Top 12 Confusing Mortgage Terms, Explained

Bethany White April 7, 2022 | 6 min read

When you start your home loan search, there are a lot of mortgage terms to sort through. Get some clarity the easy way with our roundup of 12 confusing mortgage terms, explained. After all, knowledge is (borrowing) power.

12 Confusing Mortgage Terms Explained

Adjustable-Rate Mortgage
Amortization
Annual Percentage Rate
Buydown
Default
Discount Points
Due Diligence
Easement
Eminent Domain
Escrow
Lien
Loan Estimate

1. Adjustable-Rate Mortgage

Sometimes abbreviated ARM, this type of home loan offers the mortgage interest rates that could go up or down. You’ll probably pay less in the short term and maybe more over time compared to a fixed-rate mortgage.

2. Amortization

Amortization is a fancy name for paying off your mortgage in planned, incremental payments. It’s often displayed in a table, called an amortization schedule. The amortization schedule shows your estimated monthly payment, interest, principal, remaining balance, and more.

Amortization is a great way to estimate how much you’ll pay over the course of your loan and helps you clearly see how much you’re paying at any given time. Try our amortization calculator to see amortization in action.

3. Annual Percentage Rate

Annual percentage rate (APR) is the yearly cost of borrowing money (usually a higher percentage than the interest rate). It includes additional costs and fees but not compound interest. APR gives you a bigger picture of what it costs to finance your loan by accounting for the interest rate and finance charges.

4. Buydown

A buydown is a way to lower the interest rate on your mortgage by paying more upfront in exchange for a lower interest rate. This means you could pay less for your mortgage over the life of your loan. For example, let’s say you’re eligible for an interest rate of 4.25%. You could pay a certain amount upfront to reduce that rate and save money in the long run. Just keep in mind there’s no guarantee you can buy down your interest rate.

5. Default

To default on your mortgage means to breach any aspect of the note, mortgage, or deed of trust. Some common reasons for defaulting include failing to pay your mortgage, not paying taxes or HOA dues, and needing more insurance.

Avoid defaulting at all costs as this can have serious financial consequences, especially for your credit. If you do default, work with your lender to see if there’s a way to create a new loan with better terms that you’re able to commit to. Talk to your financial advisor or legal counsel if you find yourself facing potential mortgage default.

6. Discount Points

Discount points are fees you pay your lender at closing if you buy down the interest rate. One discount point costs 1% of your loan amount. So, if your mortgage is $175,000, one discount point would cost $1,750. It can be expensive to buy down your interest rate but, if it means a lower payment over the course of your loan, it might be worth it.

7. Due Diligence

Due diligence is dotting all your Is and crossing all your Ts before you buy a house. It might seem like common sense, but the market moves fast and sometimes you may be tempted to rush into a purchase before someone else gets there first.

Due diligence could mean researching the neighborhood and school districts, looking up crime stats, and finding out the history of the home’s immediate area. It might also include asking the current homeowners what it’s been like living there. Taking the time and making the effort to air out as many concerns as possible beforehand will ensure you know what you’re agreeing to purchase.

8. Easement

Easement is legal permission to access property that’s owned by someone else (usually with certain restrictions). For example, say you share an alley with your neighbors. The alley doesn’t belong to any of you, but its landowner gives you and your neighbors permission to access it under certain restrictions, like prohibiting you to park there. If there’s an easement associated with your property, you may have to sign it with your closing documents to show you agree to the terms set by the property owners.

9. Eminent Domain

Eminent domain is the government’s right to take private property within its jurisdiction and repurpose it for public use. When eminent domain is exercised, the government seizing the property is required to pay fair market value for it.

Say you live near a busy highway that the state government needs to widen. Because the state deems the road necessary, they have the right to take your property and pay you the fair market value for it. Unfortunately, you can’t say no to this, but you can argue whether the price the government pays is true fair market value.

10. Escrow

Escrow is an account created by your mortgage lender that allows them to collect estimated taxes and insurance and pay those fees on your behalf. That means you don’t need to pay tax and insurance separately. It’ll all be included in the mortgage payment. You might even get an escrow refund check at the end of the year.

11. Lien

A lien (nope, that’s not a typo of alien) gives your lender the legal right to secure your home loan payment. In a nutshell, it says you promise to pay back the money you borrowed and if you break that promise, your lender can take you to court or take possession of your house.

12. Loan Estimate

A loan estimate is a breakdown of the amount of money you have to bring to the closing table. You may see numbers like principal, interest, taxes, and insurance, fees associated with your loan, and more. It’s important to review this document carefully and ask your lender and/or real estate agent about anything you’re not sure of. When you sign a loan estimate, you’re agreeing to the numbers you see. So, make sure you don’t pay for something you didn’t sign up for.

Are there any other mortgage terms I should know?

Anytime you want to brush up on your home loan vocab, our glossary’s got you covered. But the truth is, you shouldn’t need to be an expert on mortgage terms to get the financing you deserve. A good lender will explain everything in as simple, straightforward terms as possible. Lucky for you, we know just where you can connect with a lender like that.