7 Key Mortgage Terms Explained
Buying a home is likely one of the biggest financial transactions of your lifetime, but that doesn’t mean it has to be a nerve-racking process. If you do your homework and learn the lingo, you can navigate through the home buying process smoothly and with confidence.
1. Down payment: The initial amount of money you will put down to pay for a home at the time of purchase.
Traditionally, down payments are 20 percent of the purchase price. If you don’t have that much money immediately available, there are many other mortgage options available that don’t require a 20 percent down payment.
2. Principal: The amount of debt you own on a loan, after the down payment, not including interest.
This is the amount you will be paying off over the lifetime of the loan, typically five to thirty years.
3. Interest: A fee you pay for borrowing money.
Just like your car or student loans, you will pay back the money you borrowed with interest. Interest rates change frequently, so it’s best to work with your loan officer for current rate information.
4. Fixed-Rate Mortgage: A mortgage with an interest rate that doesn’t change for the life of the loan.
Once your interest rate is locked in, it will not change throughout the life of your mortgage. Fixed-rate mortgage interest rates are usually initially higher than adjustable-rate mortgages and they eliminate the uncertainty of sudden rate hikes throughout the life of your loan.
5. Adjustable-Rate Mortgage (ARM): A mortgage with an interest rate that adjusts based on a financial index, causing interest rates and payments to rise and fall with the market.
Your interest rate is subject to change in accordance to the market, but not until the introductory period is over, typically five or seven years.
6. Rate lock: A lenders guarantee of an interest rate for a set period of time.
Rates are constantly changing and lenders have to react to changes in the financial markets by changing interest rates. What looked like a good rate one day may no longer be your best option another day. In order to keep a good rate, you will want to speak with your mortgage professional about locking it in.
7. Closing costs: Expenses paid by the borrower and/or seller during the closing which can include loan origination fee, discount points, attorney’s fees, title insurance, appraisals, etc.
In addition to the down payment, you will also have closing costs to cover when you arrive at the closing, the day you sign all the paperwork and receive the keys to your new home. After receiving your loan application, your lender is required to provide you with a Loan Estimate that lays out the various fees to be paid at closing.