Understanding Mortgage Terms

Mortgages come with more than just interest rates and payments—they include complex terms and conditions that can impact your long-term financial health. This section breaks down important terminology and loan features so you know what to expect.

Home Equity Line of Credit (HELOC) vs. Second Mortgage

Both options let you borrow against your home’s equity—up to 80% of your home’s value, minus what you still owe. The difference:

HELOC: Works like a credit card—you only pay interest on what you draw, but rates are usually variable.
Second Mortgage: A lump-sum loan with fixed or variable terms and interest.

Always review repayment requirements. Some HELOCs require interest-only payments during the loan term, which means the full balance may come due at once later.

Subprime Loans

These are loans offered to borrowers who don’t meet traditional lending standards. Common reasons include:

High debt-to-income ratio

Poor or limited credit history

Previous bankruptcies or foreclosures

Subprime loans often come with higher interest rates and stricter terms.

What Is Equity?

Equity is the difference between your home’s value and what you owe on it. It typically increases over time and can be used for:

Home improvement financing

College tuition

Seller financing in a property sale

Accessing equity requires borrowing, which comes with risk—so always weigh the long-term impact.

Loan-to-Value Ratio (LTV)

LTV = (Loan Amount ÷ Appraised Value) × 100

Most lenders prefer an LTV of 80% or less. A higher LTV may require private mortgage insurance (PMI), unless you qualify for a government-backed loan like a VA mortgage.

For example:

20% down = 80% LTV
10% down = 90% LTV (likely PMI required)

Prepayment Penalties

Some loans charge a fee if you repay early—typically within the first 1–3 years. This fee helps the lender recoup lost interest. Always ask whether a loan includes a prepayment penalty before signing.

Second Mortgages

Second mortgages are loans against your equity that sit behind your primary mortgage. Uses include:

Home renovations

Education costs

Debt consolidation

If you default, your first mortgage gets paid off first—second mortgage lenders take on more risk, which can mean higher rates or stricter terms.

Amortization vs. Negative Amortization

Amortization: The process of gradually paying off your loan through scheduled payments of principal and interest.
Negative Amortization: When your payment doesn’t cover the full interest amount, causing your loan balance to grow. This is common with certain ARMs and must be repaid later—often with larger future payments.

What Is APR?

APR (Annual Percentage Rate) reflects the true cost of borrowing. It includes:

Base interest rate

Loan points

Additional fees

APR is usually 0.5% higher than the advertised rate. It’s designed to help you compare loan offers across lenders.

Private Mortgage Insurance (PMI)

PMI is required when your down payment is less than 20%. It protects the lender—not you—if you default on the loan.

Typical PMI costs include:

Upfront fee at closing (if applicable)

Monthly charge added to your mortgage payment

PMI can usually be removed once your LTV falls below 80%, either through payments or home appreciation.