed into a third party account to pay for the property on the day of closing.  The use of the term escrow can vary, however.  Check with your lender to find out what it means in your case.

•    Lien – A lien is a legal claim held by a second party, such as a bank, against a property or other item.  Mortgages act as liens due to the contracts involved.  The lender has a legal right to your property if you fail to pay back the mortgage.

•    Mortgage Banker and Mortgage Broker – A mortgage banker is a direct lender, either a person or a company, with private money to give out.  This is true even in the case of an FHA mortgage or other federal program.  A mortgage broker is an agent who connects borrowers with direct lenders. Brokers often have strong relationships with lenders in their local areas and can get borrowers better rates and terms on mortgages.

•    Mortgagee and Mortgagor – This one is counterintuitive.  The mortgagee is the lender, the bank or company giving you the money.  The mortgagor is you, the person accepting the money and buying the property.

Read on for more definitions with Mortgage Terminology Part Two.

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