Decode the Important Home Buyer Terms You Need To Know
Adjustable Rate Mortgage (ARM).
A type of mortgage rate loan whose interest rate changes periodically up or down, usually once or twice a year.
Annual Percentage Rate (APR).
Everything financed in your mortgage loan package (interest, loan fees, points or other charges) expressed as a percentage of the loan amount (usually slightly above the actual interest rate alone).
A loan in which the lender is willing to “transfer” from the previous owner of the home to the new owner, sometimes at the same interest rate, sometimes at a new rate. An assumable loan can make your home more attractive to buyers when you want to sell.
Costs the buyer must pay at the time of closing in addition to the down payment: including points, mortgage insurance premium, homeowners insurance, prepayments for property taxes, etc. Closing costs average 3% - 4% of the loan amount. If you're buying a HUD Home, you can request they be paid by HUD, if the sales incentive is offered.
See Also: When You Budget To Buy A Home - Don't Forget To Include "Closing Costs"
A condition put on an offer to buy a home; such as the prospective buyer making an offer contingent on his or her sale of a present home.
A type of mortgage not insured by either the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA), and thus usually requiring a 10 percent - 20 percent down payment.
Funds submitted with an offer to show “good faith” to follow through with the purchase. Earnest money is placed by the real estate broker in an non-interest bearing escrow/trust account until closing, when it becomes part of the down payment or closing costs.
A lender determines how much equity you have in your home by taking the appraised value of the home and subtracting any mortgage debt.
For example: if your house is valued at $150,000 and your mortgage balance is $100,000, you have $50,000 equity in the house.
A procedure in which documents or transfers of cash and property are put in the care of a neutral, third party, other than the buyer or seller (the escrow account). The escrow officer sees to it that all items in the purchase contract are carried out and appropriate parties are paid.
With a fixed-rate mortgage, your interest rate stays the same for the term of the mortgage, which is usually 30 years. Your principal and interest payment remains stable, making it easier to plan a monthly budget. However, initial interest rates tend to be higher than with other types of loans.
In this type of government loan, the Federal Housing Authority insures the lender against loss in case the home buyer defaults on the loan. This program was set up so that Americans who can't afford the 10 percent to 20 percent down payment required by most lenders can still buy a home. Many homes can be bought with FHA-insured mortgages, which allow you to purchase the home with a low down payment. You do not have to be a first-time buyer in order to qualify for an FHA loan
good faith estimate.
A "good faith estimate" of closing costs gives you a rough idea of the fees the lender will charge you when you apply for a loan. Standard fees are interest adjustment, title insurance, recording fees, and survey fees. There are also many variable fees, including application fee, points, appraisal, and credit report fees, and closing and settlement fees.
Insurance that protects the homeowner from “casualty” (losses or damage to the home or personal property) and from “liability” (damages to other people or property). Required by the lender and usually included in the monthly mortgage payment.
Loan Origination Fee.
A fee charged by the lender for evaluating, preparing, and submitting a proposed mortgage loan.
A point is an amount equal to one percent of the principal amount being borrowed. The lender may charge the borrower several “points” in order to provide the loan. Remember, points are negotiable and are sometimes tied to your interest rate. Paying more points to get a lower interest rate may be a good idea if you plan to take a long term loan.
Any amount paid to reduce the principal balance of a loan before the due date. Payment in full on a mortgage may result
- from a sale of the property,
- the owner's decision to pay off the loan in full
- a foreclosure
In each case, prepayment means payment occurs before the loan has been fully amortized.
Early prepayment of your loan may result in a penalty to be paid the lender. Be sure to ask about prepayment conditions in your mortgage and read all the documents carefully.
Private Mortgage Insurance (PMI)
Or Mortgage Insurance Premium (MIP) is a charge paid by the borrower (usually as part of the closing costs) to obtain financing, especially when making a down payment of less than 20 percent of the purchase price, for example on an FHA-insured loan.
Taxes (based on the assessed value of the home) paid by the homeowner for community services such as schools, public works, and other costs of local government. Paid as a part of the monthly mortgage payment.
Protects lenders and homeowners against loss of their interest in property due to legal defects in the title.
A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a mortgage, including the annual percentage rate (APR), total finance charges, amount financed, total payments, schedule of payments, late payment charges, prepayment penalty (if any), assumption options (which indicate the lender's willingness to allow a future buyer to take over your original loan), and other charges.
A loan guaranteed by the Department of Veterans Affairs against loss to the lender, and made through a private lender.
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