5 Mortgage Terms You Need to Understand Before Applying for a Home Loan
If you are going to buy a home, then you need money. You might not know how to get it. When you put your application together, think about what else will happen.
Before you get a mortgage, you need to give a lot of information. You will also probably see some words that you don’t understand. Here are some words that might be helpful:
An adjustable-rate mortgage is a home loan. The interest rate changes over time. There are different types of adjustable-rate loans, for example, a 5/1 ARM, with the same interest rate for five years and then it can change. A 7/1 ARM has the same interest rate for seven years and then it might change.
There is a downside to an ARM. Your mortgage payments could rise. You might have a cheaper rate, though, so it might be OK.
A fixed-rate mortgage means your interest rate will not change. Your monthly payments will stay the same. If you take out a loan with an interest rate of 3.2% for 30 years, then you will pay that 3.2% to the bank for all of those 30 years.
Private mortgage insurance
PMI is insurance that you pay monthly when you don’t make a 20% down payment at the closing. It protects your lender in case you can’t keep up with your monthly mortgage payments.
Principal and interest
Your monthly mortgage payment is a combination of principal and interest. The principal portion is the balance of your loan that you are paying back.
The interesting part is the money you use to pay for the interest on your loan, and it will change if you have an adjustable-rate mortgage. It will stay at the same rate if you have a fixed-rate mortgage.
When you start paying off your mortgage, a lot of money will be spent on interest at first. Later, more of the money will go to the principal and less to interest.
Closing costs are fees you can pay to finalize your mortgage. They are usually around 2% to 5% of the amount of money you borrow. The fee depends on who is giving out the loan.
The closing costs are all the different fees. They might be negotiable if you ask for them to be lower before signing. You can also pay your closing costs over time.
Mortgages can be hard to understand. You might not know the words that people use. But if you know these words, then the application process will be easier and less stressful for you!
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