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Understanding Mortgages: 10 Home Buying Terms You Need to Know

Written by Posted On Saturday, 18 May 2019 00:54

ARMs? APR? PMI? What do those terms mean? If you're an absolute beginner to house buying, these 10 terms will help you in understanding mortgages.

Mortgage loans provide a convenient method of purchasing real estate. Property owners can also access funds to fulfill other financial obligations. As of 2017, about 63 percent of homeowners in the United States had a mortgage.

The market offers multiple mortgage plans for different groups of people. The jargon used in the industry can be confusing if you are not familiar with mortgages.

Understanding mortgages is the first step towards identifying the best package and making the best out of it. If you jump into it blindly, you can jeopardize your future financial security.

You don’t want to sign a mortgage note when you can’t comprehend the language used. If you are considering a mortgage loan, be sure to understand the home buying terms explained below.

1. FICO Score

FICO score is a scale that lenders use to estimate the ability of consumers to pay their credit obligations. It assigns the candidates a number between 300 and 850.

Your score is an essential determinant of the mortgage rate you receive. It can affect your credit options in a significant way.

The higher your FICO score, the lower the interest rate you are likely to get. For this reason, individuals with lower ratings usually pay more than those with favorable scores. You can qualify for many financing options and lowest interest rates if your FICO score is 740 or more.

2. Adjustable Rate Mortgages (ARM)

Adjustable rate mortgages are loans with an initial fixed rate period, which ranges between five to ten years. Once the time lapses, the interest rate may be reviewed upwards or downwards annually as per the market conditions.

In most cases, adjustable rate mortgages have lower rates than fixed-rate loans. They can offer considerable savings to first-time homebuyers. However, the interest can hike after the expiry of the fixed rate period.

3. Home Appraisal

An appraisal is an official document that estimates the current market value of a property. Mortgage lenders demand a home appraisal before processing a loan. It often comes at the cost of the homeowner.

An authorized appraiser visits the home to inspect and determine its fair market value. Since the property is the collateral for the mortgage, its value determines the amount that a lender can offer.

Appraisals help in understanding mortgages since they tell whether the asking price for a property is reasonable. The mortgage costs at the time of closing may include the appraisal fee. Some lenders, however, waive the appraisal charge for some clients.

4. Underwriting

Underwriting as used in mortgage lending is the process of identifying all the risks surrounding a specified loan. It also involves determining the appropriate terms and conditions for the mortgage. The person who performs underwriting is called an underwriter.

The underwriter makes sure that customers meet the loan requirements. He or she also ensures that the title, insurance, tax, and closing documentation are ready.

After an appraisal, the underwriter reviews it to confirm it's accurate. Lenders rely on underwriting to approve or deny loans and you should get more details from them.

5. Origination Fee

Mortgage lenders charge an upfront fee known as the origination fee to process a loan application. It comes as a percentage of the total mortgage loan, usually between 0.5 and one percent.

Origination fees can be hefty for huge loans. For instance, a $200,000 mortgage can attract a charge of up to $2,000. You can negotiate for a reduced rate with your lender.

One way to shrink the origination fee is to pay a higher interest for the mortgage. This tactic is popular with real estate buyers who intend to resell the property within a few years.

6. Escrow

An escrow is a bipartisan third-party that regulates the business deal on behalf of the transacting parties. It holds the titles, money, other properties as well as everything valuable until the end of the transaction.

The escrow ensures that parties adhere to the rules and they remain fair to one another. It oversees the handling of documents, bills, and funds. The escrow company levels the ground for the buyer and the seller.

7. Loan to Value Ratio (LTV)

LTV is the ratio of the loan you are requesting to the value of the property you are looking to buy. For instance, the LTV for a mortgage loan of $150,000 to procure a property worth $200,000 is 75 percent. The lender computes your loan to value ratio during the underwriting process.

Clients with low LTV have more equity than those with a high percentage. Such customers are 'less risky' to lenders, and they secure low-interest loans. Your loan to value ratio can also determine if you should pay personal mortgage insurance (PMI).

8. Points

A point is a charge of one percent of the loan amount. Points are either discount or origination points. The purpose of origination points is to compensate loan officers.

Discount points are like prepaid interest. The amount you pay translates to a reduced interest rate.  Your lender can allow you to buy up to three discount points.

If you are buying a permanent residence, buying the maximum discount points possible is a good idea. You can save a substantial amount of interest in the long run.

9. Annual Percentage Rate (APR)

Another essential term in understanding mortgages is the annual percentage rate. APR is a standard formula for computing the cost of a mortgage.

It considers the interest rate, points, insurance, and other fees paid to acquire the loan. A low APR means a less expensive mortgage.

10. Government-Sponsored Enterprises (GSE)

Fannie Mae and Freddie Mac are two private but government regulated enterprises that back non-government mortgage loans. They purchase or support most home loans originated by lenders in the United States.

The GSEs accept clients with credit scores of 620 and above and down payments as low as three percent.

Understanding Mortgages - Final Thoughts

Understanding mortgages is essential for anyone looking to buy a home. If you are not familiar with home buying jargon, you risk subscribing to a raw deal. You might even procure an expensive home loan when you qualify for a more cost-effective mortgage plan.

The home buying dictionary is unlimited. This article has highlighted the vocabulary that you wouldn't miss in any home loan negotiations.

For an in-depth understanding of mortgages, be sure to check out our mortgage advice section.

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Stacy Stein

stacy is a real estate writer, and she would like to real estate, business-related topics, she would like to go out with her friends. she studied business management from California University and she presently lives in California.  



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