As you consider purchasing a home it’s important to understand some of the terminology associated with it and the financing options that are available. We hope this information will help you navigate the process.
Points: One way to get a better interest rate is to pay what is known as “points.” A point (short for discount points) is prepaid interest assessed at the time of closing by the lender. Each point is equal to 1% of the loan amount and a portion is tax deductible.
Rate Locking: As you shop for a home and a mortgage to pay for it, interest rates can change. Make sure you ask your mortgage lender if you can “lock in” a current rate being offered. It’s good to lock in when rates are rising, but not when they’re dropping. The lock-in will last for a specified period and will expire if you haven’t closed before then.
Down payment: A down payment is the money a buyer pays upfront when purchasing a home. They are typically a percentage of the purchase price, ranging from as little as 3% to as much as 20%. It varies on the type of loan, but most loan types require some type of down payment. The buyer then finances the rest of the home price.
Closing Costs: The fees you pay when obtaining your loan.
Escrow: When you get a mortgage your monthly payments include the principal, interest, and balance. Your escrow account allows the company servicing your loan to take money out of it to pay taxes and insurance.
Earnest Money Deposit: When you find a home you want to buy earnest money acts as a deposit on that property. You make the payment when you sign the purchase agreement or the sales contract. It acts as protection for both the seller and buyer.
Amortization: The gradual reduction of debt over the term of the loan. Amortization occurs through the repayment of the principal.
Private Mortgage Insurance (PMI): Insurance to protect the lender in case the borrower defaults on the loan. With a conventional loan, PMI is required with a down payment of less than 20 % of the purchase price.
Annual Percentage Rate (APR): The yearly cost of a mortgage including interest and other expenses or charges such as private mortgage insurance and points expressed as a percentage.
Appraisal: An estimate of the value of the property made by a qualified professional called an appraiser and based on the appraiser’s knowledge, experience, and analysis of the property.
Assumable Mortgage: An assumable mortgage can be transferred from the seller to the new buyer. It generally requires a credit review of the new borrower and lenders may charge a fee for the assumption. If a mortgage contains a due-on-sale clause it may not be assumed by a new buyer.
Equity: The monetary difference between your mortgage balance and the actual market value of your home.
Ratios: When you apply for a mortgage, the lender will look at your entire financial picture to determine how much money they will let you borrow. Lenders use income and debt ratios to determine how much you will be able to borrow. Ratios are nothing more than comparing your income against the amount of debt you owe.
They’ll use several guidelines including one called the Debt-to-Income Ratio. This ratio compares your total debt to your total gross income (including your spouse’s) and is important when determining someone’s ability to repay a loan. Total debt includes your mortgage plus any auto loans, credit cards, and loans of any other kind.
Types of Loans and Payments
Fixed-Rate Mortgages – Conventional Fixed-Rate Mortgage Loans are typically available in terms of 15-, 20- and 30- year terms. Choose a fixed-rate mortgage if you prefer the certainty of a fixed monthly payment without the risk of the interest rate changing. Fixed-rate ensures that your payment principal and interest remain the same each month, which can make budgeting a lot easier. However, if your loan has an escrow account that is collecting for taxes and or insurance, that likely will change over time and cause your total monthly payment to change annually.
Bi-Weekly Program – This program offers the same certainty of the interest rate over the life of your loan as the Conventional Fixed-Rate Mortgage, except your mortgage payments are billed and collected on a bi-weekly basis. Instead of 12 payments per year, you are paying 26 bi-weekly payments per year. This is an effective way to build equity faster on your own. This program does require an Automatic Payment.
Low Down Payments – Historically, the standard down payment for mortgages has been 20%. Today many lenders realize how difficult it can be to come up with such a large amount of cash and will help buyers with special loan programs. Conventional Fixed-Rate Mortgages have a down payment option for as low as 3% for first-time homebuyers.
FHA – The Federal Housing Administration insures this mortgage. The required down payment can go as low as 3.5%. Customers like FHA loans because they have more liberal qualification requirements. This is a fixed interest rate, monthly payment loan option. Your monthly payment will include monthly payments towards collecting taxes, insurance, and monthly mortgage insurance premiums that likely will change over time and cause your total monthly payment to change annually. In addition, FHA allows all of your down payment to be a gift from a family member, relative, or non-profit organization.
VA – VA loans are guaranteed by the U.S. Department of Veteran Affairs and are available to veterans, active-duty military, reservists and for those that are eligible family member of a former service member. This is a fixed interest rate, monthly payment loan option with little or no down payment. Your monthly payment will include payments towards collecting for taxes and insurance, which likely will change over time and cause your total monthly payment to change annually. VA loans share similar liberal qualification requirements to FHA and often with lower closing costs. You can purchase your new home or refinance your current VA loan using the program.