All I have to do is say "FHA" or "adjustable rate mortgage" and it's like a magic trick - people's eyes immediately glaze over. Of course, you're not supposed to know what any of it means; it's our job to navigate it for you. In the off chance, though, you want to understand mortgage speak, I'm going to decode some of the most common mortgage jargon for you.
Amortization
The schedule on how the loan is going to be repaid. The amortization schedule will have the amount borrowed, interest rate and term, and a monthly breakdown of how much interest you pay and how much is paid on the amount borrowed.
Closing
The most important part of the the homebuying process: the end. Closing is when the home is officially signed over to the homebuyer. This is also when the homebuyer will pay the down payment and closing costs.
Common Organizations
When you're getting a home loan, you'll encounter a variety of organizations that have their own loan programs. Here's some of the most common:
- FHA: Federal Housing Administration
- USDA: United States Department of Agriculture
- VA: Veterans Affairs
- Fannie Mae, or FNMA: Federal National Mortgage Association
- Freddie Mac: Federal Home Loans Mortgage Corporation (don't ask me where the H and the L went because I don't know either)
Debt-to-Income Ratio
Also referred to as DTI, this is a means by which your lender determines if you can afford your mortgage payments. Your lender will divide your monthly debt payments by your monthly income to give them a percentage to ascertain the risk of the loan.
Fixed Rate and Adjustable Rate Mortgages
You're probably well aware of interest rates, but did you know there's two different kinds? They're both somewhat self-explanatory:
- Fixed rate mortgage: the rate will be locked in for the entirety of your mortgage
- Adjustable rate mortgage (ARM): the rate will fluctuate depending on market movement
Fixed rates tend to be more expensive on average than ARMs because you're guaranteeing a rate throughout the life of your mortgage, while ARMs are cheaper because they don't have that guarantee. They tend to be more appealing to homebuyers when interest rates are lower. There's always the possibility that interest rates will rise, so the homebuyer has to decide if getting an ARM is worth the gamble.
Equity
Obviously, as you pay more on your home, the more of it you own. You're still considered the homeowner, but you lender has an interest until you pay off the loan. Equity, then, is the portion of the property you actually own.
Escrow
Escrow is an account that holds the money that will be paid for tax bills. When you pay your monthly payments, a portion of that amount will go into the escrow account, which is managed by your lender. They will send off the tax bills on your behalf when it comes time to pay them.
Lien
A lien is a legal claim or a right against a property. It gives an individual or an organization the right to take property or other legal action for unpaid debts and/or obligations. Liens also work as a public record for existing claims on a property.
Pre-approval and Pre-qualification
Two things that seem similar on the surface but are, in fact, very different. They both have something to do with estimating what you can borrow:
- Pre-qualification: Gives you a rough estimate of what you could borrow, does not mean you are approved for a loan
- Pre-approval: An in-depth look at your finances to give you a more definitive estimate of what you could borrow
Principal
This is the amount of money borrowed for the home loan.
Refinance
Refinancing is when you break up with your current home loan to go with a new loan with better rates and terms. For example, you got your loan when interest rates were higher and, now that they're lower, you want to refinance so you can take advantage of a better rate.
Underwriting
Underwriting is a part of the home loan process and is a very significant part at that. The underwriter takes your file and reviews all the information you've supplied to make sure everything is correct and conforming to your chose program's guidelines.
These are just some of the basics, but if you want even more mortgage jargon decoded for you, give your local Flat Branch family a call!
