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Top Five Mortgage Terms Explained


Navigating the complex world of home loans can be stressful, especially for first-time homebuyers. Understanding some of the key terms you will encounter during the homebuying process is crucial to making informed decisions about financing your home. Below, we break down five of the most common mortgage terms to know so you can head into the homebuying process with confidence.


Principal is the amount of money you are borrowing to purchase your home. Your lender will use the principal balance, along with the current interest rate and amortization term, to determine the monthly principal and interest payment for the loan. The total mortgage payment includes principal, interest, taxes, and insurances.


Amortization is the process of paying off a debt over time in equal installments. With each monthly payment, one portion goes toward the principal (the initial loan amount), and another goes toward the interest. Over the life of the loan, the ratio of your payment going toward interest shifts, and more money goes toward paying down the principal. Understanding the amortization schedule (a chart that shows how much principal and interest is applied each month) can help you see how your monthly payments contribute to building equity in your home.

Home Equity Line of Credit (HELOC)

A HELOC is a revolving line of credit that allows homeowners to borrow against the equity in their homes. Unlike a traditional loan, a HELOC operates more like a credit card, with a predetermined credit limit. Homeowners can draw funds as needed, repay them, and then reuse the credit. Interest rates on HELOCs are typically variable and tied to an index. They are a flexible financial tool that can be used for various purposes, such as home improvements, education expenses, or debt consolidation. At SLFCU, HELOCs are called Home Equity CreditLines.

Private Mortgage Insurance (PMI)

PMI is an insurance policy that protects the lender in case the borrower defaults on the mortgage. It’s typically required when the down payment is less than 20% of the home’s purchase price. PMI premiums are added to the monthly mortgage payment and can increase your monthly mortgage payment by hundreds of dollars. When the homeowner’s equity reaches 20% or more, PMI can often be canceled. SLFCU does not require PMI on any of its home loans!

Escrow Account

An escrow account is a separate account established by the lender to hold funds for various expenses related to homeownership. These expenses include property taxes, homeowners’ insurance, and flood insurance. Each month, a portion of your mortgage payment goes into the escrow account. For simplicity, the lender manages payments for these expenses on your behalf.

Understanding home loan terms is essential when embarking on your journey to homeownership. By grasping them, you can make an informed decision and navigate the mortgage process with confidence.

Want more information about SLFCU’s home loan options? Visit or contact us by email at or by phone at 505.237.7161 (800.947.5328, ext. 7161).

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