Amortization: The process of paying off a debt over time in regular installments. In a mortgage, early payments go mostly towards interest, while later payments reduce the principal balance much faster.
APR (Annual Percentage Rate) vs. Nominal Interest Rate: The Nominal Interest Rate is the percentage charged by the lender for borrowing money, used to calculate your principal and interest payment. The Annual Percentage Rate (APR) is a broader measure of the total cost of a mortgage, including the nominal interest rate plus most other financing charges, such as origination fees, discount points, and certain mortgage insurance premiums (like FHA's upfront MIP). APR is typically higher than the nominal interest rate and is designed to give a more comprehensive view of the loan's true cost, making it useful for comparing different loan offers.
Equity: The portion of your property that you truly own. It is calculated as the current market value of your home minus your outstanding mortgage balance. As you pay down your principal and as property values appreciate, your equity increases.
Refinancing: The process of replacing your existing mortgage with a new one. People refinance to get a lower interest rate, change their loan term, convert an adjustable-rate mortgage to a fixed-rate, or tap into their home equity.
Fixed-Rate Mortgage: A mortgage loan where the interest rate remains the same for the entire loan term, providing predictable monthly payments.
Adjustable-Rate Mortgage (ARM): A mortgage loan where the interest rate can change periodically based on an index, after an initial fixed-rate period. This can lead to fluctuating monthly payments.
PMI (Private Mortgage Insurance): Insurance protecting the lender against losses if a borrower defaults on a conventional loan with less than a 20% down payment. It's typically paid monthly until a certain Loan-to-Value (LTV) is reached.
Extra Payments: Voluntary additional payments made on top of your regular mortgage payment. These payments directly reduce your principal, leading to significant savings on total interest paid and a shorter loan term.
Compounding Frequency: The frequency at which accrued interest is added to the principal balance. This affects the total interest cost slightly; more frequent compounding (e.g., daily) generally means slightly higher total interest than less frequent (e.g., annually) for the same nominal rate.