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When buying or refinancing a home you will hear many terms, some of which might be unfamiliar to you. Understanding these terms will help you complete your purchase or refinance more efficiently and with less stress.
Here, we will break down the specifics of mortgages and refinancing your home and familiarize you with the terms you will hear.
Types of Mortgages
A mortgage is a loan that you take out to buy a home. There are several types of mortgage loans. Some of the most common include:
Adjustable-rate mortgage (ARM): also referred to as a variable rate mortgage, an ARM a type of home loan where the interest rate changes over-time. This means that the monthly mortgage payments might go up or down, depending on the rate adjustments.
Conforming loan: a mortgage that isat or below the loan limits set by the Federal Housing Agency (FHA), and that meets the underwriting guidelines of the federally backed mortgage enterprises Freddie Mac and Fannie Mae.
Conventional mortgage: a mortgage that is backed by a private lender, not a government entity like an FHA or VA loan.
FHA loan: backed by the Federal Housing Administration, an FHA loan usually has lower down payment requirements and less strict credit score limits than conventional loan programs.
Fixed-rate mortgage: a home loan with an interest rate that stays the same for the entire mortgage term. The monthly principal and interest payment do not change over the life of the loan.
Home equity line of credit (HELOC): a second mortgage where the homeowner uses the equity in their property to get a loan from the lender.
Jumbo loan: when a loan amount is higher than the limits set by the FHA the lender considers it a jumbo mortgage.
Nonconforming loan: is a loan that does not meet the conforming loan standards. Examples of nonconforming loans include jumbo mortgages, low down payment loans, and loans for individuals with high debt-to-income ratios.
USDA mortgage: backed by the United States Department of Agriculture, the government designed this type of loan to increase home ownership in rural parts of the country.
VA loan: sponsored by the Veterans Administration, a VA loan is a mortgage offered to qualifying veterans. VA loans do not require a down payment.
Types of Refinance Loans
When you refinance your home, you trade your current mortgage for a new loan. There are several ways to refinance.
Traditional: when you refinance your conventional loan for a lower interest rate, to change the loan term, or to switch mortgage types.
Cash-out: using equity in a mortgaged property totake out cash, resulting in a new loan for a higher amount than the current mortgage.
Cash-in when the borrower pays cash to lower the principal loan amount of the refinanced mortgage. This results in lower monthly payment and interest rates.
Streamline: this type of refinancing is for government-backed loans and has a shorter and less in-depth underwriting process than traditional refinancing.
General Mortgage Terms
Some of the most frequently used terms when buying or refinancing your home might include:
Amortization: calculation of the monthly principal and interest payment and how much it reduces the total loan balance over the life of the mortgage.
Annual percentage rate (APR): different from the interest rate, the APR for a mortgage includes the interest rate, discount points, and any lender fees.
Discount point: when a borrower pays money to the lender at closing to reduce the interest rate on their mortgage. For example, one mortgage point costs 1% of the loan balance and reduces the interest rate by .25%.
Foreclosure: when a borrower defaults on their mortgage payment and the lender sells the home to recover the balance owed.
Interest rate: the amount a mortgage lender charges the borrower to have their loan financed. They determine the interest rate using several factors, including credit score, type of mortgage, loan term, down payment amount, and the price and location of the property.
Lender: the financial institution that grants a mortgage.
Mortgage broker: a broker matches a borrower with a mortgage lender that best suits their needs for a home loan.
Principal: the overall balance still owed on a mortgage loan, not including interest and other fees.
How Do You Qualify for a Mortgage
When applying for a mortgage, there are several factors that lenders will use to determine if they approve a home loan for a borrower. Some of these include:
Credit report: the information a lender requests from a credit bureau that gives the borrower’s credit score, debts, credit inquiries, and payment history.
Credit score: the three-digit number on a credit report that represents a borrower’s creditworthiness including unpaid debts, payment history, credit utilization, inquiries, foreclosures, and bankruptcy information.
Debt to income ratio (DTI ratio): monthly income compared to the amount of debt a borrower has.
Down payment: a percentage of the purchase price of the home paid upfront. This amount reduces the principal amount owed on the mortgage. Different loan types have different down payment requirements.
Underwriting: the process a lender uses to qualify a borrower for a mortgage.
Home Buying Process
Buying a home has many steps, and there are phrases you will hear from the beginning of the process all the way through closing.
Fair market value (FMV): the amount a property would sell for during normal market conditions determined by comparable home values, appraisal amount, and market trends.
Appraisal: the estimate a licensed appraiser makes about how much a home or property is worth.
Earnest money: also known as a good faith deposit, a borrower gives this money to a seller to show they are serious about following through with the purchase.
Home Inspection: different from an appraisal which estimates the value of a home, a home inspection determines the condition of the home after an inspection of the home.
Homeowner’s association (HOA): a private entity that enforces rules and policies for a community. There is sometimes a monthly fee associated with owning a home in an HOA community.
Private mortgage Insurance (PMI): a monthly insurance payment required for a home where there is less than 20% equity. This insurance protects the lender if a borrower defaults on their loan payments.
Closing on Your Loan
Making it to the closing table is the last step before owning your home or completing your refinance. Some terms you might hear related to closing include:
Closing: the closing of a mortgage transaction is the last step in obtaining a home loan. It is when the borrower signs the final paperwork, pays closing costs, and the lender officially funds the loan.
Deed: the deed is a signed document showing who has ownership rights to the property. The lender usually holds possession of the deed until the borrower pays the mortgage in full.
Origination fee: a fee charged by the lender to cover the costs of processing a home loan.
Title: at closing, the seller transfers the title to the buyer, showing they now have legal ownership of the property. A title search will show if the seller has the legal right to sell the property to the borrower
Title insurance: an insurance sometimes required to protect the buyer and lender if any title issues come up after the sale closes.
Buying a home doesn’t have to be a confusing process. The most important thing is to research different mortgage options and ensure you are comfortable with the terms you will hear throughout the process.