A Quick and Easy Guide to Mortgage Loan Terminology
If you have ever bought a house or even just seen the commercials for home mortgages on television, you probably know that it can almost sound like someone is speaking a foreign language because of all of the various acronyms and other specialized terminology. This can make buying a house intimidating and confusing for consumers who are not in the home mortgage field and who are not familiar with all of the mortgage loan terminology. This article is a quick and easy guide to the most frequently used terms, so it will allow you to start the home-buying process with a leg up.
One of the first things you need to know is the difference between a Fixed Rate Mortgage (FRM) and an Adjustable Rate Mortgage (ARM). Fixed rate means that the interest rate will stay the same for the length of the loan. So, if you get a mortgage with a 6 percent interest rate, it will stay 6 percent for the entire loan. An adjustable rate means that the interest rate can, and probably will, change over the course of the loan. Usually, you can get a lower interest rate for the first 2, 3, 5, 7, or, 10 years of the loan. After that initial period, the interest rate can change, giving you a higher monthly payment. The interest rate may also be referred to as APR, which stands for Annual Percentage Rate. Your APR will be determined in part by your credit rating, which is based on your bill payment history and current financial situation. Once you have decided which route you are going to take, an amortization will be completed, taking into account the interest and principal that will be paid each month and determining what your monthly payment will be. You can also pay points before this occurs. Each point equals 1 percent of the loan, and you can pay points up front to help decrease the amount you will have to pay each month. This can be part of your down payment.
When all of that is taken care of, you are on your way to home ownership, and an escrow account will be opened. Escrow means that money from your monthly mortgage payment will be stored to pay homeowner’s insurance and taxes. You will also have to pay closing costs (unless the seller has agreed to pay them). These are due at the time of closing before you get the keys to your new house, and while they vary from lender to lender, you should get an estimate (dubbed a ‘Good Faith Estimate’) of them before you sign the final paperwork. They often include origination fees, title insurance, taxes, and homeowner’s insurance.
On your monthly mortgage statements, you may notice that you are charged PMI, which stands for Private Mortgage Insurance. You will be charged this until you have paid off 20 percent of the property value. If you have a down payment of 20 percent, you will not be charged PMI. You will also see how much of your monthly payment goes to interest, principal, taxes, and insurance.
Buying a home is a great achievement. Knowing some mortgage loan terminology before starting the process can make you have a much smoother, better-informed experience that results in the home of your dreams.
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