Buying a Home? Know These 12 Mortgage Terms
It’s official. You’ve looked at your finances, considered your needs, and made the decision: You’re ready to buy your very first home.
The homebuying processis definitely exciting, but for many first-time buyers, the prospect of taking out a mortgage is a bit nerve-racking too. After all, it’s a major financial commitment. There are many types of mortgages to choose from and some important details to consider.
As with any new subject, the best way to begin is by familiarizing yourself with some of the most important concepts. This will help you know what to expect, and what questions to ask, when you talk with your lender. Here are 12 key mortgage terms to get you started.
This stands for annual percentage rate, and it shows how much your loan will cost annually (factoring in your rate as well as other fees). When considering a mortgage, the APR will give you the clearest picture of how much it will cost over the long term.
Before the keys are in your hands, there are a number of expenses you’ll need to take care of. Mortgage closing costs include your down payment and discount points, lender fees, title insurance, and the deposit and fees for your escrow account. To prevent any surprises for you (or your finances), your lender will provide a Closing Disclosure form prior to closing day. This provides full details about your loan terms, projected monthly payments, and each closing cost.
A conforming mortgage meets the lending criteria set by Fannie Mae and Freddie Mac, two government-backed institutions that make financing more available and affordable for homebuyers. Conforming loans must follow specific guidelines when it comes to the borrower’s income, credit score, down payment, and how much they can borrow. For those who don’t qualify for a conforming loan, there are other government programs that can help (see below).
If you have the cash, making a higher down payment now can be a great way to save money later. You can do that with discount points, which are optional fees you can pay your lender in exchange for a lower rate.
Your down payment helps show your lender that you’re serious about your purchase and will likely be a responsible borrower. Conventional mortgages typically require a down payment of 5 to 10 percent of the home’s purchase price.
Along with your mortgage principal and interest, you’ll need to plan for two other long-term expenses: homeowners insurance and property taxes. To make sure these get paid on time and help simplify your payments, your lender will set up an escrow account with a predetermined amount of funds to cover these costs. Funds to maintain your escrow balance will come out of your mortgage payments.
Government Homebuyer Programs
Owning a home is often key to long-term financial stability, but some people cannot meet the requirements for conventional mortgages. If you have limited funds or a less-than-stellar credit score, the USDA, FHA (Federal Housing Administration), VA (Department of Veterans Affairs), and other agencies have special programs that could make it easier to qualify for a mortgage and get a more affordable rate and down payment.
Wondering if you qualify for one of these government programs? Talk to our team.
If it’s the right time to buy, one of the first steps is to get pre-approved for a mortgage. By providing some important financial details, including info about your income, credit score, employment, and current expenses, your lender can tell you what kinds of mortgage you qualify for, how much you can borrow, and the rate you’ll pay. This is a crucial tool during the house hunting process because it gives you a better picture of what you can afford. And, having a pre-approval letter from your lender shows sellers you’re a serious buyer, giving you a potential competitive advantage if you put in an offer.
At American Heritage, applying for pre-approval is easy and free, and you can even do it online.
Private Mortgage Insurance (PMI)
You may have heard that 20% is an ideal down payment. If you have a conventional loan, paying 20% up front lets you skip the requirement for PMI, which is coverage to protect the lender if a borrower fails to pay back their loan. If 20% is too steep for you, there’s good news: Once your loan balance drops below 80% of the home’s value, the PMI requirement goes away.
Mortgages fall into two basic categories based on how their interest rate works.
- Fixed-rate mortgages lock in one rate for the whole term, giving you predictable monthly payments. This can help you simplify your finances and avoid paying a higher rate. But, fixed rates are often higher than the starting rates for ARMs.
- Adjustable-rate mortgages (ARMs) have a rate that updates periodically. Many ARMs start with a lower fixed rate for a number of years before switching to a variable rate. This option may save money up front, but you could end up paying more over time. ARMs are usually best for those planning to move or refinance their mortgage.
This is how much time you have to pay off your home (a process called amortization). You may see repayment terms as short as 10 years or as long as 30+ years. Most first-time buyers opt for the classic 30-year, which keeps payments lower by spreading them out over a longer term. But, keep in mind that this long term also allows more time for interest to accumulate.
This legal term refers to your ownership of the property. When the title is transferred from the seller to the buyer, it’s recorded by your county or city government. To help protect you and the lender in case of a dispute over the property, a title services company will assist with the purchase of your home, and your lender will also require title insurance.
Homebuying Can Be Complicated. We Make It Simpler.
Along with having the right information about home financing, it’s crucial to work with a team that can help you choose the mortgage that’s right for you, then guide you through every step of the process.
To learn more about our money-saving options for first-time homebuyers, as well as our full-service real estate firm, reach out to our team at American Heritage.