Mortgage terms: New Home Financing 101

Mortgage terms

If you are not familiar with real estate purchases, it is helpful to know different terms related to mortgages. Therefore, improve your financial savvy and confidence by reading these mortgage terms.

Adjustable-Rate Mortgage (ARM)

The adjustable-rate mortgage (ARM) is a type of mortgage in which the interest rate on the outstanding balance changes over the entire loan term. Its interest rate remains fixed for a short period (generally 1, 3, or 5 years) and then adjusts according to the standard financial index. Thereafter, the ARM mortgages would adjust their interest rates at regular intervals to complete the purchase process.

Appraisal

It is the property valuation, such as real estate, businesses, collections, or antiques, by authorized persons. The official appraisers must have a different assignment from the supervisory authority that oversees the responsibilities of appraisers. The insurance and tax companies would use the home appraisal values to determine the selling price of an item or property.

Amortization

Amortization is the division of a loan into a series of fixed payments. These payments are then broken into bits over time (usually in months) to create a monthly installment plan. Also, these monthly installments include both the principal loan and interest rate provided by the lending institutions.

Most of your payments will be turned into interest at the start of the mortgage process. However, as you continue making payments, more will go towards your principal loan.

Annual Percentage Rate (APR)

The annual interest rate (APR) is the cost you pay every year to secure a home loan. It includes mortgage insurance, points, and other expenses in addition to the initial interest rates (values expressed in percentages).

The annual interest rate is a more comprehensive indicator of the funding costs. It reflects both the interest rate and the price to acquire a desired home mortgage. The higher the APR, the more expenses you will reimburse during the loan term.

Closing Costs of home mortgage

Transaction costs are the expenses in addition to the real estate price that the buyer and seller usually incur when completing a real estate transaction. These costs may include loan origination fees, discount points, evaluation fees, title research, title insurance, surveys, taxes, registration fees, and credit report costs. After three days of the application process, the financial companies would claim these costs on the credit evaluation form for further work.

Debt-to-Income Ratio

Your debt-to-income ratio includes all your monthly debt payments divided by your total monthly income. The lender can use this number to determine your ability to manage the monthly payments. It compares the monthly payment of your existing debt and the proposed new loan with your monthly income. Therefore, the income divided by expenditure gives a percentage; the higher the ratio, the greater the loan risk for the lender.

Down payment

Down payment is the total amount prepaid by the buyer to purchase a house, excluding transaction costs. It is the difference between the selling price and the loan amount. The main purpose of the down payment is to ensure that the lender has sufficient funds to provide a loan in the partial reserve banking system and recover part of the loan when the borrower defaults. The asset is used as collateral to prevent mortgage defaults.

Home Equity

Home equity represents the value of a homeowner’s interest in their home. In other words, it is the current market value of the property (without a lien allocated to the property). Furthermore, the home equity or its value fluctuates over time. An increase in the principal loan installments will increase the borrower’s home equity during the loan term.

Loan Estimate

Loan estimation is the crucial home mortgage term representing the disclosure of the total loan cost by the lender. It is an easy-to-read document that contains information about your interest rates, transaction costs, and monthly payments. The lending company will provide you with the disclosure statement within three days of the application. The real estate loan evaluation will help you compare the mortgage quotes of different companies and choose the right loan in line with your situation.

Interest-Only Mortgages

It is a type of adjustable-rate mortgage that allows the borrower to repay just the installment related to the loan interest and not the principal amount for some time. More so, the lending institutions considered interest-only mortgages as high-risk loans.

Mortgages

Mortgage loans are loans from banks or other financial institutions to help borrowers purchase houses. Additionally, government institutions backed these home mortgage loans. It means that if the borrower fails to pay the lender monthly and fails to meet the loan’s obligations, the lender can sell the house and recover the funds.

Escrow

There are two definitions of escrow that you need to understand when purchasing a home. The first one is the escrow method which describes the process of a sales agreement. The neutral party like the escrow company and attorney handles the mortgage process to secure buying and selling transactions.

The second definition deals with an escrow account. The escrow account is a third-party account that first assesses your family insurance and annual tax charges. Then, after careful assessment, you will be required to pay a portion of the tax and insurance along with interest and principal loan every month.

Origination Fee

The borrower pays initial costs to the lender when applying for a home mortgage. It usually includes application and evaluation fees and other loan-related expenses.

Principal and Interest

The borrower received the amount for a home mortgage initially; referred to as a principal loan. Also, the creditor will pay this money to the lender at the end of the payment agreement. The rate of interest is what the lender charges you to loan money.

As you pay the loan, the principal owned by your lender decreases, but the interest payment will remain the same. Principal and interest may account for most of your monthly payments, but keep in mind that your mortgage payments may also include taxes and insurance.

Title Insurance

Title insurance is a type of liability insurance. It is designed to protect lenders and homebuyers from property losses caused by property defects.

The most common title insurance is the lender’s title insurance, which the borrower purchases to protect the lender. The second type is owner’s title contract insurance, which the seller usually pays to protect the buyer’s interests in the property. Visit our website RateChecker.com to learn more about mortgage loans.

Bottom Line

For most people who don’t have hundreds of thousands of dollars in cash to buy a house outright, mortgages are necessary for the home-buying process. Therefore, you must know all the mortgage terms as well. Moreover, there are a lot of different kinds of home loans, so you can find one that fits your needs. Different programs backed by the government help more people get mortgages and make their dream of owning a home come true.

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