Essential Guide to Home Loan Basics

If you're just beginning your journey into home financing or preparing to apply, understanding key terms and concepts is essential.

Collateral: An asset or security offered by the borrower to the lender as assurance for the loan. If repayments are not made, the lender can claim the asset, typically property or real estate.

Down payment: The initial upfront amount paid towards purchasing a home. Usually, the entire house cost isn't financed; a portion is paid directly. Larger down payments generally lead to lower loan amounts and potentially better loan terms.

Loan term: The duration over which the loan is repaid. Factors such as income level and age influence this—higher income and younger age often allow for longer repayment periods.

Equity: The difference between your home's current market value and the outstanding loan balance. As property values increase and loans are paid down, your home equity grows.

Refinancing: Replacing an existing loan with a new one, often to secure better terms or interest rates.

Title: Legal proof of ownership rights to a property.

Annual Percentage Rate (APR): The yearly interest rate on a loan, which can be fixed or variable.

Principal: The original borrowed amount, which decreases with regular repayments.

Foreclosure: When a borrower fails to repay, the lender may sell the property to recover the debt.

Monthly amortization: Regular monthly payments covering both principal and interest, ensuring timely repayment.

Loan to Value Ratio (LTV): The percentage of the property's value financed through a loan. LTVs over 80% may require Private Mortgage Insurance (PMI).

PMI: Insurance that protects the lender against losses if the borrower defaults; the premium is added to monthly payments.