By: Dan Kelly
When it comes to purchasing a home, buyers are often surprised at the number of terms they do not recognize. It is easy to get overwhelmed with mortgage rates and the different kinds of loans available. We are here to educate you and walk you through the home-buying process so you can have enjoyable experience.
Adjustable-rate mortgage (ARM)
Essentially the opposite of a fixed-rate mortgage, an ARM is dependent upon the fluctuating indexed interest rate. While you may find that an adjustable-rate mortgage is initially lower than a fixed-rate, these rates can go up over time. Because interest rates are unpredictable, it may be hard to tell on your own which type of mortgage is best. If you need help, just let us know.
Appraisal
In short, an appraisal is an estimate that determines what your property is worth. Banks use appraisals as indicators for how much they should lend you as a homebuyer. This helps both the bank and the homebuyer because neither party wants to lend or pay more than what a home is worth.
Closing cost
When purchasing a home, your lender or third parties will often charge fees that are involved in closing the deal. Costs incurred include fees related to loan origination, appraisal, title searches, title insurance, surveys, taxes, deed-recording, and credit report charges. You can expect your closing costs to be two to five percent of the purchase price of your home.
Conventional loans versus Federal Housing Administration loans (FHA)
When you apply for a home loan, you typically have two options: A conventional loan or a government-backed loan. If you have good credit, a steady income, and can afford the down payment, a conventional loan may be available; however, because this type of loan is not insured by the government, there are no guarantees for the lender if you fail to repay the loan.
An FHA loan is one that is insured by the Federal Housing Administration, meaning that if you default on the loan, the FHA will repay the bank’s loss. With insurance behind the loan, lenders can often offer good incentives, including a low down payment, financing of some closing costs, and low overall closing costs.
Escrow
Escrow payment is a common term referring to the portion of a mortgage payment that is designated to pay for property taxes and hazard insurance. It is an amount “over and above” the principal and interest portion of a mortgage payment.
Fixed-rate mortgage
Having a fixed-rate mortgage simply means that your rate will remain the same for the lifetime of your home loan. Unless property taxes, insurance premiums, or homeowner’s association fees change, your monthly mortgage payments should stay relatively consistent.
Mortgage term
“Mortgage term” refers to the number of years you have to pay back your mortgage. Depending on your agreement, you may choose to have either a 15-year or 30-year mortgage. Check out our mortgage calculator to see which option is best for you.
Preapproval
Not to be confused with prequalification, preapprovals are for homebuyers who are really ready to commit to buying a home. If your lender deems you preapproved, you are almost always guaranteed that the bank will lend you money for your purchase. The process for preapproval, including the documents you must submit, is much more comprehensive than the process for prequalification.
Prequalification
Prequalification is an initial step in the mortgage process. After handing over your financial information – including debt, income, and assets – to your lender, you are provided with an estimated mortgage amount specific to your situation. Getting prequalified allows you to discuss goals and needs regarding your mortgage with your lender.
Private mortgage insurance (PMI)
Private mortgage insurance is required when you make a down payment of less than 20 percent or when you refinance your mortgage with less than 20 percent equity. While this protects the lender from losing money in the case of a foreclosure, you can typically stop paying PMI once your payments reach 20 percent of the value of your home.
While you are able to get through the home-buying process without knowing the terms that your mortgage team, lenders, and real estate agencies use, it’s better to have at least a basic understanding. The Kelly Team at Envoy Mortgage can help walk you through the process, explaining each unfamiliar term. Check out our tools and resources page for even more information or contact us to set up an appointment.