Congratulations! If you’re reading this, that means you’re considering buying a new home. There is nothing like having that one place where you feel the safest, most comfortable, and secure.
But if this is your first time buying a home, all the associated terms and phrases can be a bit confusing. You wouldn’t be the first to feel that way.
We are here to lend a hand. We have developed this two-part series (be sure to check out part 1 on our website if you haven’t already), to explain some of the most common concepts associated with mortgages. And you don’t have to have a degree in finance or accounting to understand.
Equity – this is the amount a home is worth after subtracting the amount left on the mortgage. It’s a reflection of how much money a borrower has paid into the home.
Escrow – This is an account a lender creates for a borrower to pay certain expenses like property taxes. With this kind of account, a portion of each monthly payment toward a mortgage goes into it for such expenses. However, not all mortgages have associated escrow accounts. If a lender doesn’t set up such an account or doesn’t offer the option, the borrower is responsible for paying such expenses directly.
Fannie Mae – This is an organization that many have heard of but don’t quite know what role it plays in mortgages. Fannie Mae (The Federal Mortgage Association) provides more access to lending funds by buying mortgages from lending institutions. Though it was created by Congress during the Great Depression, it is not a government agency. It is what’s called a government-sponsored enterprise and it is under the conservatorship of the Federal Housing Finance Agency.
FHA Loan – These mortgages are issued through private lenders but are insured by the Federal Housing Administration. Such loans have borrowing limits but allow for lower credit scores and lower down payments.
Fixed-Rate Mortgage – This is opposite from the adjustable-rate mortgage we covered earlier. These loans’ interest rates do not change during the term of the loan.
Freddie Mac – This is The Federal Home Loan Mortgage Corporation, which functions similarly to Fannie Mae. It, too, is a government-sponsored enterprise that purchases mortgages and either puts them in its portfolio or packages them and sells them to other investors. The only difference is Freddie Mac purchases mortgages from smaller lenders while Fannie Mae buys them from larger entities.
Home Equity Line of Credit (HELOC) – These are often confused with home equity loans. A HELOC is a line of credit that allows homeowners to borrow against their home’s equity (see “equity” above). One difference between this and a home equity loan is the distribution of funds. For a HELOC, homeowners have a draw period in which they can borrow on a credit card. Once the draw period ends, the homeowner must begin paying the funds back.
Home Equity Loan – For this type of loan, it is similar to a HELOC in that homeowners borrow against the equity in their homes. The difference is that home equity loans distribute the funds in one lump sum and repayment is done with a fixed interest rate. HELOCs repayment usually come with adjustable interest rates.
Interest Rate – This is how much borrowers will payback on their mortgage annually. It is expressed as a percentage. So, if a borrower has an interest rate of 3 percent, the borrower will pay 3 percent of the loan amount each year.
Jumbo Loan – This is a type of conventional loan. While conventional loans have a borrowing limit of $548,250 for most of the country (some areas have higher limits), a jumbo loan is a loan that exceeds the limit set by Freddie Mac and Fannie Mae. These types of loans may require higher credit scores, more of a down payment, and may carry higher interest rates.
Mortgage Insurance – This is a type of insurance policy that protects lenders in the event borrowers default on their loan. Most often it is required of borrowers who put down less than 20 percent as a down payment. This can apply to conventional loans, USDA or FHA loans.
Mortgage Term – This refers to the length of repayment for a mortgage. Depending on the loan, terms can vary. The most common terms are 10, 15, 20, or 30 years.
Principal – This is the amount of a borrower’s loan to be paid back minus the interest rate.
USDA Loan – These types of loans are for homebuyers in rural areas. Private lenders provide the funds through mortgage programs through the U.S. Dept of Agriculture’s Rural Housing Service.
VA Loan – These loans are for current members of the U.S. military or veterans. They are backed in part by the U.S. Dept. of Veterans Affairs. Like USDA and FHA loans, the VA doesn’t loan the money. It sets the qualifications for such loans.
Do you still have questions? No problem. Better Lending has a team of experienced loan advisors who are ready to answer them, no matter how many you have. We are available to make the process of securing a mortgage or refinance as painless as possible. Be sure to call 800-400-1373 to speak with our team.
Borrowers are allowed to have Private Mortgage Insurance (PMI) removed from a home loan in two ways, automatically or by request.
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