Home Buying and Mortgage Terms
Have you wondered what all those real estate terms mean when searching for a new home ? If so, then you will find these descriptions to be helpful!
Fixed Rate Mortgage – A fixed rate mortgage has an interest rate that remains unchanged throughout the mortgage term. This also means that your monthly payments will remain the same over this period.
Bridge Loan – A type of short-term loan, bridge loans are secured through the buyer’s existing home. Its funds are typically used towards the construction, upgrading or closing costs for the new home.
Down Payment – The amount of money homebuyers spend upfront towards the purchase of a new home.
Mortgage Insurance – It is a type of insurance to protect mortgage lenders against loss if the borrower fails to pay the mortgage.
Escrow – A special bank account for your mortgage, in which some of each monthly mortgage payments are deposited by the mortgage lender to cover expenses such as homeowner’s insurance and property taxes.
Interest Rates – Typically, interest rates do not vary much, but exceptionally low interest rates tend to have loan origination charges and added fees.
Debt-to-Income Limits – Can you afford the house? The answer to this question lies in debt-to-income ratios, as it determines whether you can afford a mortgage payment or not. It is important you know your debt-to-income ratio and ask if that ratio can be accepted by the lender without any additional charges in fees or rate for the type of loan you require.
Points – The extra fees a lender charges in compensation for giving out a loan at a particular interest rate, even though the borrower has a perceived credit risk. This can be financed over the full term of the loan, or paid at the time of closing. As a rule, if you plan to stay in a home for few years only, you would want to pay less on points. However, if you expect to stay for more than five years, you may want to opt for a lower interest rate and slightly higher points.
Miscellaneous Fees – Charges for document preparation, origination, couriers, processing, and application fees.
Closing Costs – The costs a borrower pays at the time of closing, along with the down payment, in order to complete the transferring of ownership.
Balloon Mortgage – This loan provides low interest rates for a fixed period initially. The balance is then refinanced or is due.
Turn Time – The total time a lender takes from application to closing
Annual Percentage Rate (APR) – This is the total cost of a loan, expressed as a percentage number, which represents the yearly cost over the term of the loan.
Adjustable Rate Mortgage (ARM) – Monthly payments can vary in this type of loan, as the interest rates change regularly.
Rate Lock – Although interest rates fluctuate, buyers can opt for a quoted interest rate for a specified amount of time.
A Few More Home Mortgage Tips to Keep in Mind
Request a pre-approval letter — This will state a maximum loan amount from the lender you expect to use and tells the builder that you are financially qualified.
Request a copy of the settlement sheet (HUD-1) – Using earlier estimates, compare the settlement sheet line. In addition, you should ask for corrections or explanations of any unexpected charges or discrepancies.
Watch the calendar — Are there problems that could derail or delay the closing? Is there any additional documentation required by the underwriter? Ensure you get a copy of the appraisal once it has been completed.
Request a pre-approval letter – This states the maximum loan amount you expect to use from the lender, and informs the homebuilder that you are financially qualified to buy the home.
Formally applying for the loan – You should review the Good Faith Estimate and Truth in Lending that lenders provide you. Moreover, if you have any questions, make sure you get them answered early on during the loan process.