Before you start looking at real estate listings, you may want to familiarize yourself with the lingo your mortgage lender will use when you apply for a loan. The more you know, the easier it will be for you to go through the process and get the home you desire. The following are some common terms you can expect to see when you apply for a mortgage.
Adjustable Rate Mortgage
Also called an ARM, this type of loan does not have a fixed interest rate. Instead, it automatically adjusts or floats with changes in the index. Most ARMS have a fixed rate for a set period of time. Once this period elapses, the rate can raise or lower depending on the terms of the loan.
Amortization
This is a schedule that shows how much interest and principal you pay each month. In the early years of your mortgage, a significant portion of your payments will go towards paying the interest on your loan.
Annual Percentage Rate
Also called the APR, is a broader measure of the cost to you of borrowing money, also expressed as a percentage rate. In general, the APR reflects not only the interest rate but also any points, mortgage related fees, and other charges that you pay to get the loan. For that reason, your APR is usually higher than your interest rate.
Appraisal
The appraisal is essentially an evaluation that shows how much the home is worth on the market. This is usually required by the lender and used as a basis for determining your LTV (loan-to-value) ratio.
Appreciation
This is the value of your home after it increases in value due to market conditions. When your home is worth more after you buy it, it has appreciated in value. When it’s worth less, it has depreciated in value.
Assessed Value
Your assessed value is determined by your assessor’s office. It is used to determine the taxable value of your property.
Assumable Mortgage
Some mortgages can be transferred from the seller to a buyer that meets certain qualifications. For instance, some VA and FHA loans are assumable by prospective buyers.
Bridge Loan
A bridge loan is a short-term loan used to purchase property until a conventional mortgage can be obtained.
Capital Gains
Capital gains are paid on a property by the seller at the time of sale. These are based on the profit an individual makes from the sale of real estate.
Closing Costs
These are the expenses you must pay to close the mortgage. These costs include attorney’s fees, recording fees, title fees, loan origination fees, appraisal fees, points, etc.
Credit Score
Your credit score is determined by the three main credit bureaus. These are Equifax, Experian, and TransUnion. The higher your credit score, the better the mortgage terms you can secure from your lender.
Debt-to-Income Ratio
Your lender will qualify you for a loan based on a number of factors, including your debt-to-income ratio. This number adds up your total set monthly expenses such as student loans, existing personal loans, mortgage, etc., and compares it with your monthly income.
Down Payment
You will have to put down between 3-20% in order to secure a mortgage on a home. For most loans, you will need to pay mortgage insurance until you have at least 20% equity built up in the home.
Earnest Money
This is money the buyer can choose to put up when making an offer on a home. This money shows the seller that the buyer is willing to make a good faith effort to close the sale.
Escrow
Escrow accounts are held by the mortgage lender and used to pay property taxes, insurance, and other expenses required for closing the deal.
Loan-to-Value
The loan-to-value (LTV) ratio is a financial term used by lenders to express the ratio of a loan to the value of a property being purchased or refinanced.
Escrow
Escrow accounts are held by the mortgage lender and used to pay property taxes, insurance, and other expenses required for closing the deal.
Mortgage Insurance
This compensates the lender in case you default on your loan. Once you have 20% equity in the property, you can cancel your mortgage insurance. As of 2018, these payments are no longer tax deductible on most loans.
Points
Points are percentage points of the amount of the loan. You can pay these to the lender when you close on the property in exchange for a reduction in the interest rate. By essentially buying down the interest rate, this can lower your monthly payments and reduce the amount of interest you will pay over the life of the loan.
Pre-Approval
Becoming pre-approved for a mortgage shows the buyer that you have the ability to purchase the home. When you are pre-approved, you have shown the lender that you meet the necessary income and asset requirements to complete the sale.
Title Insurance
Title insurance protects the lender by demonstrating that the home is free and clear of any liens that could impact the mortgage.
Team Wiest can help you navigate the terminology of the mortgage process. We invite you to contact us at (615) 553-4164 to learn more about our services and the support we provide as you move closer to your home ownership goals.