Buying or refinancing a house is one of the biggest financial decisions you will make, so do your homework before you sign on the dotted line. Get familiar with the loan process with our helpful hints, so you won't be surprised down the road. Decipher the mortgage codes with an easy-to-use mortgage glossary.
Expect to have lots of questions about the home financing process. That's why its important to choose a lender who makes you feel comfortable and welcomes your questions.
Adjustable-Rate Mortgage (ARM): a mortgage with an interest rate that changes periodically, according to an index that is selected when the mortgage is issued. The initial interest rate is lower than that for fixed-rate mortgages, but monthly payments can go up or down when the rate is adjusted. See also Adjustment Interval, Caps and Index.
Adjustment Interval: the period of time between changes in the interest rate for an adjustable-rate mortgage. Typical adjustment intervals are one year, three years, and five years.
Annual Percentage Rate (APR): a stated interest rate that reflects all the financing costs of a mortgage. The APR includes points, origination fees and other finance charges in addition to the interest on the mortgage, and includes them all in a yearly interest rate. As a result, the APR is usually higher than the interest rate alone. It also provides a benchmark for comparing different types of mortgages based on the annual cost for each loan.
Balloon Mortgage: a special type of fixed-rate mortgage that offers low, fixed monthly payments for a selected period of time (usually five to seven years), then requires one large payment (the "Balloon") for the remaining principal.
Biweekly Mortgage: a type of fixed-rate mortgage with payments for half the usual monthly amount scheduled every two weeks. Because you make the equivalent of 13 months of payments every year, the loan term is shortened from 30 years to 18 or 19 years, and total interest costs are substantially lower.
Caps: consumer safeguards for adjustable rate mortgages that limit the amount monthly payments can increase. An Interest Rate Cap limits the amount the interest rate can change, while a payment cap limits the increase in monthly payment to a specific dollar amount.
Closing: the meeting between the buyer, seller and lender (or their agents) where the property and funds legally change hands.
Conventional Loan: a mortgage loan not insured by FHA or guaranteed by the VA or Farmers Home Administration.
Convertible Adjustable-Rate Mortgage: an ARM that can be converted to a fixed-rate mortgage, usually after a set period of time.
Credit Report: a report that documents a borrower's credit history and current status. Borrowers can examine their own credit reports, although most credit reporting companies charge a fee to provide a report.
Discount Points: See Points
Down Payment: an amount paid in cash to the seller when the home is purchased. The down payment is the difference between the purchase price and the mortgage amount, and is traditionally 10 to 20 percent of the purchase price, although many loans are now available with smaller down payments.
Escrow: a special account set up by the lender in which money is held to pay for taxes and insurance. Escrow can also refer to a third party who carries out the instructions of both the buyer and seller to handle the paperwork at the settlement.
FHA (Federal Housing Administration) Mortgage: a loan insured by the Federal Housing Administration. FHA Mortgages require lower down payments than conventional mortgages, and also feature less stringent income and financial requirements.
Fixed Rate Mortgage: a mortgage with an interest rate that remains constant for life of the loan. The most common fixed-rate mortgage is repaid over a period of 30 years; 15 year fixed-rate mortgages are also available.
Index: an economic indicator, usually a published interest rate, that determines changes in the interest rate of an ARM. ARM rates are adjusted to reflect changes in the index. The margin is the amount a lender adds to the index to establish the actual interest rate on an ARM.
Interest: the sum paid for borrowing money, which pays the lender's costs of doing business.
Origination Fee: a percentage of the loan amount charged by the lender to cover the cost of processing the loan. Generally 1% of loan amount. Be sure to ask if this fee is included in home loan amount or is part of your up-front expenses.
PITI (Principal, Interest, Taxes and Insurance): the four components that (for most homeowners) are included in the monthly mortgage payment. Principal and interest are the portions of the payment assigned to repay the mortgage itself; taxes and insurance are paid by your lender into a special escrow account to pay for homeowners insurance and property taxes.
Points (Loan Discount Points): prepaid interest on a mortgage that is usually paid at the time of closing. Each point is equal to one percent of the total amount of a mortgage (one point on an $80,000 mortgage is $800, or 1 percent of 80,000). Most lenders offer mortgages with several combinations of points and interest rates; generally the lower the interest rate, the more points you will pay at settlement.
Hint: If you plan to be in your home for a short period, it may not be worthwhile to pay discount points to reduce your rate. To lower your monthly payment by lowering your interest rate, you may wish to pay points up front.
Principal: the amount of debt, not including interest, left on a loan; also the face amount of the mortgage.
VA (Department of Veterans Affairs) Mortgage: government-insured loans guaranteed by the Department of Veterans Affairs, requiring very low or no down payments and with generous requirements for qualification. They are available only to veterans of the armed services, those currently on active-duty or in the reserves, and their spouses.
