It’s very likely that the single most complicated contract you will ever sign in your life is the one for your home’s mortgage.
We’re talking pages and pages of fine print, words you may have never seen before and lots of references from one section to another.
It’s important that you understand what you’re signing for this major financial commitment. Basically, you’re agreeing to a very big loan that you need to pay back on time, in full every month — with serious consequences if you fall behind. Here are 12 terms you really need to know before you sign all those papers:
Amortization — This is just a big, fancy word for paying off a loan over time. When you see the phrase "amortization schedule," it’s just referring to how quickly you’re agreeing to pay off the loan.
Adjustable Rate (ARM) or Fixed Rate Mortgage — You will choose either an ARM or a Fixed-Rate for your mortgage. An ARM means that the interest rate you pay can adjust over time. A fixed rate does not change. Sometimes, it’s less expensive initially to buy a home with an adjustable-rate mortgage, but you have to be very careful because when that rate adjusts, your payments could go way up and you may need to refinance your mortgage. If you choose an ARM, be sure to mark important dates on your calendar and start talking to your lender a couple of months before your first rate adjustment! You may opt for an ARM Cap, which is a clause that limits how much the bank can raise your mortgage interest rate, but you may have to pay more for this.
Appraisal — The bank will want to drive by the home you’re planning to purchase to do their own assessment of what it’s worth. This is to protect them from lending you more than the home is actually worth. (They usually won’t lend you $1 million dollars for a home that’s only worth $500,000.)
Closing — This is when you sign all the paperwork, checks are turned over and you get keys to your new place! Congratulations!
Closing Costs — Because there’s so much paperwork involved, mortgage lenders often add on "closing costs" to finalize the mortgage. You will know about how much these will be in advance, and you can negotiate those fees, but the time to do that is before your actual closing.
Downpayment, Principal and Interest — These are the three basic elements of any loan. How much are you paying at the outset? This is often expressed as a percentage of the total cost of the home. That’s your downpayment. You will also make a combined payment of principal (which counts against the total loan) and interest, which is the amount the bank charges for giving you the loan.
Earnest Money — This is money you pay to show good faith that you really do intend to purchase a home. A seller’s Realtor usually requires this small payment to change the home’s listing from "for sale" to "pending" or "under contract" so other people know the home has been claimed.
Points — These are an extra percentage of the principal charged by your lender. Typically, one point equals one percent of the principal, so one point on a $500,000 would be $5,000. You can "buy down" your points and doing so can often save you a lot of money in the long run. Sometimes in negotiations with the selling party, you can ask them to buy down your points instead of giving you cash back at closing.
Rate Lock — Mortgage interest rates are always fluctuating. At some point, typically a month or two before closing, you’ll want to "lock" your mortgage rate. This is when you agree to an interest rate with your lender so you know exactly what your interest rate will be for your mortgage.
This is just the beginning! There’s a lot more to know about mortgages. We’re excited to help you with your home purchase in 2025 (or even in 2026) — and we’d love to help you get on the path to being a homeowner. We’re here for you, for life, and we hope to talk to you soon!
