Getting ready to purchase a home? Buying a house is likely the biggest purchase you’ll make during your lifetime. It’s also one of the most complicated ones. Your realtor or mortgage consultant will probably use terminology that may sound like a foreign language. Understanding those terms will not only give you peace of mind, but can help you save you money on your big purchase.
Let’s start of by looking at two of the most common types of home loans. Both have their strengths and weaknesses. Your mortgage consultant will help you identify which is the best fit for you.
- Fixed Rate Mortgages.These mortgages lock you into an interest rate for a set period of time, usually 15 or 30 years. Unless you refinance your loan later, you’ll be locked in at your rate even if the interest rates go down. For your first home, you’ll likely use a Federal Housing Administration loan (FHA). These loans are a good option for first time homebuyers who lack the finances for a traditional down payment.
- Adjustable Rate Mortgage. These loans are the opposite of a fixed rate. These loans are a good option if you’re looking to stay in a home only for a short time. Over time, the interest rates on the loan can jump dramatically. There are several variations of ARM loans, but they will all cost you more in the long run compared to a fixed rate mortgage.
Once you’ve found a mortgage to fit your needs, you’ll come across terms in it you’ll need to familiarize yourself with. Here a few:
- Amortization. When you make your monthly mortgage payment, the total minus your interest rate is applied to your principle. Your principle is the total amount borrowed. The process for paying down your principle is called amortization.
- Escrow. The collection of money or items by a third party for safekeeping is called an escrow. The most common uses in homeownership are for property taxes or homeowners insurance. Your escrow will likely depend on the type of mortgage you use.
- Good Faith Estimate. The list of charges you’ll need to pay on the day of closing are listed in the good faith estimate. This form will be given to you by your mortgage consultant.
- Short Sale. These are an alternative to filing a foreclosure. In these cases, the bank has agreed to take less money in a sale of a home than the current outstanding mortgage amount. The bank must consent to any sale.
- Truth In Lending. This form describes all the types of mortgages available to a borrower and is mandated by the Federal Government.
- Underwriting. The process for analyzing all of your documents by a lender is called underwriting. The underwriter will likely ask for bank statements, pay stubs and W2’s. For many people, this can be the most daunting part of getting a mortgage because of new government regulations.
These are just some of the terms you may come across during your home buying process. For reference, check out theMortgage Professor. Remember, your mortgage consultant and realtor are working for you. If you have questions or concerns about terms or the process you shouldn’t be afraid to ask!