Applying for a mortgage can be a confusing experience due to all the terms and processes that first-time homebuyers are unfamiliar with. Here at Altius Mortgage, we sit down with you and go through everything you need to know about mortgages and homebuying. Because we prioritize customer service, we are also providing this glossary below of common mortgage terms.
Amortization — Mortgage loans are amortized, and that means each month when you make a payment, part of it is applied to the interest and another part to the principal. As you get nearer to the end of your loan term, a larger percentage of your payment goes to the principal.
ARM (Adjustable Rate Mortgage) — Many homebuyers opt for a fixed-rate mortgage, but others choose adjustable rate. This means that your interest rate fluctuates with the market, and the amount of your payments can change based on this.
Closing Costs — Closing is done when you take possession of your home. Closing costs can include the appraisal fee, the title search fee, your credit check, attorney’s fees, taxes, insurance and more. These charges can be as much as 3%-5% of the home price, which can be significant for some homebuyers. However, some loan programs cover the cost of closing.
Down Payment — A down payment is the lump sum of money you give to the lender when you buy your home. The rest is financed. Some homebuyers put down as much as 20% of the purchase price, but most put down less. Some mortgage programs provide for zero-down loans.
Fannie Mae — This mortgage program is backed by the government and provides home loans to low- and moderate-income individuals and families.
FHA Loan (Federal Housing Administration) — This loan program provides mortgages to low-to-moderate income people. Applicants may have a lower credit score and they may be allowed to make a smaller down payment.
Interest Rate — Interest is the cost of borrowing money. The rate is usually expressed as a percentage and can change based on markets and the Federal Reserve. In 2020, mortgage interest rates have been around 2.5-4%. A better credit rating usually gets a better interest rate.
Principal — The principal is the cost of your home. When you pay your mortgage, each month some money goes toward the principal and some goes toward the interest on the loan.
PMI (Private Mortgage Insurance) — If you put down less than 20% on your home, you are required to pay PMI until you have 20% equity in the home. PMI protects the lender from losses in case of default.
Refinance — Refinancing your home loan can save you money if interest rates drop. Homeowners can refinance with the lender they are using or switch to another lender.
VA Loan (Veterans Administration) — A VA loan is a special type of loan available to veterans and their spouses or surviving spouses. These loans may provide for no money down and low-interest rates despite low credit scores.
For help learning more about other financial terms you may not be familiar with, contact the friendly, professional team at Altius Mortgage.