Will you be getting your first mortgage in the near future? If so, you're going to be hearing a lot of terms that you are not likely familiar with. That's why you need to know what the following terms mean. 


Each monthly mortgage payment is broken up into the amount that goes towards the principal balance and interest. The principal is essentially the money that goes toward your actual home's balance. Interest should be self-explanatory since it is the amount of money that the lender makes from servicing your loan. These two factors are what make up the majority of your mortgage payment.


The way that your principal and interest ratio is divided for each monthly payment is identified in an amortization schedule. What you'll notice about the schedule is that the beginning of the mortgage has payments that are made up of mainly interest with very little principal, and then the payments at the end are the complete opposite. 


One factor that is used to qualify you for a mortgage is your debt-to-income ratio, which is commonly referred to as your DTI. The lender calculates your DTI by looking at your total income in a single month and how much of that income goes towards debts. For example, if you make $10,000 per month but you have existing loans totaling $1,000 worth of payments each month, that would give you a 10% DTI ratio. Most lenders look for a DTI that is no higher than 43%.

Earnest Money

Earnest money is also called good faith money, and it is money that the seller typically requests when they accept an offer on a home. The earnest money will eventually go toward your down payment when you go to close on the home at the very end, but it could be lost if you walk away from the home without having a valid reason. For example, there is often a clause allowing you to get your earnest money back if your mortgage is not approved. 


Your mortgage lender will likely give you the option to purchase points, which is a way to lower the interest rate of your mortgage. A point costs 1% of your loan amount, rather than the home's sale price, and each point will lower your mortgage by .25%. For example, if you needed a $200,000 loan and were offered an interest rate of 3.25%, one point would cost you $2,000 and lower your interest rate to 3.00%.

Contact a real estate loan lending program to learn more.