Mortgage Terms Explained: APR, Escrow, PMI & More

Your interest rate is the cost of borrowing money, shown as a percentage. If your rate is 6.5%, that's how much you're paying annually just to use the lender's money.

The APR (Annual Percentage Rate) includes the interest rate plus all the fees tied to the loan: origination fees, broker fees, and certain closing costs. It's the bigger, more honest number.

During the buying process: When you make an offer and it gets accepted, you typically put down earnest money, a small deposit to show you're serious. That goes into an escrow account until the deal closes.

After you close: Many mortgage payments include money that goes into escrow each month to cover property taxes and homeowner's insurance. Instead of getting hit with a huge tax bill once a year, your lender collects a little each month and pays those bills automatically.

Here's something that surprises a lot of first-time buyers: you might have to buy insurance to protect the lender, not yourself. When you put down less than 20%, lenders consider you a higher risk and require PMI each month, typically 0.5% to 1.5% of your loan amount per year.

The principal is the amount you actually borrowed, not counting interest. Buy a $350,000 house with $50,000 down and your principal is $300,000.

Amortization is the fancy word for the payment schedule that splits each monthly payment between paying down principal and paying interest. In the early years, most of each payment goes toward interest, not the principal.

A fixed-rate mortgage locks in your interest rate for the life of the loan. Your payment stays the same every single month for 15 or 30 years. Easy to budget, no surprises.

An adjustable-rate mortgage (ARM) starts with a lower fixed rate for a set period, usually 5, 7, or 10 years, then adjusts based on market conditions. It can go up or down.

Your down payment is the chunk of cash you bring to closing. The more you put down, the less you borrow, and the better the deal you'll get from lenders.

Loan-to-Value (LTV) is the ratio of your loan to the home's value. Put 20% down on a $400,000 house and borrow $320,000, so your LTV is 80%. Lenders love low LTV because it means less risk, and it usually means no PMI for you.

A lot of first-time buyers are blindsided by closing costs. You've saved up your down payment, and then suddenly there's another pile of fees on top. Closing costs typically run 2% to 5% of the loan amount and include loan origination fees, appraisal fees, title insurance, attorney fees, prepaid property taxes, and homeowner's insurance.

On a $300,000 loan, that's somewhere between $6,000 and $15,000 on top of your down payment.

Pre-qualification is the quick, informal version. You give a lender some basic info and they give you a rough estimate of what you might qualify for. Helpful for early planning but doesn't carry much weight with sellers.

Pre-approval is the real deal. The lender verifies your income, employment, and credit history, then issues a letter saying you're approved up to a certain amount. In a competitive market, sellers take pre-approved buyers much more seriously.