On the path to buying a home, taking out a mortgage is a key step, but one that is often riddled with technical terms and complex concepts. A clear understanding of these terms not only helps you navigate the buying process more confidently, but also enables you to make more informed and beneficial financial decisions.
Whether you are a first-time buyer or considering refinancing your existing mortgage, knowing the language of mortgages can turn a potentially confusing and complex experience into a manageable and transparent path.
The basic mortgage glossary
Before we dive into the heart of our glossary, it is important to note that each mortgage-related term carries specifics that can significantly affect the terms of your financing. From more general and commonly known concepts like “interest rate” and “principal” to more specific terms like “spread” and “APR,” each glossary entry is a piece of the mosaic that makes up your mortgage. Let’s explore together the most important terms to demystify the world of mortgages and give you the tools to face it with confidence.
Interest rate
The interest rate is the percentage the bank charges on the loan amount, determining how much interest you are going to pay in each installment. There are two main types: fixed, which remains unchanged throughout the term of the mortgage, and variable, which can fluctuate according to benchmark indices such as Euribor.
Capital
The principal represents the total amount of the loan you are given by the bank. Over the term of the mortgage, with each installment paid, a portion of the principal is gradually repaid until the debt is paid off.
Mortgage term
The term of the loan indicates the period of time agreed upon for loan repayment, which can range from a few years to 30 or more. The choice of term affects the size of the monthly installment and the total amount of interest paid.
Mortgage installment
The installment is the amount that the borrower agrees to pay periodically to the bank and includes a portion of principal and a portion of interest. The composition of the installment may vary over time depending on the type of interest rate chosen.
Depreciation
The amortization schedule is the program that determines how the loan will be repaid over time, detailing the breakdown of installments between principal and interest.
LTV (Loan to Value)
The LTV ratio expresses the percentage of the property value financed through the mortgage. A high LTV can affect the terms of the mortgage, including the interest rates charged.
TAN (Annual Percentage Rate)
The TAN represents the pure interest rate applied to the mortgage, without taking into account ancillary fees and additional costs.
APR (Annual Percentage Rate of Charge).
The APR includes, in addition to the TAN, all fees and ancillary costs of the loan, thus providing a more complete view of the actual cost of the loan.
Guarantees
Banks require collateral to protect against default risk. The most common is the mortgage on the property, which allows the bank to resell the property if the installments are not paid.
Mortgage Surrogation
Subrogation allows people to transfer their mortgage from one bank to another at no cost in order to obtain more advantageous terms, such as a lower interest rate.
Spread
The spread indicates the bank’s profit margin on the mortgage. It is the difference between the interest rate charged on the mortgage and the market reference rate.
Guarantee Fund
A mechanism that facilitates access to credit for certain categories of borrowers by providing partial risk coverage by the state.
Early termination
The ability to repay the loan in full or in part in advance of the scheduled maturity, which may result in penalties.
Repayment plan
The schedule that details the amount and frequency of mortgage repayments, which may involve constant, increasing or decreasing repayments over time.
Portability clause
The possibility of transferring the mortgage to another property, keeping the same contractual conditions, if the mortgaged property is sold.
Debt consolidation loan
A type of mortgage that allows several existing debts to be combined into a single loan, often with the goal of reducing the amount of the monthly payment.
Life and mortgage insurance
Policies that cover mortgage repayment in the event of events such as death or permanent disability of the borrower.
Maxi final installment
An installment amount significantly higher than the periodic installments expected at the end of the amortization plan in some types of mortgages.
Escalation clause
A contractual clause that provides for the adjustment of mortgage payments based on the performance of certain economic or financial indices.
Moratorium
An agreed-upon period of suspension of mortgage payments, granted under certain circumstances to provide temporary relief to the borrower.
Understanding Mortgages for Safe Decisions
Navigating the mortgage world requires a solid understanding of the key terms and concepts that govern its dynamics. This glossary seeks to provide a knowledge base that can guide both new buyers and existing mortgage holders through the complexities of real estate financing.
Remember, however, that every financial situation is unique, so consulting an expert in the field can offer additional insights tailored and advice specific to your needs. With the right information and careful planning, the path to buying your home can become a rewarding and safe experience.
