It’s time home buyers understand the ever-dreaded, over-complicated mortgage terms. When explained correctly, it’s not as scary as a first-time home buyer may think. When submitting a loan application, some home buyers go in blind causing them unnecessary anxiety throughout the mortgage process. By the end of this quick read, you will have a better understanding of a mortgage.
Here is a list of mortgage terminology you need to know when applying for a mortgage in alphabetical order:
Adjustable Rate Mortgage (ARM) – an attractive type of mortgage due to its lower interest rates compared to a fixed-rate mortgage. However, an ARM’s interest rate can change after a certain period of time called an adjustment period. An ARM will have a cap on how much the rate can increase or decrease during the adjustment period.
Adjustment Period – a time period when an ARM mortgage interest rate will increase or decrease according to the current financial market. The adjustment period occurs after the initial “fixed rate period” of 3, 5, 7, or 10 years depending on the type of ARM. Thereafter, the rate will usually adjust again every 6 or 12 months.
Annual Percentage Rate (APR) – the APR is how much the loan will cost annually, including the interest rate and any lender, broker, or 3rd party fees.
Appraisal – an analysis of the property being purchased to determine its value and overall condition. This ensures the home is valued at the price point the seller is asking, and they’re not hiding any major repairs or issues.
Appreciation – when your home increases in value and is now worth more than it was in the past. This usually occurs due to changes in the market, home improvements made, or changes in the neighborhood.
Closing Costs – these are costs are required to complete the real estate transaction. Closing costs are charged by all parties involved for their services: the lender, appraiser, settlement agents, etc.
Condominium – also known as a condo, these are most often single units in a multi-unit building, like apartments. One major difference is the resident owns the unit itself. Other owners will split the cost of repairing common areas like the exterior of the building. A monthly Homeowners Association (HOA) fee is paid to the association to cover shared costs.
Conventional – any loan not guaranteed by a government entity. These loans are popular and offer down payments as low as 3%.
Credit Report – a document provided by a credit reporting vendor to examine the amount of money borrowed and your payment history.
Credit Score – a specific number showcasing your credit profile. It is used to predict the likelihood that any money borrowed will be paid back.
Deed – a legal document proving ownership of the property.
Down Payment – a percentage of the home purchase price that is paid upfront.
Equity – the amount of money the home buyer has earned. Equity is earned when payments are made and the home appreciates in value. Many home buyers refinance and use their equity to make repairs or for life events. If a home buyer sells, the equity is theirs to keep or use towards their next home purchase.
Escrow – money the home buyer pays towards the taxes and insurance of their home.
Escrow Account – the most common type of escrow account is for real estate taxes and homeowners insurance. Escrow payments are included in the total mortgage payment and held in a separate interest bearing account with the lender/servicer. When taxes and insurance are due, the servicer pays the tax authority or insurance company on behalf of the homeowner.
Fannie Mae and Freddie Mac – entities created by congress to play a large role in the health of our housing market. These entities provide liquidity, stability, and affordability in the housing market by purchasing mortgages from lenders and bundling them into mortgage-back securities or them in their portfolios.
Fixed-Rate Mortgage – a popular type of mortgage in which the interest rate will remain the same throughout the life of the loan.
Gift Funds – many loan programs allow gifts from family and friends to put towards a down payment. A gift letter must be written stating that the donor gifted a certain amount of money and you don’t have to repay it. Often times, proof of funds from the donor is also required.
Hazard Insurance – also known as homeowners insurance. This type of coverage protects from loss or damage to the home or property.
HOA fee – HOA Dues are paid to the association or management company by each unit owner. The amount of the HOA dues depends on the maintenance required for the common area. These dues are not included in your mortgage payment, but the amount will be calculated into your monthly debt obligations when it comes to qualifying for the loan.
Home Equity Line of Credit (HELOC) – A HELOC is a type home equity loan. This type is most often a junior lien that acts as a credit card. The “draw period” is usually 10 to 15 years and another 10 to 15 years where it has amortize payments until it is paid off.
Home Inspection – a home inspection is ordered by the home buyer’s real estate agent. A qualified home inspector goes to the property to look for material defects. The inspector looks at the major home systems such as plumbing, electrical, roofing, etc. If a material defect is found in any of the following, the seller will be asked to fix the issue prior to closing.
Home Warranty – home buyers can purchase this policy upfront in case any expensive repairs pop up during their first year of home ownership. This can cover issues such as HVAC and A/C systems, washer and dryer, and/or plumbing. The cost of a home warranty is usually $400-$500 upfront. This can also be negotiated for the seller to pay for at an offer or contract agreement.
Homeowners Insurance – a type of insurance required for homeowners that protects the owner and lender from natural disasters or personal injury on the property.
Interest – the amount the home buyer pays to borrow money for buying a house.
Interest Only Mortgage – a mortgage in which the home buyer pays just the interest on the loan for a specific amount of time.
Investment Property – a non-owner occupied property purchased in order to make profits from reselling, renting, or to gain tax benefits.
Liabilities – monthly debt obligations including mortgage(s), car payments, installment loans, credit cards, child support, alimony and any other disclosed or un-disclosed debt.
Lien – a claim or charge on the property for payment of a debt.
Loan estimate – a disclosure that includes all loan terms and settlement costs. This disclosure is required to be sent to the home buyer within 3 business day of the initial application and throughout the loan process if and when changes occur that affect terms and/or loan costs.
Lock-in Rate – reserving an interest rate for home loan product for a specific amount of time.
Margin – a percentage added to the index of an ARM to establish the interest rate on each of the adjustment periods.
Market value – the current value of a property being purchased. The appraisal usually determines this amount.
Mortgage Insurance Premium (MI) – monthly insurance premium required on certain government-backed loans such as FHA or USDA loans.
Non-occupant co-borrower – also known as a co-signer and is another borrower on the loan but does not live in the property. Their income, assets, credit, and debt-to-income can help you better qualify if needed.
Origination Fee – an amount charged by a lender for processing the loan.
Points – expressed as a percentage of the loan amount for certain costs ranging from lender fees to buying down the interest rate.
Principal – the amount of money borrowed to buy a home. If a home buyer has paid towards their mortgage, the principal would be
the remaining balance yet to be paid off.
Private Mortgage Insurance (PMI) – usually required when putting less than 20% down on a Conventional loan. This is an insurance that protects the lender in case the homeowner defaults on their mortgage.
Rate Cap – the maximum or minimum on how much an interest rate can increase or decrease each adjustment period.
Refinance – paying off an existing loan with a new one. A few common reasons homeowners refinance is take cash out of their equity or change the payment terms of their loan.
Servicer – performs functions after the loan closes and throughout the life of the loan like collecting mortgage payments, taxes and insurance, and holding escrow accounts.
Short Sale – Most often occurs when a homeowner owes more on their home than it could sell for. The lender/servicer is involved in the sale of the home by agreeing to the purchase price also agreeing to release the lien and considering the loan paid-in-full after the property is sold.
Temporary Buy Down Mortgage – a type of mortgage loan in which the seller pays a lump sum upfront to reduce the monthly payment. There are other buy down programs that allow the home buyer to have a much lower interest rate for the first few years. An example is the 2-1 temporary buy down program offered at Platinum Home Mortgage.
Title – a legal document stating evidence that a person owns real property, such as a home.
Title Insurance – protects both homeowners and the mortgage lender from defects in a title.
Underwriting – the process used to determine the conditions needed for final loan approval. During underwriting, the property appraisal, along with the borrower(s) credit profile, income and asset documents are reviewed.