Clustrmaps
Mortgage Terms You Should Know
Getting a mortgage is hard enough without having to worry about what everything means. Here are ten of the most common terms used in mortgage discussions, along with clear explanations of what they are, and how they affect your home buying experience.
Amortization
Lenders don’t typically spread out your interest payments evenly over the course of your mortgage. In most cases, you are paying a higher amount of your interest during the first few years, and a smaller amount toward your principal. As you pay off more of your mortgage, this begins to even out, and then, finally, your payments go mostly towards your principal, and only a very small amount will go towards the last remaining portion of the interest you owe.
Closing
Closing on a home is the day that every new homebuyer looks forward to. It is the day that the last bit of paperwork is signed, the last of the fees are paid, and the home is officially theirs. The seller gets their money at the same time. This is the final step of a home buying experience, where the title for the home is officially transferred to the new owner. Closing is also sometimes referred to as the settlement.
Credit Score
This is the magic number, or numbers, when you are looking for a mortgage. Your credit score is determined the following way:
- 30% — Payment history.
- 30% — Current debt amounts, and the ratio of available credit versus debt.
- 40% — Number of recent inquiries for your credit score, length of credit history, and types of credit.
This is a rough guide, and each credit bureau calculates your score a little differently
Down Payment
In order to buy a home, you need a down payment. The absolute minimum is 3.5% of the total cost of the home. The recommended amount is at least 20%. For a $120,000 home, this is $24,000, which is a lot, but a higher down payment can save you thousands of dollars in interest and private mortgage insurance (see below).
Interest
Banks don’t lend money for free. They are a business, and they want to make money. The interest you pay on a home is for the money that you have borrowed from your lender, and can range from 3%, if you are very lucky, to over 10%. A lower interest rate requires a great credit score and a decent down payment.
Interest rates can be either fixed (they never change, unless you refinance) or variable. Variable interest rates can change, going either up or down, during the course of a mortgage. If they go down, you pay less. If they go up, you pay more.
Origination Fee
The lender doesn’t prepare a loan for free. An origination fee (origination is the term used to describe the printing, putting together, and signing of any loan documents) is usually charged at closing. The origination fee may be paid by either the buyer or seller, or, alternatively, split between the two. It is usually calculated on the point system. A point is 1% of the principal, and is one of the most common amounts requested.
Pre-Approval
After completing a credit check, and having you fill out paperwork for a mortgage, some lenders will pre-approve home buyers for a certain amount of credit. This is convenient, because it allows the buyer to move quickly on a home as soon as it becomes available, instead of trying to get approved after an ideal home is found.
Principal
This is the amount you have actually borrowed from the lender. It is the total cost of the home minus your down payment. For the $120,000 home, with the $24,000 down payment, your principal is $96,000. This money will be paid back over the course of your mortgage.
Private Mortgage Insurance
If you cannot put at least 20% down on a home, as of July, 2009, you will have to have private mortgage insurance. This usually runs an additional 3%, or more, of your loan total, and protects the lender in case you default on your mortgage. This can cost new homeowners anywhere from a couple hundred to over a thousand dollars a year.
Term
Term refers to the length of your mortgage. Normal term lengths are 15 years, 20 years, and 30 years, although these are not the only options. The amount of your monthly mortgage payment is determined, in part, by the term length of your mortgage itself.
Knowing the meaning of these ten terms will make applying for a mortgage much easier. If you would like a more in-depth glossary, check out the one available from the US Department of Housing and Urban Development.
[...] news by Chris Gmyr US Fidelis – Ran payment too early and caused my mortgage pmt to … [...]
[...] news by Chris Gmyr What is an 80-10-10 mortgage loan? | billeater.com [...]
[...] Mortgage Terms You Should Know | Chris Gmyr [...]
[...] Mortgage Terms You Should Know | Chris Gmyr [...]
[...] Mortgage Terms You Should Know [...]
[...] Mortgage Terms You Should Know [...]
[...] Mortgage Terms You Should Know | Chris Gmyr | Syracuse Real Estate [...]
[...] Mortgage Terms You Should Know | Chris Gmyr [...]