Understanding Mortgage Terms: Amortization, Escrow & More
Navigating the world of mortgages can feel overwhelming especially when you’re bombarded with financial jargon like amortization, escrow, principal, and more. Whether you’re a first-time homebuyer or just need a refresher, understanding these terms is essential for making informed decisions about your home loan.
In this post, we’ll break down some of the most common (and confusing) mortgage terms in simple, easy-to-understand language.
1. Amortization
Amortization refers to the process of paying off your mortgage over time through regular monthly payments. Each payment is split between two parts:
-
Principal (the amount you borrowed)
-
Interest (the cost of borrowing)
In the early years of the loan, most of your payment goes toward interest. As time goes on, more of your payment goes toward reducing the principal.
🧮 Example:
On a 30-year mortgage, your payment stays the same each month, but the way it’s applied changes — interest-heavy at first, then principal-heavy later on.
2. Escrow
An escrow account is a separate account your lender sets up to pay for:
-
Property taxes
-
Homeowners insurance
Each month, a portion of your mortgage payment goes into this account. When the bills are due, your lender pays them on your behalf. This ensures you don’t fall behind on taxes or insurance — which protects both you and the lender.
💡 Tip:
Your escrow amount can change yearly if your tax or insurance costs increase or decrease.
3. Principal
The principal is the original loan amount you borrow — not including interest. For example, if you buy a home for $300,000 and put down $60,000, your principal loan amount is $240,000.
Paying down your principal reduces the balance you owe and can save you thousands in interest over time.
4. Interest
Interest is what the lender charges you to borrow money. It’s calculated as a percentage of your loan amount and is one of the biggest costs of a mortgage.
A lower interest rate = lower monthly payments and less paid over time.
5. Private Mortgage Insurance (PMI)
PMI is a type of insurance that protects the lender if you default on your loan. It’s typically required if your down payment is less than 20%.
✅ Good to Know:
Once you’ve built up at least 20% equity in your home, you can often request to cancel PMI and lower your monthly payment.
6. Loan Term
The loan term is how long you agree to repay your mortgage. The most common options are:
-
30 years (lower monthly payment, more interest over time)
-
15 years (higher payment, less interest paid overall)
7. Points (Discount Points)
Points are optional fees you can pay at closing to “buy down” your interest rate.
-
1 point = 1% of the loan amount
-
The more points you pay upfront, the lower your interest rate may be
This is often a smart move if you plan to stay in your home long-term.
8. APR (Annual Percentage Rate)
The APR is the true cost of borrowing. It includes your interest rate plus other fees (like closing costs and origination fees), giving you a more complete picture of what you’ll pay.
9. Equity
Home equity is the difference between what your home is worth and how much you still owe on your mortgage.
Example: Understanding Mortgage Terms: Amortization, Escrow & More
If your home is worth $350,000 and you owe $250,000, you have $100,000 in equity.
You can borrow against your equity with products like home equity loans or lines of credit (HELOCs).
10. Foreclosure : Understanding Mortgage Terms: Amortization, Escrow & More
Foreclosure is a legal process where the lender takes possession of your home if you stop making mortgage payments. It’s a last resort for lenders and a serious situation for borrowers, often resulting in damage to your credit score and loss of your home.
Final Thoughts on Understanding Mortgage Terms: Amortization, Escrow & More
Understanding mortgage terminology helps you take control of your financial future. Whether you’re applying for a new loan, refinancing, or just managing your current mortgage, knowing what these terms mean can help you avoid costly mistakes and make smarter decisions.
