Buying a home is such an exciting time! It can also be a nerve-wracking time, especially when you’re trying to juggle all of the things needed in preparation for your new home.
If you are buying a home, familiarize yourself with the following common mortgage terms to make your home buying process easier to understand!
- 5/1 Adjustable Rate Mortgage – A 5/1 adjustable rate mortgage (ARM) or 5-year ARM is a mortgage loan where “5” is the number of years your initial interest rate will stay fixed. The “1” represents how often your interest rate will adjust after the initial five-year period ends.
- Ability-to-repay rule – The reasonable and good faith determination most mortgage lenders are required to make that you are able to pay back the loan.
- Adjustable Rate Mortgage (ARM) – A mortgage that does not have a fixed interest rate.
- Amortization – An accounting technique used to periodically lower the book value of a loan or an intangible asset over a set period of time. In relation to a loan, amortization focuses on spreading out loan payments over time.
- Closing Disclosure – A multiple-page form that provides final details about the mortgage loan you have selected which includes loan terms, projected monthly payments, and closing costs.
- Construction loan – A construction loan is a short-term loan used to finance the building of a home or another real estate project.
- Conventional loan – One that is provided by a private lender such as a bank or credit union. With this type of loan, you get the money you need up front, and pay back the lender over the course of your mortgage.
- Deed-in-lieu of foreclosure – An arrangement where you voluntarily turn over ownership of your home to the lender to avoid the foreclosure process. If you don’t want or need to hold on to the home, then a short sale could be another alternative to a deed in lieu of foreclosure or a foreclosure proceeding.
- Demand Loan – A loan that a lender can require to be repaid in full at any time. This condition is understood by the lender and the borrower from the outset.
- Earnest Money – A sum of money you put down to demonstrate your seriousness about buying a home.
- Escrow – An account set up by your lender to pay home-related expenses like property taxes and home insurance. A portion of your monthly payment amount will be held in this escrow account. If your mortgage does not have an escrow account, you will pay these expenses directly.
- FHA loan – A government-backed mortgage insured by the Federal Housing Administration.
- Home equity line of credit (HELOC) – A line of credit secured by your home that gives you a revolving credit line to use for large expenses or to consolidate higher-interest rate debt on other loans such as credit cards.
- HUD – Department of Housing and Urban Development is the Federal agency responsible for national policy and programs that address America’s housing needs, that improve and develop the nation’s communities, and enforce fair housing laws.
- Loan-to-value ratio – A measure comparing the amount of your mortgage with the appraised value of the property.
- Margin – The money borrowed from a broker to purchase an investment and is the difference between the total value of an investment and the loan amount.
- PITI – Principal, Interest, Taxes, and Insurance, known as PITI, are the four basic elements of a monthly mortgage payment. Your payments of principal and interest go toward repaying the loan.
- Private Mortgage Insurance (PMI) – Private Mortgage Insurance is mortgage insurance that banks and financial institutions require of certain buyers to ensure that the lender will be protected in the case the borrower defaults on their mortgage payments.
- Right of rescission – The right of a consumer to cancel certain types of loans. If you are buying a home with a mortgage, you do not have a right to cancel the loan once the closing documents are signed. However, if you are refinancing a mortgage, you have until midnight of the third business day after the transaction to rescind (cancel) the mortgage contract.
- Subprime mortgage – A loan that is meant to be offered to prospective borrowers with impaired credit records.
When you start your home buying process, refer back to this home buyer’s glossary. If you have questions, one of our real estate bankers at Deerwood Bank would love to help you choose a loan that fits your unique situation. We want to provide as much help as we can to make sure you have the best home buying experience. As always, we are here to help you!