Mortgage Vocabulary

Mortgage vocabulary quick guide

 

Let’s be entirely honest and say that not everybody knows the usual mortgage terms. That is totally fine, they come in quite a number and are somewhat weird and tough to fully understand. Knowing them is a must when you have to buy a mortgage. You certainly don’t want to end up thinking something is not what you thought it is and making a bad decision. To combat that moment, we have made a quick list that will let you know many of the terms.

 

ARM

ARM stands for Adjustable Rate Mortgage. This certain mortgage is one where it’s rate is not set in stone, unlike the fixed rate mortgage. Basically, the rate changes according to the market trend and it might decrease or increase. You can find more information about it on our types of mortgages page.

 

Annual Percentage Rate

 

Also known as APR, this special rate is not linked to your interest rate alone. It adds together all the costs, fees, interest rates together in a concise variable. This annual percentage rate is used to compare different offers and see what is better for you.

 

Closing costs

 

These costs refer to the amount that you need to pay in order to obtain the property. Costs which include: title insurance, taxes, attorney fees and origination fee of your loan. Both buyers and sellers are required to pay them. This certain cost won’t be an accurate value until you finally finalize the loan. Thankfully, your lander will try to make the best estimation possible.

 

Collateral

Whenever you take a mortgage, the house that you are going to buy will act like collateral. Collateral, simply put, is a fail-safe in case you don’t pay. If you don’t pay when you should, the lander has full permission to claim your house. It works in such a way to justify the lander’s risk of actually giving you the money. If you don’t pay the lander doesn’t risk a lot because he can have your house in exchange. He also is putting pressure on you to pay your loan installments, since you don’t want to lose your home anytime soon.

 

Debt-to-Income Ratio

As the name clearly states, it is a ratio between your debt and your income. Simply but, if you have a 6000$ monthly income and your monthly mortgage payment is 3000$, you would have a debt-to-income ratio of 50%. An ideal debt-to-income ratio for housing should be in the 30% area.

 

Down payment

The amount of money you need to pay upfront for the house is called a down payment. Obviously enough, you don’t have to pay the whole house, just a small part. If you get a 250.000$ house and pay 50.000$ upfront you will have a down payment of 20% of the house’s value. Having a large down payment is beneficial. If you give a lot of money upfront, most landers will offer you better rates. Not every mortgage needs a large down payment. There are some special kind of mortgages which offer you the possibility to have a small down payment with a increased interest rate in exchange.

 

FHA

FHA stands for the Federal Housing Administration. It’s business is to insure mortgages as a government agency. It gives people the opportunity to get a mortgage with a lower credit history and lower than usual down payments. Because of this, you will need to pay a mortgage insurance and on top of it a fee of 1.75%.

Fixed-Rate Mortgage

A mortgage with a rate which will not change. Basically is the opposite of an ARM. You can find more details about it on our types of mortgage page.

Prepayment Penalty

Sometimes, if you choose to pay your mortgage earlier than expected, you might be charged with a fee. It is generally stated in the documents. Thankfully, this practice fell out of fashion and it is not as common as they once were.

Private Mortgage Insurance

A PMI, or a Private Mortgage Insurance is a special amount that you will have to pay on top of your interest, principal and other fees monthly. This PMI is made to protect the lander in case you stop paying. Most of the times, it is needed when the down payment that you gave is smaller than 20% of the house’s cost. Usually, when the loan drops bellow 80% of the house’s cost, the PMI payment drops.