The Most Commonly Misunderstood Mortgage Terms + Definitions

Throughout 2020, the supply of residential real estate was at record breaking lows as properties were snatched up almost instantly, thanks to competitive mortgage rates only rivaled by rates during the recession. While the market has proved cutthroat, it seems Americans haven’t been doing quite as much research on their home purchases. A new survey reveals that nearly half of Americans don’t know any mortgage terms.

While the intricacies of home loans are intimidating, it’s important to know what you’re signing up for when you put a downpayment on your new abode, whether a single family property or investment property. Let’s explore some of the least-known home buying terms and their respective definitions to help you make an informed purchase.

Amortization was the least known term across all demographics, followed by earnest money deposit.

While mortgages can be confusing, it’s essential to understand these key terms. This jargon illustrates how your payments will be distributed throughout the lifetime of your home loan, including how much of your payments will go to interest versus the principal. If the market remains as competitive as it is currently, the difference of understanding an earnest money deposit and not could be the difference on an accepted offer.

Amortization: Amortization is how your mortgage payments are dispersed between interest and the principal payment. Your initial payments will have a higher rate distributed to interest, and as you pay off your loan you’ll pay less in interest and more towards your principal.
Earnest Money Deposit: Earnest money deposits are about 1-3 percent of a home’s entire value and give you an edge against other prospective buyers. This deposit signals to the seller that you’re a serious buyer and, if accepted, will go towards the down payment on your home.
Escrow: Escrow is where your money is held by the lender for property taxes and insurance. Your property tax is typically paid from this account, every 6 months. You’ll contribute to this account in small increments with your monthly payments.
Annual Percentage Rate: Annual percentage rate (APR) is the rate of interest on your loan. This rate includes additional lender fees, and is typically the closest estimate of how much you’ll pay in interest over the lifetime of your loan, because of the inclusion of those fees.
If you’re in the market for a new property, do your due diligence and research your home loan. Doing so can save you money down the road, plus costly penalties at the start.

Jessica is a Content Marketing Specialist developing high-quality content for diverse industries including tech, finance, and real estate. Her work can be seen featured on sites like Better Homes and Gardens and wikiHow.