Mortgage loans involve a number of terms which you need to know and understand before applying for one. Such words and phrases include “closing costs”, “pre-payment penalty”, “non-conforming”, and “points.” Keep reading to learn more about these mortgage terms and others you should know…

Points: This refers to pre-paid interest payments which might have to be made at the beginning of a mortgage. Points increase the initial cost, but they reduce the amount of interest paid during the repayment period.

Pre-Payment Penalty: Some mortgages require borrowers to pay a penalty if they want to pay off part or all of the balance before it is due. Borrowers who intend to sell their homes relatively soon should make sure this penalty is not included in the mortgage’s terms.

Term: This refers to how long it takes to repay the mortgage without making extra payments; many fixed-rate mortgages have terms of fifteen or thirty years. Longer terms bring about smaller monthly payments, but a greater overall cost.

Interest Rate: Lenders primarily generate income by charging interest on mortgages and other types of loans. The higher the interest rate, the larger monthly mortgage payments will be. A mortgage may have a fixed interest rate, or it might be adjustable.

Closing Costs: When a home or other property is sold, both the buyer and seller must pay a number of different expenses called “closing costs.” Some costs go to the lending institution, while others are paid to realtors, the local government, insurance companies, etc.

Subprime: These are a type of mortgage which is usually offered to home buyers with poor credit records and has a higher interest rate than other mortgages. Subprime mortgage loans have become harder to obtain because of the high foreclosure rate produced by them.

Down Payment: With some exceptions, home or business buyers are required to provide a large initial payment which covers part of the property’s selling price. This is called a down payment, and is not part of the mortgage principal.

Non-Conforming: Also referred to as “jumbo”, these mortgages exceed a certain “conforming” borrowing limit (this varies depending upon the state and the number of units in the home; you may want to know this amount and take it into consideration when purchasing an expensive home) and require a higher interest rate to be paid.

Reverse: This is a kind of mortgage which is only available to senior homeowners; it enables them to receive payments in exchange for slowly depleting their home equity. This makes it more difficult for someone to inherit and live in the home, but it lets the current owner continue living there despite a reduced income.