You’re a first time home buyer. Or you’re looking for your second (or third or fourth) home. Either way, there are a lot of terms thrown around in the mortgage industry. And there are probably a few you aren’t familiar with quite yet.
Well, we are here to help with that. Here are a few of the top terms you may hear throughout your mortgage process. If there’s something you still want to know, tell us! We would love to answer any questions you may have.
Let’s start with the basics: types of loans
Adjustable Rate Mortgage- this is a mortgage whose interest rate can adjust throughout the payback period based on market interest rates. Typically, there is a maximum amount the interest rate can be adjusted over the life of the loan, as well as the number of times it can be adjusted throughout one given year.
This type of mortgage features lower interest and lower payments earlier on during the loan term. Lower rates and lower payments can provide the room, financially, for a borrower to purchase a larger home while still being able to afford the monthly payments. Additionally, it allows borrowers to take advantage of falling interest rates without refinancing.
Construction Mortgage- typically a short-term loan, it is given to the borrower to pay for the construction of a new home. If you are considering buying land and building a house, this may be a great option for you to consider to assist on the financial side of building your dream home.
Fixed Rate Mortgage- this is a mortgage whose interest rate stays fixed throughout the payback period of the mortgage. The stability of these loans make budgeting, saving and planning much easier. Fixed Rate Mortgages are also simple to understand, which makes them great for first-time (or any-time) homebuyers.
Jumbo Mortgage- any mortgage that exceeds the limits set by Fannie Mae or Freddie Mac is considered a jumbo mortgage. There is no government backing for these loans, so the requirements to obtain a jumbo loan are significantly higher. The “number” that makes a mortgage “jumbo” varies across the country. For instance, the minimum in Los Angeles, a more expensive housing market than Detroit, is significantly higher. To see if you qualify for a jumbo loan, talk to your loan provider.
Reverse Mortgage- this is where the equity on the house is turned into cash for the homeowner. Home equity is the portion of your property value that you actually own (you can think of it as the part of the property you have already “paid off”). There are a lot of factors to consider when it comes to a reverse mortgage. Fees, your financial stability and how long you plan on staying in your home are a few things to keep in mind when pondering a reverse mortgage.
VA Mortgage- this is a government sponsored mortgage that is guaranteed by the Veteran’s Administration. It is only available to active US service members, veterans and their spouses.
Now for a few more good terms to know
P&I- Principal and Interest. This will be your normal monthly mortgage payment.
PMI- also known as private mortgage insurance. Insurance on a mortgage is generally required of borrowers who make a down payment of less than 20%. Typically, FHA Loans fall into this category and require borrowers to pay a private mortgage insurance. At a certain point during the life of the loan, some borrowers no longer need to pay a PMI.
Foreclosure- the term used to define when a borrower is unable to payback their mortgage and legal proceedings have ensued. This is a period when the lender is, legally, obtaining the title and possession of the home. Typically, houses that have been foreclosed upon are sold and, after sale, the money owed to the mortgage lender is returned to them. For more information and details on foreclosure proceedings, you can talk to your mortgage lender.
Escrow- it is an account set up by the lender to set aside money for the eventual payment of home insurance and property taxes. They are typically required when you (the borrower) are putting down less than a 20% down payment. Requirements regarding escrow accounts are dependent upon your lender.
Don’t let your home buying process be overwhelming or confusing. Talk to one of our loan officers about what options you have available to you! And if there is something you don’t fully understand, just ask. We are here to help.