Basic Home Loan Terms Explained

Basic Home Loan Terms Explained



Basic Home Loan Terms Explained
The wonderful world of​ home buying can sometimes overwhelm the​ first time home buyer .​
They are inundated with information riddled with terms of​ art .​
ARMS,​ points,​ interest rates,​ good faith estimates,​ pay-downs,​ lock-in dates,​ so on​ and so forth .​
Though some or​ all of​ these terms may seem somewhat foreign to​ you,​ do not get overwhelmed,​ there are simple explanations for each and every one of​ them.
Let us start with the​ different types of​ loans there are .​
Typically all home loans fall into two basic categories: mortgages and home equity loans .​
Mortgages are simply a​ loan against property that is​ secured with a​ mortgage .​
This mortgage is​ basically a​ lien against the​ property until such time that loan is​ satisfied .​
So a​ mortgage is​ a​ loan against property that is​ secured with a​ lien against it.
A home equity loan is​ a​ loan that is​ also secured with a​ lien against the​ property .​
The home equity loan lien is​ secondary to​ the​ first mortgage on​ the​ home .​
This type of​ loan is​ based on​ the​ amount of​ equity in​ the​ house .​
Equity is​ the​ difference in​ dollars between the​ value of​ the​ home and the​ amount owed on​ it .​
Equity can be a​ positive number (the house is​ worth more than what is​ owed) or​ can be a​ negative number (negative equity) which means that there is​ more owed on​ the​ house than the​ house is​ worth.
A lien is​ simply a​ legal term that indicates that someone other than the​ homeowner has a​ legal right and interest in​ the​ property .​
So,​ if​ the​ property is​ ever sold,​ all liens need to​ be satisfied - any money owed to​ anyone with a​ lien must be paid,​ otherwise the​ new owner may become obligated to​ pay the​ amount owed .​
a​ lien is​ against property,​ not a​ person .​
Typically in​ all real estate transactions there will be a​ title search that will reveal any liens against the​ property .​
This title search is​ basically an​ examination over anyone and anything that may have some legal interest,​ obligation or​ right to​ the​ property.
If there are multiple home loans on​ a​ property the​ order they are paid in​ is​ the​ oldest to​ the​ newest .​
This is​ only a​ factor if​ the​ property is​ being sold for below what is​ owed .​
This is​ either through a​ short sale where the​ house is​ being sold by the​ homeowner for below the​ amount that is​ owed in​ the​ house .​
They will need approval from all lien holders in​ order to​ do this .​
This is​ also an​ issue if​ a​ house falls into foreclosure.
Within these two types of​ loans you​ will want to​ know the​ difference between a​ fixed-rate mortgage and a​ variable rate mortgage .​
a​ variable or​ adjustable rate mortgage is​ an​ ARM .​
Fixed-rate mortgages have the​ same interest rate from the​ first day of​ the​ loan to​ the​ last day of​ the​ loan unless it​ is​ refinanced .​
a​ fixed rate or​ variable rate loan will generally start off for a​ period of​ time at​ a​ specified rate and then after that period ends,​ if​ the​ loan has not been paid off or​ refinanced then the​ rate becomes adjustable based on​ specific conditions set forth in​ advance - typically tied to​ the​ federal interest rate .​
An ARM loan will have typically a​ 3 or​ 5 year period during which the​ rate is​ lower than the​ going rate .​
This is​ used to​ entice would-be borrowers or​ help borrowers have lower payments for the​ initial period.
Points are often discussed in​ connection with loan packages and interest rates .​
You can pay down an​ interest rate by paying points for example .​
What this means is​ you​ can pay for a​ lower interest rate if​ you​ pay a​ specified number of​ points .​
Points are simply one percent of​ the​ loan amount .​
So a​ $100,​000 loan equates to​ $1000 for every point.
Another term you​ will often here is​ PMI,​ private mortgage insurance .​
PMI is​ insurance for your lender when the​ amount you​ borrow is​ more than 80% of​ the​ value of​ the​ property .​
In these cases the​ borrower needs to​ pay for this insurance policy .​
The calculation for your monthly PMI payment is​ 0.5% of​ your loan amount divided by twelve.
Tied to​ the​ calculation of​ PMI,​ as​ well as​ many other factors of​ the​ loan is​ an​ appraisal .​
An appraisal is​ a​ determination by a​ real estate professional of​ what the​ value of​ the​ property is​ .​
They will evaluate the​ property and similar properties in​ the​ area .​
They will consider market trends,​ recent sales and other factors to​ give an​ estimate on​ what the​ property is​ worth and would sell for.
Another potential add-on to​ your monthly payments is​ escrow payments .​
Escrow is​ money that is​ being held typically to​ pay taxes .​
Your lender will collect 1/12 of​ your yearly taxes every month in​ order to​ be assured that your taxes are paid .​
Your lender then makes your required tax payments .​
Typically your lender will have a​ cushion in​ the​ escrow account of​ 2 - 3 months in​ case you​ fall behind in​ your payments.
Though there are many more terms you​ may encounter these are the​ most often used,​ misunderstood terms .​
During the​ home loan process,​ however,​ you​ should never feel embarrassed or​ ashamed to​ ask what a​ term means .​
The more you​ know the​ better off you​ will be.




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