27 Mortgage Terms + What 40% Of Americans Don’t Know About Their Loan
Hanna Kielar10-minute read
March 05, 2021
Remember when you sat through your first required foreign language class in school and the vocabulary seemed so out of reach? Learning mortgage terms during the home buying process can feel a little bit like that. With enough practice, though, eventually you’ll be at the front of the class with the star pupil (your Home Loan Expert) chatting conversationally about your mortgage.
We asked 2,000 Americans which home buying terms they understood. Unsurprisingly, those with the most experience in the home buying and selling market are the most familiar with mortgage terms – the more surprising group is the people who reported not knowing any terms at all.
- 40% of those surveyed didn’t know any home buying terms.
- Men were 1.2x more likely to get confused by home buying terms than women.
- Millennials ages 25 – 34 were the least likely to know any home buying terms.
- Amortization was the most confusing mortgage term for those surveyed, and down payment was the least confusing.
Mortgage Terms Glossary:
- Adjustable-Rate Mortgage (ARM)
- Annual Percentage Rate (APR)
- Balloon Loan
- Closing Costs
- Closing Disclosure
- Debt-To-Income (DTI) Ratio
- Discount Points
- Down Payment
- Earnest Money Deposit
- Fixed-Rate Mortgage
- Home Inspection
- Homeowners Insurance
- Private Mortgage Insurance (PMI)
- Property Taxes
- Real Estate Agent
- Seller Concessions
- Title Insurance
40% Of Respondents Don’t Know Mortgage Terms
What are typical mortgage terms? We asked Americans which of these common home buying terms they confidently understand:
- Down payment
- Closing costs
- Annual percentage rate (APR)
- Earnest money deposit
Demographically, older people understand different home buying terms better than others. Baby boomers, who tend to have the most experience with home buying as they’re most likely to have purchased, sold and downsized, know terms best.
Although Gen Z is the furthest from the home buying process, their millennial counterparts were 4% less familiar with common mortgage terms than them.
- 35% of females didn’t know any mortgage terms.
- 41% of men didn’t know any of the terms.
- Millennials ages 25 – 34 are the least likely to know home buying terms.
- Baby boomers ages 65+ are the most familiar age group with mortgage terminology.
Only 9% Of Gen Z Respondents Know What A Down Payment Is
People in the majority of the age groups understood what a down payment was, followed by knowledge of the terms closing costs and annual percentage rate (APR).
- Only 9% of Gen Z ages 18 – 24 knew what a down payment was.
- 34% of millennials ages 25 – 44 were familiar with the term down payment.
- 18% of Gen X ages 45 – 54 knew what a down payment was.
- 39% of Baby boomers ages 55+ knew the term down payment.
Amortization Confuses 69% Of Respondents
Only 31% of Americans could confidently say they understood the term amortization. A close second, only 34% of Americans knew what an earnest money deposit meant for their wallet.
Five out of six home buying terms confused over half of Americans, with women knowing slightly more than their male counterparts despite the women’s housing gap. Here’s how different demographics felt about the most confusing term of the survey:
- Women and men were nearly equal in knowing the term amortization; however, 4% more women knew the term compared to their male counterparts.
- Baby boomers ages 55 – 64 were the most familiar with the term amortization compared to other age groups.
- Gen Z was the least familiar with the term, with only 7% of people ages 18 – 24 reporting that they knew what it meant.
How does your knowledge of mortgage terms stack up compared to the survey respondents? Brush up on these 27 home buying terms prior to securing a loan to move through the process seamlessly with confidence.
Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage (ARM) is a type of loan with an interest rate that varies depending on how market rates move. When you sign up for an ARM, you first get a short period of fixed interest. This is the introductory period of the loan and can last for up to 10 years. During your introductory period, your interest rate is usually lower than what you’d get with a fixed-rate loan. After the introductory period expires, your interest rate will follow market interest rates. ARMs have caps in place that limit the total amount that your interest can rise or fall over the course of your loan.
