Learning The Language of Mortgages

For most first-time home buyers, finding the right mortgage will also be part of the home buying experience. Inexperienced borrowers can get quickly overwhelmed with the many loan types and options that are available on the market. Welcome to the land of interest rates, points, escrow, private mortgage insurance, lock-ins and overages. In order to speak with lenders and get the best loan, borrowers need some basic mortgage terminology under their belt.

Mortgage Terms

When traveling in a foreign country, it’s helpful to know at least a few key words of the language. The same holds true when delving into the mortgage market.  Here’s a list of mortgage terms that borrowers will want to be familiar with before speaking with a mortgage lender or broker:

Conventional loans - mortgage loans other than those insured or guaranteed by government agencies such as the VA (Veterans Administration), the FHA (Federal Housing Administration), or the Rural Development Services (formerly know as Farmers Home Administration, or FMHA).

Annual percentage rate (APR) - cost of credit expressed as a yearly rate.  An APR will include: the interest rate, broker fees, points and other credit charges that the borrower is required to pay.

Fixed-rate loan -  has repayment terms usually of 15, 20, or 30 years. The interest rate and the monthly payments (principal and interest) stay the same during the entire life of the loan.

Adjustable-rate mortgages (ARMs) - offers a lower initial interest rate than fixed-rate loans. The interest rate will fluctuate over the life of the loan based on current market conditions. When interest rates rise, usually so do your payments and when interest rates fall, your monthly payments may be lowered

Interest rate - cost of borrowing money expressed as a percentage rate. Interest rates change based of market conditions.

Loan origination fees - charged by the lender for loan processing and are usually expressed as a percentage of the loan amount.

Escrow - holds money or documents by a neutral third party prior to closing. It can also be an account held by the lender that a home owner pays money into for taxes and insurance.

Mortgage document - signed by a borrower at the time the home loan is made giving the lender the right to take possession of the property if the borrower defaults on the loan.

Points - fees paid to the lender in order to buy down the interest rate. Typically one point equals 1% of the loan amount. Points are usually paid in cash at the time of closing.

Overages - difference between the lowest available price and higher price that the home buyer agrees to pay for the loan. Brokers and loan officers may keep some or all of this difference as additional compensation.

Private mortgage insurance (PMI)- usually mandatory on loans with less than 20% of the sale price paid as a down payment. PMI protects the lender against loss if a borrower defaults on the loan.

Lock-in- is a written agreement that guarantees the borrower a specific interest rate on a home loan if the the loan is closed within a certain period of time, such as 60 or 90 days. It will also specify the number of points the borrower will pay at closing.

Transaction, settlement, or closing costs  - will typically include: application fees; title examination, abstract of title, title insurance, and property survey fees; fees for preparing deeds, mortgages, and settlement documents; attorneys’ fees; recording fees; and notary, appraisal, and credit report fees. The Real Estate Settlement Procedures Act, requires that borrowers receive a good faith estimate (GFE) of these closing costs withinn three days of the loan application. The good faith estimate should lists each cost as a specific amount or range.

First time home buyers will want every advantage possible when obtaining the best mortgage for their new home. Understanding a bit of mortgage speak will give borrowers the edge they need when speaking to lenders. If you’d like more information on mortgages, visit the experts at New Homes Central Lending.

[tag]mortgages, mortgage market, new home, home loan, mortgage industry[/tag]

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