Don’t let mortgage terminology fool you! When you are ready to purchase a home, most all of us will need to get a loan, called a mortgage. This transaction can be quite complex, but have no fear we have complied a list of the top mortgage terms to know, making your mortgage process as smooth as possible.
Once you have squared away the purchase price on your home, you will need to make a down payment. This down payment is the amount of cash you need to bring to cover the remaining amount on your property. Typically, a down payment is 20% of the purchase price, therefore if you are buying a home for $200,000, your expected down payment would be $40,000. Although, a 20% down payment is the standard, it is definitely not the rule, There are products that have a very low down payment, FHA has a 3.5% down payment and if you are a veteran or member of the military, the down payment is 0%! If you do find yourself in the position of struggling with a large deposit, remember you have various mortgage options and there are a lot of down paymen assistance programs that can help. Just be warned mortgages that require less than 20% down typically compensate for than with much higher interest down the road.
Congrats on making your down payment! The remaining balance of your house is called the principal. The principal gets paid off in monthly payments over the lifetime of the loan, which anywhere from five to 30 years. Most mortgages typically being 30 years.
The borrower always pays the price! The money that you owe is then comprised into a percentage based off of the principle amount you borrowed. Interest rates can very depending on homebuyer eligibility, an example of this would be a 5% interest rate on a 30-year fixed-rate mortgage.
Consider fixed rate mortgages your reliable friend! In a fixed-rate mortgage once you lock in your interest rate with your lender, that rate is locked for the remainder of your loan, which can be negative or positive depending on the rate of your loan. Although, you can have peace of mind that you won’t have any high adjusting payments down the road. The trick to fixed-interest rates is shopping around and ensuring the lowest possible rate. Notice, fixed-interest rates are almost always higher than that of an adjustable-mortgage, but the uncertainty of sudden rate hikes makes a strong argument for this loan, providing the homebuyer peace of mind.
Adjustable-Rate Mortgage (ARM)
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As the name suggests, this mortgage loan, adjusts by the lender in accordance with current interest rates, after its initial introductory period which can last anywhere between three, five, seven or 10 years. This initial interest rate is usually lower than that of a fixed-interest mortgage, and since the interest rate is low, the average amount you pay monthly will be too. Although, when your rates adjust, if they do go up, so will the amount that have to pay monthly on your mortgage. Typically, these adjustable-rate mortgages have a cap that limit how high your rate can go, reducing your risk.
An ARMs cap a day keeps the interest away! The cap limits how high the bank can increase the interest rate on your loan, therefore keeping payments manageable. Although, you may pay an additional amount for this cap feature.
When you in the process of negotiating the terms of your loan, no matter what type of loan you have, you are subject to the ever changing rates of the financial market. Meaning the rates, you were so excited about three days ago have now changed and no longer look affordable. Once you have have a rate that you want, you need to lock it in with the bank. This rate lock will remain in effect until the deadline on the loan, which is typically 60 days.
So you arrive at closing, you’re ready to sign all the paperwork and receive your keys, but you’re not done yet, you still need to cover you closing costs. The closing costs are the various fees for the services and processes that let you mortgage take place. You will know of these fees way in advance! The amount listed should be something you are already familiar with, as the closing disclosure you receive three days after your application, will lay out these various fees.
Points are an optional closing cost fees, that allow the borrower to pay off the principal to offset the interest amount. One point equals 1% of the loan amount, therefore $1,000 on a $100,000 mortgage. By paying a larger portion of principal at closing the lender will lower your interest rates over the life of the loan.