When you’ve decided that you want to make the investment of purchasing a home, chances are you will have to navigate through an industry marked with language that you just don’t understand. If this is your first time making such an important and expensive investment, you might be overwhelmed by the terminology that you’re getting introduced to.
In this article, we’ll dissect some of these confusing terms and phrases so that you’ll find the steps toward home ownership a bit less mystifying.
Mortgage Terms 101
Adjustable Rate Mortgage – A mortgage that has an adjustable rate is one that has a fixed interest rate only for a certain period of time: usually one to five years. For this period the rate will stay unchanged, but after that it will increase or lower based on an index.
Amortization Period – This refers to the time in which it is expected for the mortgage to be paid in full.
Closing Costs – Home buyers must expect to pay various fees associated with the closing of the sale. This includes attorney and appraisal fees, recording fees, and a multitude of other prospective costs.
Debt-to-Income Ratio – Lenders will evaluate whether or not a client is capable of repaying their loan by assessing their debt-to-income ratio. This calculation weighs the client’s monthly recurring debts to their income to make this determination.
Down Payment – This is the amount that you will pay, as the buyer, and separately from your mortgage loan. Most lenders require a down payment before they will facilitate a mortgage loan.
Equity – If you subtract the amount of money you’ve paid toward the home from the total value of your home, the resulting number is the equity. The equity of a home increases as you make more payments toward the loan.
Fixed Rate Mortgage – Fixed rate mortgages do not experience any fluctuations in interest rates. An interest rate is set for the life of the loan and is not subject to change at any time.
Homeowner’s Insurance – A homeowner’s insurance policy is a necessary part of purchasing a home. It financially protects homeowners in the event of a devastating event, like a fire, and is typically required.
Principal – When you pay toward your mortgage each month, some of your funds are going to the interest and some are going to the principal. The principal is the value of the loan itself, sans interest.
Private Mortgage Insurance – If a buyer is unable to produce a down payment of 20% or more, the lender may bridge the gap but still require the buyer to purchase private mortgage insurance. This insurance protects the lender in the vent of the buyer not being able to repay their loan.