For those seeking a mortgage, especially if it’s for the first time, there seems to be a dizzying array of words and phrases associated with mortgages. When we hear “amortization,” or “closing disclosure,” it can be a bit intimidating. And if you feel that way, it’s okay. There are many others who are in the same boat as you.
No worries, we have you covered here. This blog is part 1 of a two-part series where we cover the most common terms associated with securing a mortgage. We certainly don’t want you up all night, staring at your bedroom ceiling, worrying about it. Once you grasp these concepts, you will have a greater understanding of the whole mortgage application process.
ARM – This acronym stands for an adjustable-rate mortgage. That simply means that at some point during the term of the mortgage, the interest rate will change. An ARM usually starts out with a lower payment than a fixed-rate mortgage. And after a certain period, the rate and monthly payment rate can increase.
Amortization – This means that with regular payments, the amount a borrower owes on a mortgage decreases over time. When a mortgage has become fully amortized, that means the loan has been paid off in full. Some loans do not fully amortize after a borrower has made all payments. And in that case, the borrower must make a lump sum or balloon payment at the end.
Annual income – This is a bit tricky. It sounds self-explanatory but it actually is the total income a borrower makes before taxes are taken out. Lenders will use this information and compare it with the debts the borrower has to determine the likelihood the borrower will have the means to keep up with payments.
Annual Percentage Rate (APR) – According to the Consumer Financial Protection Bureau, APR is a “broader measure of the cost of borrowing money than the interest rate.” Included in the APR is the interest rate, points, mortgage broker fees, and perhaps other charges you may incur to get the loan.
Appraisal fee – When a borrower applies for a mortgage, lenders will need a formal appraisal of a home to determine its value.
Closing disclosure – This is a required form that provides the final details of a mortgage, including interest rate, what monthly payments would be, and any other associated fees and costs.
Construction loan – This type of loan is where borrowers obtain a loan to pay for building a home or rehabbing it.
Conventional loan – These are some of the most common loans. They differ from others in that they are not insured by a government agency like Federal Housing Authority (FHA) or the Dept. of Veterans Affairs (VA). Conventional loans follow guidelines from government-sponsored agencies Fannie Mae and Freddie Mac, which include a loan limit.
Credit history – As the name suggests, this is a report that details a borrower’s credit accounts and history of payment. Credit reporting companies keep track of this data and provide it to lenders. A credit report based on a borrower’s credit history is a factor used to determine a borrower’s interest rate.
Credit score – A borrower’s credit score is a number that indicates how well that person has maintained their credit. The number is calculated through a formula called a scoring model based on the information in a credit report.
Debt-to-income ratio – This is a comparison of how much a person is in debt compared to his/her income. This is an important factor lenders use to determine a borrower’s ability to repay the amount in the loan.
Down payment – This is the money a borrower puts toward the price of the home upfront. Generally the more a borrower puts down, the more favorable rate they could receive.
Be sure to check our blog next week when we reveal part two and explore more concepts related to mortgages. In the meantime, our staff of experienced loan advisors is ready to guide you through the process as efficiently as possible. When you’re ready to speak with us, call 888-400-1373.
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