Understanding Mortgage Terminology

Understanding Mortgage Terminology 1

Understanding Mortgage Terminology
Purchasing a​ home is​ a​ smart investment .​
However,​ if​ you’re purchasing a​ home for the​ first time,​ there is​ some terminology you​ need to​ be aware of​ regarding your future home mortgage .​
Here are some common words and terminology you’ll encounter when you’re looking for a​ home loan.
Adjustable Rate Mortgage (a.k.a .​
ARM Loan): An Adjustable Rate Mortgage is​ a​ home loan where the​ interest rate adjusts throughout the​ term of​ the​ loan .​
ARM Loans usually have an​ initial interest rate that is​ lower than that of​ a​ Fixed-Rate Mortgage .​
This low interest rate is​ locked for a​ set length of​ time .​
Once that time has expired,​ the​ interest rate can go up based on​ market factors .​
The lower initial interest rate helps those who can’t afford a​ fixed-rate mortgage get financing for their home .​
However,​ the​ interest rate will most likely increase after the​ initial term of​ the​ low interest rate expires.
Annual Percentage Rate (APR): APR is​ the​ interest rate quoted by the​ lender plus additional home loan costs .​
Additional costs include origination fees,​ points,​ etc .​
APR is​ often higher than the​ stated interest rate .​
This is​ because the​ additional costs will alter the​ originally advertised interest rate accordingly.
Closing Costs: Closing costs are the​ expenses involved in​ finalizing a​ mortgage .​
Closing costs include lender/agency fees,​ loan origination costs,​ escrow payments,​ title insurance,​ attorney fees,​ etc .​
Closing costs are often shared between both the​ buyer and the​ seller.
Escrow: Escrow is​ at​ the​ end of​ the​ mortgage process where a​ neutral third party obtains the​ documentation and money involved in​ the​ transaction until the​ transaction is​ complete .​
An escrow account is​ also used to​ hold the​ property tax and insurance monies that are collected during payment of​ the​ loan.
Fixed-Rate Mortgage: a​ fixed-rate mortgage is​ a​ loan where the​ interest rate stays the​ same .​
It does not fluctuate while the​ loan is​ being paid off .​
Financing for fixed-rate mortgage loans are commonly spread out over 10,​ 15,​ 20,​ or​ 30 years .​
This type of​ loan is​ popular because there are typically no surprises .​
Since the​ interest rate remains the​ same,​ the​ monthly mortgage payments are static,​ and don’t change year to​ year.
Points: Points are a​ percentage of​ the​ principal of​ the​ loan used to​ lower the​ interest rate of​ a​ loan .​
There are two types of​ points: Discount Points and Origination Points .​
Discount Points reduce the​ interest rate of​ a​ loan by having the​ lender pay more at​ closing .​
One point equals one percent .​
So,​ if​ you​ want to​ lower your interest rate by one percent,​ the​ borrow needs to​ pay one percent of​ the​ principal at​ closing .​
However,​ this does not lower the​ principal amount .​
It merely lowers the​ interest rate .​
Origination Points are used is​ the​ same fashion and utilized to​ cover the​ loan processing expenses.
Principal: Principal is​ the​ original amount borrowed from the​ lender .​
It does not include interest or​ other fees .​
It’s the​ lump sum the​ borrower gets from the​ lender.
Knowing the​ terminology involved in​ your mortgage will help you​ stay on​ top of​ the​ mortgage process and allow the​ entire process to​ run smoothly .​
Read up on​ these terms and keep yourself out of​ the​ dark.

Understanding Mortgage Terminology

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