Buying a home is likely the largest transaction you will complete. Buying a home can be confusing, but understanding the most common mortgage terms will help you make the best choices for your individual situation. It will also make the mortgage application process a lot easier. It is important to understand all of the mortgage terms before you apply for a mortgage. To help buyers, Midge & Co has put together a helpful list of mortgage terms defined. Consider this your “cheat sheet” as you prepare to buy a new home.
An appraisal by definition is an expert estimate of the value of something. An appraisal on a home will tell you what the estimated value of the home. This value will help you determine if the asking price is a fair one. It will also determine the amount the bank is willing to lend you. Lenders will usually not lend more than the amount of the appraisal.
Adjustable Rate Mortgage (ARM)
An adjustable rate mortgage is a mortgage with an initial low interest rate that will go up as market conditions dictate. ARM loans will have limitations on how many times a year the rate can go up and how much it can be increased over the loans lifetime. With and adjustable rate mortgage, if the interest rate of the loan goes up your monthly payment will go up because the term of the loan is set.
A fixed-rate mortgage is a mortgage that has the same interest rate through the entire lifetime of the loan. This is the same mortgage definition as a traditional mortgage. With a fixed rate mortgage you do not need to worry that your payment will increase. The fixed monthly payment for a fixed-rate mortgage is the amount paid by the borrower every month that ensures that the loan is paid off in full with interest at the end of its term.
Annual Percentage Rate (APR)
The Annual Percentage Rate represents the amount that you will pay in addition to your mortgage. This rate includes the interest rate of the loan, mortgage fees, and any other charges that may come with your mortgage agreement. This is the interest rate for the whole year, not just for a month.
Knowing the principal amount can up you understand the true value of the home. The principal on the loan is the amount that you originally borrowed. If your mortgage is $250,000 and the principal value of the home is set at $230,000, this means interest rates and fees add up to $20,000 over the term of the loan. Paying on the principal means paying extra money towards the amount you owe, without paying towards any of the interest.
A balloon payment means that you will pay the balance of the loan in one large lump-sum payment at the end of the loan. These types of mortgages typically last 5 to 7 years and have low interest rates to start off. Interest only loans often have balloon payments. Construction loans do, as well.
Homeowner’s insurance protects you from theft, fire and other damage to your home & property. If you have a mortgage, you must have homeowner’s insurance.
Private Mortgage Insurance (PMI)
Mortgage insurance is not the same as homeowner’s insurance. Even though the borrower is the one paying for it, it does not protect the borrower. It protect banks from foreclosures and short sales. Mortgage insurance is something that many home buyers will have to purchase. It is required for lenders without putting down twenty percent on a home.
Now that you understand the common mortgage terms, use our free mortgage calculator to find out what your monthly mortgage payment could be. You can also see a breakdown of your costs, including taxes, insurance, and PMI. Need advice choosing a lender? Contact Midge & Co, and we can recommend a lender based on your specific situation.