Whether you're buying a new home or refinancing your current mortgage, there's going to be a lot of information piling up on you. You'll be hearing lots of technical terms from your lender and real estate agent, which can be overwhelming and confusing.
Know Your Basic Mortgage Terms
You don't want to end up at your home's closing confused and uninformed. The best way to avoid that is to do your homework and read up on the important technical terms so all the important bits don't sound like gibberish. Here's our mortgage glossary that you can refer to!
Adjustable Rate Mortgage
With an adjustable rate mortgage (ARM), the interest rate may go up or down. Many ARMs will start with an interest rate lower than fixed rate mortgages. This initial rate may stay the same for months or years. When this introductory period is over, your interest rate will change and the amount of your monthly payment may increase.
Annual Percentage Rate
An annual percentage rate (APR) is a way of measuring what it costs you to borrow money. The APR reflects not only the interest rate but also the points, mortgage broker fees, and other charges that you have to pay to get the loan. For that reason, your APR is usually higher than your interest rate.
Balloon Loan
A balloon loan is a mortgage that requires a larger-than-usual, one-time payment at the end of the term. This can mean your payments are lower in the years before the balloon payment comes due. Generally, this final payment is used to pay off the loan.
Closing Costs
Closing costs are fees and costs associated with obtaining the mortgage loan. You pay most of these expenses when signing the final loan documents, or when you “close” the deal. Some common closing costs include underwriting and/or processing fees, appraisal fees, pest inspection fees, title insurance, and title inspection/recording fees.
Credit Report
A credit report includes information about how often you make your payments on time, how much credit you have, how much credit you have available, how much credit you are using, and whether a debt or bill collector is collecting on money you owe. Lenders use these reports to help them decide if they will loan you money and what interest rates they will offer you.
Credit Score
A credit score is a number that is used to predict how likely you are to pay back a loan on time. Your credit score starts with the information about your payment habits from your credit report. A mathematical formula – called a scoring model – is then used to create your credit score. Credit scores are used by companies to make decisions such as whether to approve a mortgage at a certain rate or issue a credit card. Usually, a higher score makes it easier to qualify for a loan and may result in a better interest rate. Most scores range from 300-850.
Discount Points
What is commonly referred to as a "discount point" in the mortgage industry is a point you pay the lender or broker to reduce the interest rate on a loan. In general, the more discount points you pay, the lower the rate. One "point" equals one percent of the loan amount. For example, on a $100,000 loan, each point costs you $1,000. Other fees that do not lower your interest rate may also take the form of points, so be sure to clarify the type of point you are paying.
Escrow Account
An escrow account is set up by your mortgage lender to pay certain property-related expenses on your behalf like property taxes and homeowners insurance. Because bills for taxes and insurance can be large and infrequent, many homeowners prefer to pay them in monthly installments along with their mortgage payment.
FHA Loan
The Federal Housing Administration administers a program of loan insurance to expand homeownership opportunities. FHA provides mortgage insurance to FHA-approved lenders to protect them against losses if the homeowner defaults on the loan. The cost of the mortgage insurance is passed along to the homeowner.
Fixed Rate Mortgage
With a fixed rate mortgage, the interest rate is set when you take out the loan and will not change. An FHA fixed rate loan often works well for first-time homebuyers because it allows up to 97% financing. This helps to keep down payments and closing costs at a minimum.
Good Faith Estimate
A good faith estimate is a form that lists basic information about the terms of a mortgage loan for which you've applied. It includes the estimated costs you'll have to pay for the home loan and provides you with basic information about the loan.
Interest Rate
The interest rate is the cost you will pay each year to borrow money, expressed as a percentage rate. It does not reflect fees or any other charges you may have to pay for the loan.
Jumbo Loan
Each year Fannie Mae, Freddie Mac, and their regulator, the Federal Housing Finance Agency (FHFA) set a maximum amount for loans that they will buy from lenders. In general, the loan limits are $417,000, although they go higher in some states and US territories. Larger loans that are allowed to exceed these limits are called jumbo loans.
Loan Origination Fees
An origination fee is what lenders and any mortgage brokers charge the borrower for making the mortgage loan. Origination services include taking and processing your loan application, underwriting and funding the loan, and other administrative services.
Mortgage
A mortgage is an agreement between you and a lender that gives the lender the right to take your property if you fail to repay the money you’ve borrowed, plus interest. Mortgage loans are used to buy a home or to borrow money against the value of a home you already own.
Reverse Mortgage
A reverse mortgage is a special type of loan that allows older homeowners to borrow against the equity (wealth) in their homes. The money you receive, and the interest charged on the loan, increase the balance of your loan each month. Over time, the loan amount grows. Since equity is the value of your home minus any loans, you have less and less equity in your home as your loan balance increases.
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