the more you know, the better
Shopping for a new home is fun and exiting. Yet securing financing to buy real estate can be stressful. The more you know about the home mortgage business, however, the smoother your transaction will be. Here’s a list of the most frequently used terms to help you get a handle on financing terminology before you buy a home.
- Adjustable Rate Mortgage (ARM) – A mortgage in which there is a term with a fixed interest rate. The term can last anywhere from one month to ten years. After the term is over, the interest rate is adjusted periodically according to a pre-selected index.
- Amortization – The payments of a loan (including interest accrued) are divided into equal periodic payments in order to pay off the debt within a fixed period.
- Amortization Term – The fixed period in which an amortized mortgage is paid off. For example, the amortization term of a 15-year fixed rate mortgage is 180 months.
- Annual Percentage Rate (APR) – The interest accrued on a loan within one year, typically expressed as a percentage (i.e. 5.90%).
- Appraisal – An estimate of the value of a property.
- Balloon Mortgage – A type of mortgage where the loan is not fully amortized; monthly payments are made until a preset date when the remaining balance must be paid in full.
- Balloon Payment – The final lump sum that must be made in a balloon mortgage.
- Bi-weekly Payment Mortgage – Instead of traditional monthly mortgage payments, payments are made every two weeks, which affords the borrower significant savings in interest.
- Broker – A mortgage broker works as an intermediary between the borrower (their client) and the lender. Brokers are typically paid commission or a fee for their service.
- Closing – Also known as settlement, the closing is when the property and funds paid for the property change hands.
- Closing Costs – Closing costs are expenses above and beyond the total cost of the property. These usually include taxes, title search and insurance, deed recording, appraisal fee, and other expenses assessed at closing. Closing costs typically comprise anywhere from 3% to 5% of the total value of the home.
- Debt-to-Income Ratio – A ratio expressed as a percentage that depicts a borrower’s monthly mortgage payment divided by their gross monthly income.
- Default – A default occurs when a borrower fails to fulfill their legal obligations of making mortgage payments.
- Down Payment – The amount of money a borrower must pay initially for the purchase of a house. It is often the difference between the approved loan amount and total cost of the home.
- Equity – The monetary value which an owner has in real estate that is above and beyond the debt owed on it.
- Fixed Rate Mortgage – A mortgage in which the interest rate remains fixed throughout the term of the loan.
- Foreclosure – When a homeowner defaults by failing to make payments on their mortgage, the lender that holds the mortgage is given legal ownership of the property to allow them to recoup the money that was lent. as a repossession of property.
- Interest – The fee (expressed in an annual percentage) charged by a lender for borrowing money.
- Money Merge Account – A popular accelerated mortgage program which utilizes a home equity line of credit and proprietary software to help homeowners pay off their mortgage early.
- Principal – The actual amount of money borrowed, not including interest fees.
- Refinance – Acquiring a new mortgage on a property to replace an existing mortgage and to secure a lower interest rate.
- Title – An official document that proves an individual’s ownership of a particular property.