Getting to Know The Most Common Mortgage Terms

Purchasing a house, regardless of whether you’re a newbie or veteran home buyer, is often one of the most confusing, yet most important, decisions in anyone’s life.

A home purchase is important for many reasons – most of which vary from person to person – but the one thing that almost always remains the same is that a home provides a place that you can call your own.

When searching for the home that just screams ME you should carefully consider factors such as location, size, community features and future maintenance costs prior to making an offer.

Factoring in these considerations is a step that should only come after the proper finances have been put into place. Unless you’re paying cash, you’ll need to first get pre-approved for a mortgage loan.

It is important to note that the decisions you make regarding your home’s mortgage will impact you financially for years to come, dependent on the length of your term, which can be anywhere from seven to thirty years.

Moreover, while many potential borrowers opt-in for 30-year fixed rate mortgage terms, as they often provide homeowners with low monthly payments, others may find a 15-year fixed more attractive due to its lower interest rate.

It’s important to note, however, that 15-year mortgage terms are often associated with higher monthly payments. As mentioned before, securing a mortgage can be rather confusing, when you consider all the mortgage terms.

With mortgage terms such as escrow, equity, appraisals, amortization and annual percentage rates – just to name a few of the terms we will cover in this week’s posting – it is perfectly understandable to get confused.

Accrued Interest: Interest that has been earned, but not yet paid.

Adjustable-Rate Mortgage (ARM): Refers to an interest rate that periodically changes according to an index for the term of the mortgage.

Annual Percentage Rate (APR): The annual cost of your loan, expressed as a yearly rate. After all interest, discount points, lender fees (if applicable), and mortgage insurance have been taken into account.

Appraisal: A written estimate, which is performed by a licensed appraiser, of your potential home’s current market value and current condition.

Amortization: A schedule on how the loan is intended to be repaid, with monthly payments, and interest rates scheduled for each passing month.

Equity: The difference between the market value of the home and what the remaining balance on the mortgage is.

Escrow: An account in which a neutral third party holds your loan documents and down payment in a real estate transfer until all conditions of the sale are met according to the lending institution and sellers requirements.

Fixed-Rate Mortgage: Refers to home loan in which the interest rate remains that same for the entire duration of the mortgage term, most often 15 or 30 years, but can sometimes be shorter or longer.

Good Faith Estimate (GFE): A written estimation of what you can anticipate your closing costs will be. Your lender will provide you with this three days prior to your mortgage loan application submission.

Homeowners Insurance: An insurance policy that includes hazard coverage, which will cover any loss or damage to your property, as well as for personal liability and theft. Flood and other natural disaster insurance can be purchased separately.

Interest-Only Mortgage: An adjustable-rate mortgage that allows borrowers to only pay the interest for a specified amount of time. Many factors should be considered prior to choosing this type of mortgage as it can be risky.

Jumbo Mortgage: A non-conforming mortgage that far exceeds your county’s conforming limits. Interest rates associated with Jumbo Loans are typically higher than both fixed-rate and adjustable-rate mortgages.

Principal: The amount of debt, excluding interest, left remaining.