Crunch Finance Article

Common Mortgage Terms Explained

Mortgage: A mortgage is a loan specifically used for purchasing real estate. It is secured by the property itself, and if the borrower fails…

A quick guide to some of the most commonly used mortgage terms

  1. Mortgage: A mortgage is a loan specifically used for purchasing real estate. It is secured by the property itself, and if the borrower fails to repay the loan, the lender can take possession of the property through a legal process known as foreclosure.
  2. Interest Rate: The interest rate is the percentage of the loan amount charged by the lender as compensation for borrowing. It significantly influences your monthly mortgage payments.
  3. Principal: The principal is the original amount of money borrowed for the mortgage. As you make payments, the principal balance decreases.
  4. Amortisation: Amortisation refers to the process of paying off a loan over time through regular payments. In the context of mortgages, it typically involves monthly payments that cover both principal and interest.
  5. Down Payment: The down payment is the initial upfront payment made when purchasing a property. It is usually a percentage of the property’s total price, and a higher down payment often leads to better loan terms.
  6. Loan-to-Value (LVR) Ratio: The LVR ratio is the percentage of the property’s value that is financed by the mortgage. It is calculated by dividing the loan amount by the property’s appraised value.
  7. Closing Costs: Closing costs are fees and expenses associated with finalising the real estate transaction. They include costs for services like appraisal, title search, and legal fees.
  8. Escrow: Escrow is an account held by a third party (often the title company) to manage and disburse funds during the real estate transaction. It is commonly used for property taxes and homeowners insurance.
  9. Equity: Equity is the portion of the property that you own outright. It is calculated by subtracting the outstanding mortgage balance from the property’s current market value.
  10. Fixed-Rate Mortgage: A fixed-rate mortgage has a constant interest rate and monthly payments that remain unchanged throughout the loan term. It provides predictability for budgeting.
  11. Adjustable-Rate Mortgage (ARM): An ARM has an interest rate that may change periodically, typically after an initial fixed period. The rate adjustments are based on a specific financial index.
  12. Pre-approval: Pre-approval is a lender’s conditional commitment to provide a mortgage loan based on the borrower’s financial information. It helps in understanding the loan amount for which you qualify.
  13. Redraw Facility: A redraw facility is a subtle treasure chest within your home loan. It allows you to reclaim any additional repayments you’ve made, offering financial flexibility when you need it.
  14. Offset Account: An offset account is a financial chameleon, seamlessly blending your savings with your home loan. The balance in this account is subtracted from your loan principal, reducing the interest you pay.
  15. Lender’s Mortgage Insurance (LMI): Lender’s Mortgage Insurance is the quiet guardian for lenders. If your down payment is less than 20%, LMI provides a safety net for the lender, safeguarding against potential financial hiccups.
  16. Bridging Loan: A bridging loan is a financial bridge between your current and future property. It assists in situations where you’re buying a new home before selling your existing one.
  17. Redemption: Redemption is the silent victory lap of your home loan journey. It’s the moment when you’ve fully repaid the loan, and the property is entirely yours.

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