The Rosetta Stone of Home Loan Terms

The first thing you will notice when looking into a home loan is the odd and unfamiliar terminology being used. Frankly, it can be intimidating and overwhelming. Here are some of the more common terms use and their meaning.

Amortization occurs with every loan, but is a misunderstood concept. It simply refers to the repayment of the loan on a schedule. The schedule is typically monthly payments over a term of years.

If you are cash rich at the closing, you might want to investigate paying a discount point. It is the equivalent of one percent of the loan amount. By paying it, you can pay down the interest rate on the loan and save money over time.

When is the best time to start the loan process? This is a common question and leads us to the term pre-approval. You want to get pre-approved for a loan and lock in an interest rate. This allows you to shop for a home knowing exactly what you can spend.

The mortgage application is pretty much what it sounds like. It should be viewed, however, as only the first step in the process. You can expect the lender to ask for additional information and documentation.

The adjustable rate mortgage, better known as an ARM, is a common mortgage loan that has an interest rate that adjusts according to some index such as LIBOR. The interest rate can go up or down, but usually has a cap on how much it can move in a certain period of time.

There are a number of quasi-government lenders. Fannie-Mae is one. It does not lend to the public directly, but guarantees loans made by lenders to certain types of lenders, often first time buyers or low-income borrowers.

A mortgage loan is really a calculation of risk. Some lenders try to lower their risk by requiring borrowers to maintain a “cash reserve”. This is an amount of money held in a bank account and is often equal to three months of your total expenses.

Timing is a big issue in the world of mortgages. Specifically, rates change on a daily basis. To avoid this problem, you want to “lock in” your interest rate when a lender approves you. The cost is usually a few hundred dollars.

Private mortgage insurance is an annoying aspect of buying a home. It protects lenders from some of the losses that can happen if a borrower defaults, but the borrower is required to pay for it! Put more than 20 percent down and you can avoid it.

Obviously, this represents only an introduction to the terminology of the mortgage industry. That being said, you can cut down on the confusion associated with it if you simply take the time to learn the language.

Article Source: http://www.realtyreferenceonline.com/articles

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