Common Mortgage Terminology

Mortgage
A mortgage comes with a lot of jargon that one must be familiar with.

Buying a home is an exciting journey, but the process of obtaining a mortgage can feel like trekking through a financial jungle. Don’t worry, you’re not alone! Many terms get thrown around, leaving even savvy home buyers scratching their heads. Of course, arming yourself with some basic mortgage knowledge will make the home buying process much smoother. This article will equip you with the knowledge to conquer the mortgage terminology beast.

Mortgage basics

  • Loan amount: The total sum you borrow from the lender to purchase your home.
  • Interest rate: The annual percentage charged for borrowing the money, impacting your monthly payment.
  • Down payment: The upfront cash you contribute towards the purchase price, reducing the loan amount and potentially lowering your interest rate.
  • Loan-to-value ratio (LTV): The loan amount divided by the appraised value of the home. Lower LTVs generally mean better loan terms.

Mortgage types

  • Fixed-rate mortgage (FRM): Offers a stable interest rate throughout the loan term, providing predictability in your monthly payments.
  • Adjustable-rate mortgage (ARM): Features an initial fixed-rate period followed by adjustable rates based on market conditions. Can offer lower initial rates but carries potential risk if rates rise.
  • Conventional loan: Conforms to Fannie Mae or Freddie Mac guidelines, typically requiring a 20% down payment and private mortgage insurance (PMI) for lower down payments.
  • FHA loan: Insured by the Federal Housing Administration, allowing for lower down payments (3.5%) and potentially more flexible credit requirements.
  • VA loan: Backed by the Department of Veterans Affairs, offering zero down payment options for eligible veterans and active duty military members.
  • USDA loan: Guaranteed by the Department of Agriculture, designed for rural home ownership with no down payment required in eligible areas.

Key mortgage costs

  • Closing costs: One-time fees associated with processing the loan, including origination fees, appraisal fees, title insurance, and taxes.
  • Private mortgage insurance (PMI): Protects the lender if you default on a loan with less than 20% down payment.
  • Annual percentage rate (APR): The true cost of borrowing, reflecting the interest rate plus additional fees rolled into a single percentage.

Additional terms

  • Amortization: The gradual repayment of the loan principal over the loan term.
  • Escrow: An account holding funds for property taxes and homeowners insurance, often included in your monthly mortgage payment.
  • Underwriting: The process of evaluating your financial health and ability to repay the loan.
  • Pre-approval: A conditional approval based on your preliminary financial information, giving you an idea of how much you can borrow.
  • Commitment letter: The commitment letter is a formal document that serves as proof a borrower is pre-approved for a loan. This letter will state what amount the borrower is pre-approved for, but is not binding. Oftentimes, this letter is dependent on various factors, like a second credit check closer to closing and a home inspection. Many real estate agents and home sellers won’t consider an offer from a prospective buyer without a commitment letter.

Summary

As always, it is important to consult your mortgage broker for assistance with the best approach for your personal situation. In addition to comparing rates from multiple lenders with your mortgage broker, your real estate agent may also be a valuable resource for information. In addition, many lenders offer online resources and calculators to help you estimate your loan payment, closing costs, and eligibility for different loan programs. Take advantage of these tools to empower your home buying journey!

Are you thinking about about buying or selling real estate in the South Florida area? We can help! Contact Natasha at Live South Florida Realty, Inc. today! Also, be sure to download our free Florida Home Search app for your smartphone or tablet today!

Published
Categorized as Home Buying

By natasha moore

REALTOR® with Live South Florida Realty, Inc.