Home loan amortization is the process of how payments spread out over time. When you make a payment on your mortgage, a percentage of your payment goes toward interest and a percentage goes toward your loan principal. In the beginning of your loan, your principal is high and most of your payment goes toward interest. However, you chip away at your principal over time and pay less in interest. An amortization schedule can reflect consistent monthly payments and keep you on track to pay off your loan within the term.
Annual Percentage Rate (APR)
An appraisal is a rough estimate of how much your home is worth. Mortgage lenders require that you get an appraisal before you sign on a home loan. The appraisal assures the lender that they aren’t loaning you more money than what your home is worth. Your lender may help you by scheduling an appraisal, done by an independent third party.
- Checking and savings accounts
- 401(k) and IRA accounts
- Certificates of deposit (CDs)
- Mutual funds
When you apply for a mortgage, your lender will want to verify your assets. This is to ensure that you have enough money in savings and investments to cover your mortgage if you run into a financial emergency.
A balloon loan, or balloon payment mortgage, gets its name from the large size of its payments. It’s a type of financing that requires a lump sum to be paid at some point in the mortgage term – most commonly, at the end. With a balloon loan, you choose to pay an interest-only mortgage or one that includes both principal and interest payments. Interest-only mortgages only require you to pay the cost of interest throughout your term with the entire balance due at the end.
Closing costs are settlement costs and fees you pay to your lender in exchange for finalizing your loan. Some common closing costs include appraisal fees, loan origination fees and pest inspection fees. The specific costs you’ll need to cover depend on your location and property type. Closing costs usually equal 3% – 6% of the total value of your loan.
Debt-To-Income (DTI) Ratio
Your DTI is equal to your total fixed, recurring monthly debts divided by your total monthly gross household income. Mortgage lenders look at your DTI when they consider you for a loan to make sure that you have enough money coming in to make your payments. You may have trouble finding a loan if your DTI is too high. Most lenders cater to applicants who have a DTI of 50% or lower.
Discount points are an optional closing cost you can pay to “buy” a lower interest rate. One discount point is equal to 1% of your loan amount. The more discount points you buy, the lower your interest rate will be. However, if you buy more points, you’ll need to cover them in cash at closing. You’re essentially paying more up front to enjoy more savings over the life of the loan.
Your down payment is the first payment you make on your mortgage loan. You’ll usually see your down payment listed as a percentage of your loan value. For example, if you have a 20% down payment on a $100,000 loan, you’ll bring $20,000 to closing. Most loan types require some kind of down payment.
Though many people believe that you need a 20% down payment to buy a home, this actually isn’t true. You can buy a home with as little as 3% down. Some types of government-backed loans may even allow you to buy a home with no down payment.
Earnest Money Deposit
An earnest money deposit is a check that you write to a seller when you make an offer on a home. Most earnest money deposits are equal to 1% – 3% of the home’s value. An earnest money deposit tells the seller that you’re serious about buying their home. If the seller accepts your offer, your earnest money deposit goes toward your down payment at closing.
Most people who have a mortgage have an escrow account where their lender holds money for property taxes or homeowners insurance. This allows you to split taxes and insurance over 12 months instead of paying it all at once. Your lender may add escrow payments to your monthly mortgage dues along with principal and interest payments.
A fixed-rate mortgage has the same interest rate throughout the term of the loan. For example, if you buy a home at 4% on a 15-year fixed-rate loan, it means that you’ll pay 4% interest on your loan every month for your entire 15-year term. Homeowners who choose a fixed-rate term often believe that rates will rise over the course of their loan and want the stability and predictability this type of loan provides
A home inspection is different from a home appraisal. An appraisal gives you a rough estimate of how much a home is worth, but an inspection tells you about specific problems in the home. An inspector will walk around the home you want to buy and test things like the heating and cooling system, light switches and appliances. They will then give you a list of everything that needs to be repaired or replaced in the home. Most mortgage lenders don’t require an inspection as a condition of getting a loan, but it’s a good idea to get an inspection to make sure that your home doesn’t have any pressing issues before you buy it.
