Loan Definitions — Explained

Clarifications of some tricky loan-related words

A loan is a certain amountPic_02(113) of money that needs to be repaid. Whenever you receive or need to take out a loan, you may hear certain phrases or words pop up that you’re not aware of. Here’s what some of them mean:

Amortization: The time when you pay off debt at the end of a fixed period. So, for example, if you took out a 15-year loan for $30,000, $2,000 would be recorded each year as an amortization expense.

Annual Percentage Rate (APR): If you’re paying or receiving interest on a loan, the APR is the percentage rate of the interest.

Equity: The amount of money between how much your home is appraised for and the dollar amount in mortgage that you still have to pay off. For example, if your home is appraised for $300,000 and you’ve paid off $100,000, you still owe $200,000. If you minus the balance owed ($200,000) from the appraised value ($300,000) you’re left with your equity: $100,000.

Escrow: Money being held by a reliable third party for the buyer and seller. The third party takes care of everything when it comes to closing or settlement, from paperwork to disbursement of funds.

Interest: When you borrow money and pay it back over a period of time, you have to pay interest for delaying the repayment — typically an annual percentage (see APR).

Principal: The amount of money remaining on a loan, not including its interest.

Private Mortgage Insurance (PMI): When you buy a house, if your down payment is less than 20 percent, you’re required to pay a PMI payment. This payment protects the bank lending the mortgage in the event you’re unable to make payments on your home in the future and you have to file for a foreclosure. Once you’ve paid 20 percent toward the principal amount of the loan, you no longer have to pay PMI.

Points: Points are a type of pre-paid interest — one point being one percent of the total amount of your mortgage loan. There are two types: discount points and origination points. Discount points are paid during closing, which will give you a better interest rate for your loan’s duration. With origination points, a broker processes the loan, and you and the lender pay for the service.

If you ever have any financial questions or need further explanation about any financial topic, don’t hesitate to call or stop in.

Used with Permission. Published by IMN Bank Adviser
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