Buying a home is a major step for most people. But listening to lenders use mortgage terminology can quickly make you feel like they are speaking a foreign language. Here’s a quick overview of some of the most common terms you will hear when shopping for a home loan.
1. Adjustable-Rate Mortgage (ARM)
Adjustable-rate mortgages have interest rates that fluctuate based on a designated index rate. They often have short fixed periods, after which the interest rate will adjust at specified intervals, such as once every year. These are often used for shorter-term lending.
2. Annual percentage rate (APR)
This is basically the cost that you will pay each year for borrowing money, shown as a percentage. It is an average of all interest charges compounded over the life of the mortgage plus upfront costs and fees, divided by the length of time you will be repaying the loan. Because your lender must disclose a loan’s APR to you, this is a common phrase in mortgage terminology.
3. Closing costs
There are a lot of costs that must be paid at closing that are not included in a home’s price. These are generally called closing costs. They might include attorney’s fees, points to lower your interest rate, prepaid interest, transfer and property taxes, and fees to transfer the title and deed.
4. Credit score
Your credit score is a numerical value assigned to you based on your perceived creditworthiness. Lenders will use it to determine your suitability for mortgage programs and interest rates.
5. Fixed-rate mortgage
In conventional, fixed-rate mortgages, your interest rate is set upfront and does not change for the life of your loan. The standard is a 30-year loan, although they can be issued for shorter repayment periods. If you prefer a payment that won’t change over time, fixed-rate mortgages are probably a good choice for you.
This piece of mortgage terminology is important because it represents your total monthly mortgage payment. This acronym stands for principle (P), interest (I), taxes (T), and insurance (I).
7. Private Mortgage Insurance (PMI)
This is designed to protect lenders and may be required if your down payment is less than 20 percent of the house’s purchase price. Some loan programs may not require PMI, so be sure to ask your lender about your options.
Find Out More About Mortgage Terminology
To learn more about mortgages, contact the professional staff of the Bjornson Mortgage Team. They can help you navigate the complex world of mortgage lending and help you find the right financing for your home purchase.