12 Mortgage Terms You Should Know Before Buying a Home

Unless you’re a realtor or a home buying pro, mortgage lingo might sound like a foreign language. In fact, 40% of home buyers didn’t know any home buying terms at all, and millennials aged 25-34 were the least likely to know any home buying terms. Amortization was the most confusing and down payment was the least. To give you a quick vocabulary lesson, let’s review the top 12 mortgage terms you should know before buying a home.

 

    1. An adjustable-rate mortgage is a type of loan with an interest rate that varies depending on how market rates move. This is the introductory period of the loan, and can last for up to 10 years, during this period interest rate is usually lower than a fixed-rate loan. However, after the introductory period expires, your interest rate will follow market interest rates. Also, adjustable-rate mortgages have caps in place that limit the total amount your interest can rise and drop over the course of your loan.

 

  1. Amortization:
    1. Home loan amortization is the process of how payments spread out over time. When you make a payment on your mortgage, a percentage of your payment goes toward interest and a percentage goes toward your loan principal. An amortization schedule can reflect consistent monthly payments and keep you on track to pay off your loan within the term.

 

  1. Appraisal:
    1. An appraisal is a rough estimate of how much your home is worth. Mortgage lenders require that you get an appraisal before you sign on a home loan. This assures the lender that they aren’t loaning you more money than your home is worth. Your lender may help you by scheduling an appraisal, done by an independent third party.

 

  1. Balloon Loan:
    1. A balloon loan is named after the large size of its payments. It’s a type of financing that requires a lump sum to be paid at some point in the mortgage term. With a balloon loan, you choose to pay an interest-only mortgage or one that includes both principal and interest payments.

 

  1. Debt-To-Income Ratio (DTI):
    1. Your debt-to-income ratio is your total fixed, recurring monthly debts divided by your total monthly gross household income Mortgage lenders will look at this when they consider you for a loan to make sure enough money is coming in. If your debt-to-income ratio is too high, you may have trouble finding a loan, and most lenders prefer applicants with a a ratio of 50% or lower.

 

  1. Discount Points:
    1. Discount points are an optional closing cost you can pay to buy a lower interest rate. One discount point is equal to 1% of your loan amount. You’re basically paying more up front to enjoy more savings over the life of the loan.

 

  1. Earnest Money Deposit:
    1. An earnest money deposit is a check you write to a seller when you make an offer on a home. Most earnest money deposits are equal to 1% – 3% of the home’s value. Also, an earnest deposit shows the seller that you are serious about buying their home.

 

  1. Escrow:
    1. Most people who have a mortgage have an escrow account where their lender holds money for property taxes or homeowners’ insurance. The benefit of this is that this allows you to split taxes and insurance over 12 months instead of playing it all at once.

 

    1. Private Mortgage Insurance is a type of insurance that protects your lender if you default on your loan. Your lender will usually require you to pay Private Mortgage Insurance if you have less than a 20% down payment. You will have the option to remove Private Mortgage Insurance from your loan when you reach 20% equity in your property.

 

  1. Property Taxes:
    1. Everyone is required to pay property taxes to their local government. The amount you pay in property taxes depends on your home’s values and where you live. Don’t forget to factor in property taxes when you shop for a home.

 

  1. Seller Concessions:
    1. Seller concessions are clauses in your offer that ask the seller to pay certain closing costs. Limitations on the percentage of your closing costs sellers can cover varies by property type.

 

  1. Title Insurance
    1. Title insurance is a common closing cost. You buy title insurance to protect yourself against outside claims to your property. Unlike other insurance, you don’t need to pay for title insurance every month.

 

Overall, mortgage terms can be difficult to remember, but knowledge is power when it comes to home buying, and at Galaxy Lending Group, we want to make homeowners happy, one loan at a time. Apply now, and begin the process towards your new home today!