12 Mortgage words you need to know before you buy your first home

12 mortgage words you need to know before you buy your first home

BY AMANDA SPURGEON

Making the move from renter to homeowner this year? Don’t get discouraged by tricky vocab. Here are some common words you might hear along the way:

1. Adjustable-rate mortgage (ARM)

An adjustable-rate mortgage is a loan with an interest rate that changes based on market fluctuations. ARMs may initially have a lower interest rate than a fixed-rate mortgage, but keep in mind that that rate could go up, which may result in a higher monthly payment.

2. Annual percentage rate (APR)

Your annual percentage rate, or APR, includes your loan’s interest rate, discount points (see 8) and other financing costs. The higher your APR, the higher your payment will likely be over the life of the loan. The APR is usually higher than the interest rate, because it encompasses multiple loan costs

3. Down Payment

Your down payment is the amount of money you’ll put toward the sale price of your future home. It reduces

the amount of money you’ll have to borrow. How much money you need to put down depends on the type of loan you choose. Mortgage lenders generally require between five and 20 percent, though some first-time home buyer programs offer mortgages with down payments as low as 3 percent.

4. Earnest money

Earnest money is essentially a cash deposit you make to the seller if they accept your offer to buy the home. It’s a way to tell the seller you’re good for the rest of the money and you won’t back out before the sale is completed. If you do back out, the seller can usually choose to keep your earnest money.

5. Escrow

Escrow is when an impartial third party holds on to something of value during a transaction. That earnest money check you write to the sellers? It’s held in escrow by a third party until you and the seller come to a final purchase and sale agreement so that no one can use it as leverage to affect the loan terms.

You’ll probably also hear about an escrow account from your mortgage lender. An escrow account is where your mortgage lender holds funds for your homeowners insurance and property taxes. They’ll collect them as part of your monthly payment and make the payments when they’re due. An escrow account allows the lender to guarantee that those payments will be made, therefore protecting their investment.

6. Fixed-rate loan

Fixed-rate mortgage is a loan with an interest rate that doesn’t fluctuate. You’re locked into the interest rate for the life of the loan, allowing you to accurately predict your future payments.

7. Good faith estimate (GFE)

A good faith estimate or GFE is a document from your lender that includes the breakdown of estimated payments due at the closing of your loan. This document not only allows you to plan ahead for these expenses, but also gives you a chance to shop around and compare closing costs with other lenders.

8. Point

Mortgage points are fees you pay directly to your lender at closing in exchange for a lower interest rate. This is also sometimes called “buying down the rate.” One point costs 1 percent of your mortgage amount or $1,000 for every $100,000.

9. Pre-approval

Pre-approval comes after you fill out a mortgage

application. Your lender will take a hard look at your financial situation—pull your credit, assess debt-toincome ratios and verify your employment. When it’s all said and done, you’ll be given a specific amount for which your mortgage is approved. You’ll probably also get a written contingent agreement allowing you to shop for homes at or below that dollar amount.

10. Private mortgage insurance (PMI)

PMI protects your lender if you default on your loan, but you pay the premiums. It’s a requirement for any mortgage loan with a down payment less than 20 percent. There’s really no benefit for the borrower, so it’s best to avoid it if you can.

If you opt for a lower down payment, you’ll have to make PMI payments until the balance of the loan reaches 78 percent of the home’s original value.

11. Lien

To sell or refinance a property you must have a clear title of ownership. A property lien is a legal claim on a residential property for the homeowner’s unpaid debts making the title unclear. If a lien is placed on a home’s title, the owner can’t legally sell, refinance or otherwise transfer the title of ownership to the home.

12. Market value

Market value is the price a home will most likely sell for in an open market transaction. This value is based on different elements of a home, like exterior condition, internal characteristics, comparable homes in the area and location. •