Mastering Mortgage Loan Terms: A Simple Guide

Mastering Mortgage Loan Terms: A Simple Guide

Mastering Mortgage Loan Terms: A Simple Guide 1000 1000 Aaron Page

Entering the world of mortgages for the first time can feel like learning a new language. There are so many terms and phrases that you’ve probably never heard before. But fear not, in this easy-to-read blog post, we’ll guide you through the most common mortgage terms and what they mean for your home buying journey.

Mortgage Basics

Let’s start with the big one: a mortgage. This is a loan that you take out to buy a property. The property itself serves as collateral for the loan, which means if you stop making payments, the lender could take the property back through a process known as foreclosure.


The principal is the amount of money that you borrow to buy your home. So if you buy a $300,000 house and you put down a $60,000 down payment, your principal would be $240,000. This is the amount you need to pay back over the term of the loan.


Interest is what the lender charges you to borrow their money. It’s usually expressed as a percentage of the loan amount (the principal), known as the interest rate. For example, if you have a 5% interest rate on a $240,000 loan, you’ll pay $12,000 in interest in the first year.


This is the process of slowly paying off your loan over time. Each mortgage payment you make includes some money towards the principal and some towards the interest. At the beginning of your loan term, most of your payment goes towards interest, but as time goes on, more and more goes towards paying off the principal.

Fixed-Rate vs. Adjustable-Rate Mortgages

With a fixed-rate mortgage, your interest rate stays the same over the life of the loan. This means your monthly payments will be predictable.

On the other hand, with an adjustable-rate mortgage (ARM), your interest rate can change over time. It might start lower than a fixed-rate mortgage, but it could go up (or down) in the future.

Down Payment

The down payment is the amount of money that you pay upfront for your home. The rest of the purchase price is covered by your mortgage. A common down payment amount is 20% of the purchase price, but it can be less.

Closing Costs

Closing costs are additional fees you pay at the end of the home buying process. They include things like loan origination fees, title insurance, and appraisal fees. They’re usually between 2-5% of the loan amount.

Loan Term

The term of your loan is how long you have to pay back your mortgage. The most common loan term is 30 years, but there are also 15-year terms and others.


An escrow account is set up by your lender to pay certain costs like property taxes and homeowners insurance. Every month, a portion of your mortgage payment goes into this account, and when those bills are due, your lender pays them for you.

And there you have it – a basic guide to the terms you’re likely to encounter during your mortgage journey. Understanding these terms will give you confidence and help you make informed decisions. Remember, the mortgage process is a journey, and every journey begins with a single step. Here’s to the first step of many in your home buying adventure. Good luck!