Homeowners insurance is a type of protection that compensates you if your home gets damaged during a covered incident. Common damages that are covered include fires, burglaries and windstorms. In exchange for coverage, you pay your insurance provider a monthly premium. You’re not legally required to get homeowners insurance to own a home. However, your mortgage lender may require you to maintain at least a certain level of coverage for the life of your loan.
A preapproval is a document that tells you how much you can afford to take out in a home loan. Many lenders consider the preapproval to be the first step in getting a mortgage. When you apply for a preapproval, your lender will ask you about things like your credit score, income and assets. Your lender will then use this information to tell you how much you qualify for in a home. This can give you a rough budget to use when you compare properties.
Keep in mind that a preapproval isn’t the same thing as a prequalification. Prequalifications usually don’t involve asset and income verification, which means that they aren’t as reliable as preapprovals. Make sure you get a preapproval before you begin shopping for homes.
Private Mortgage Insurance (PMI)
Private mortgage insurance (PMI) is a type of insurance that protects your lender in the event that you default on your loan. Your lender will usually require you to pay PMI if you have less than a 20% down payment. You have the option to remove PMI from your loan when you reach 20% equity in your property.
You’ll be required to pay property taxes to your local government. The amount you pay in property taxes depends on your home’s value and where you live. Property taxes fund things like police departments, roads, libraries and community development. Don’t forget to factor in property taxes when you shop for a home.
Real Estate Agent
A real estate agent is a local property professional who can help you shop for a home more effectively. 17% of people look for their agent as their first step in the home buying process. Real estate agents can show you homes in your price range, draw up offer letters and work with sellers to get you a great deal on a home. There are two main types of real estate agents: seller’s agents and buyer's agents. Seller's agents work on behalf of sellers while buyer's agents work with those shopping for a home. In exchange for working with you, your real estate agent takes a commission from your home sale or purchase.
Refinancing happens on an existing mortgage. Essentially, you trade the original debt obligation in for a new one. Refinancing is beneficial for borrowers to create a more convenient payment schedule, a lower interest rate or a different term. When considering refinancing on your mortgage, consider the closing costs associated with getting a new loan.
Seller concessions are clauses in your offer that ask the seller to pay certain closing costs. For example, you might ask the seller to cover things like appraisal fees or your title search. The seller can reject your concessions or send you a counteroffer with concessions removed. Limitations on the percentage of your closing costs sellers can cover varies by property type.
Your mortgage term is the number of years you’ll pay on your loan before you fully own your home. For example, you may take out a mortgage loan with a 15-year term and that means that you’ll make monthly payments on your loan for 15 years before the loan matures. The most common mortgage terms are 15 years and 30 years, but some lenders offer terms as short as 8 years.
A title is proof that you own a home. Your title includes a physical description of your property, the names of anyone who owns the property and any liens on the home. When someone says that they’re “on the title” of a home, it means that they have some kind of legal ownership of the property. For example, if your parents were to help you purchase a home, they’d likely be listed on the title.
Title insurance is a common closing cost. You buy title insurance to protect yourself against outside claims to your property. Unlike other types of insurance, you don’t need to pay for title insurance every month. Instead, you make a single payment at closing that protects you for as long as you own the home.
Mortgages can be difficult to navigate and learning the common terminology is the first step to fully understanding your loan to complete the home buying process. When reading through hefty contracts, keep a mortgage terms glossary handy to refer back to.
Methodology: This study was conducted for Rocket Mortgage® using Google Surveys. The sample consisted of no fewer than 2,000 completed responses per question. Post-stratification weighting has been applied to ensure an accurate and reliable representation of the total population. Responses were collected from January 7 – January 11, 2021.
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