A simple guide to terms every first-time homebuyer should know.

First-time homebuyers have a lot to learn, especially when it comes to understanding how home loans, also called mortgages, work. Here’s a quick guide to the basics.

Principal

Principal is the original amount of money borrowed through a home loan. It may also be referred to as the initial loan balance.

Down payment

A down payment is the lump sum the buyer pays toward the purchase price of a home. Some buyers put 20% down. On a $200,000 home, this means bringing $40,000 (not including closing costs or other additional fees) to the table when the sale closes, and financing $160,000 with a home loan.

Larger down payments mean borrowing less money. Let’s say the buyers of a $200,000 home put down 25%, or $50,000. Their home loan would then be $150,000.

In some cases, there’s no down payment. A Consumers 0% Down/No PMI Mortgage allows qualified buyers to purchase a house without a down payment. This allows them to use their money for other expenses, such as updating the home or buying furniture.

Equity

Equity is a measure of how much of a home’s value you own. It is calculated by subtracting the outstanding mortgage balance from the home’s market value. For example, if Sarah’s home is worth $350,000 and she owes $200,000 on her mortgage, she has $150,000 in equity.

If home values go down, it’s possible to have negative home equity. This means the homeowner owes more on the property than it’s worth. Consider Jarod, who owes $250,000 on his mortgage, but his home’s market value has dropped to $225,000. He has negative equity of $25,000. A situation like Jarod’s is commonly called being underwater or upside down on a mortgage.

Private mortgage insurance (PMI)

Private mortgage insurance is generally required whenever the buyer makes a down payment of less than 20% of the of the home’s purchase price. It protects the lender against financial loss if a borrower defaults on the loan.

Generally, when homeowners attain at least 20% equity, they can request cancellation of their PMI.

If you have a Consumers home loan with PMI, we automatically cancel PMI when the loan’s principal balance is first scheduled to reach 78% of the property’s original value, provided you are current on your payments.

Mortgage APR

An annual percentage rate (APR) is a more complete reflection of the cost of a home loan than the interest rate alone. APR considers the interest rate, any discount points, mortgage broker fees and other charges required by the lender. APR is usually higher than the interest rate.

Mortgage points

You may hear about points as a way to decrease monthly home loan payments. For more information on mortgage points and how they work, contact a mortgage loan officer today!

Escrow

Escrow is an account set up by the lender to collect and hold money for certain property-related expenses, such as property taxes, homeowners insurance and PMI. When these bills are due, they’re paid directly from your escrow account.

Amortization schedule

A loan amortization schedule shows how much of each monthly payment goes toward principal and interest over the life of the loan. To get a customized amortization schedule, enter your loan details on our Loan Payoff Calculator. “View Report” to see the monthly breakdown.

A Mortgage Toolkit for you

There’s a lot to know about home loans, but you don’t have to navigate the process alone. Our Mortgage Toolkit explains what you need to know about the application process, including thing to do and things to avoid. You can also connect with one of our mortgage loan officers online or call 800.991.2221 to get answers to your questions.

 

All loans subject to approval. Rates, terms, and conditions are subject to change and may vary based on credit worthiness, qualifications and collateral conditions.