5 Commonly Misunderstood Mortgage Terms Explained

It's easy to get lost in the jargon when you're buying a home.

From lending terms to mortgage types, you may feel like you need a glossary to keep it all straight when buying a home. Understanding these five commonly confusing mortgage terms will help you feel confident when it’s time to make an offer.

1. Annual percentage rate

You might think that annual percentage rate and interest rate are the same mortgage terms—but not quite.

APR is a measure of the cost of credit expressed as a yearly rate, considering you pay finance charges to obtain the loan, as well as making monthly payments over a certain period of time. Your interest rate applies only to the actual loan amount borrowed.

2. Earnest money

After the initial offer on a home, the parties have to jump through a few hoops—such as an appraisal or a home inspection—before the offer can go through.

Those hoops include putting up earnest money, which is the portion of your down payment made up front to the seller. By paying earnest money, you’re telling the seller you’re serious about buying the home, and you have the financial backing to make the seller feel secure.

3. Loan estimate

Once you apply for a loan, BB&T will provide you with a loan estimate. This is a breakdown of the potential cost of your loan, including interest rate, monthly payment, private mortgage insurance and more. Keep in mind that factors like interest rates and other terms could change before you reach your closing date, which could affect your loan’s final cost.

4. Discount points

Have you ever heard of a discount you actually pay for? Now you have! Paying mortgage discount points is like prepaying interest in order to obtain a lower interest rate on your mortgage.

Points are equal to percentages of your mortgage: one percent equals one point. As in, if you pay for one point up front, the amount would be equal to one percent of your mortgage. The more points you pay, the lower your interest rate, which could save you money in the long run.

5. Escrow

Remember that earnest money you had to fork over? While in the midst of negotiation, an escrow account is a secure holding area for those funds until the transaction is complete.

Your property tax and home insurance payments, which are factored into your monthly mortgage payment, are also held in an escrow account. BB&T uses the funds in your escrow account to pay for your taxes and insurance on your behalf when they're due—two fewer things for you to worry about!

Keep it up. You're getting smarter about home buying.

Related topics

How Long Does It Take to Get a Mortgage?  (Article)

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Loan Approval Process: Next Steps  (Video)

Get a clear picture of what happens after you submit your mortgage application.

What Are Points?  (Article)

Learn how paying points can reduce your interest rate and monthly payment amount.

Loans, lines of credit and credit cards are subject to credit approval.

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