3 Terms Every Mortgage Holder Should Know

Mortgages are complex, so it's important to understand how they work. Here are three terms every homeowner needs to know before starting a loan application.

If you're considering a mortgage, knowing just three terms can help you make an informed choice and understand the commitment you're getting into.


The first term you need to understand is actually term. It refers to the length of time you'll be repaying the loan. Term is important because it will determine how much total interest you'll pay, and the amount of your monthly payment. The longer the mortgage, the lower your monthly payment will be – and the more interest you'll pay over time. Try to choose the shortest term you can comfortably afford. You'll potentially save tens of thousands – in some cases hundreds of thousands – of dollars in interest by keeping the length of the mortgage as short as you can.


Next, understand the interest rate on your mortgage and how it's calculated. The interest rate is the amount of interest you'll pay for the money you're borrowing, expressed as a decimal – for example 4.25%. It's important to know if your rate is fixed or adjustable – that is, will it remain the same for the life of the loan, or will it change at specified periods over time. Most homebuyers should avoid adjustable rate mortgages (also known as ARMs) unless they plan to be in their home for only a few years. While ARMs often have a lower interest rate, they can jump up to a much higher rate at the end of the initial term.


Finally, understand what closing costs you'll have to pay. Closing costs include a laundry list of various expenses and services such as appraisals done on the house, attorney fees, notary fee, and deed fees. Often, they're not included in the loan and you're responsible to pay for them out of your own pocket. Be a smart and savvy consumer. If you see a fee you don't understand or doesn't make sense, ask your loan officer. Make sure it's legitimate, and ask if it can be avoided or paid for by the seller.

Understanding these three terms can help you be a more informed homebuyer and choose the mortgage that's right for you. Remember, it's important to shop around for a mortgage when you're buying a home. Even a small difference in the interest rate between two lenders can add up to thousands of dollars in savings.

For more information about these three important mortgage terms, talk to a professional – like your local Rabobanker. We're always here to help.

The information contained in this article is intended for general educational purposes only and is not to be construed as legal, tax, or financial advice. Please consult with your own legal, tax or financial advisor for guidance with your own particular circumstances.