If you’re looking to buy a home anytime soon, it can be a daunting task. Sometimes it can feel like your real estate agent and loan officer are speaking a different language. Whether you’ve bought a home before or are a first-time-buyer, knowing key mortgage terms will make the process easier.
Here is a quick guide of terms to familiarize yourself with before starting your home-buying process. Feel free to bookmark this page for future reference.
Amortization:
The gradual reduction of the mortgage debt through regularly scheduled payments over the term of the loan.
Annual percentage rate:
Abbreviated as APR, this measures the cost of credit in a yearly rate. It includes the stated interest rate and certain charges.
Appraisal:
Written estimate or opinion of a property’s value prepared by a qualified appraiser. The appraisal amount should be close to the cost you’re paying for the home to help make getting a loan easier.
Debt-to-income ratio:
Relationship between borrower’s total monthly debt payments, including new housing expenses and gross monthly income. It determines how much you will qualify for. The less debt, the better. The maximum ratio is 43 percent, though below 36 percent is preferable. That means that 36 percent of your income goes toward debt and living expenses.
Escrow:
Something of value (money or documents) that is deposited with a third party to be delivered when the condition of the contract is delivered. Escrow can be used, for example, to deposit funds with an attorney or escrow agent to be disbursed upon the closing of a real estate sale.
Mortgage insurance:
Insurance that protects lenders against losses if a borrower defaults on a home loan. If your down payment is less than 20%, lenders typically require mortgage insurance.
Prequalification:
A preliminary assessment by a lender of the amount it will lend to a potential buyer. This is not a credit approval. Prequalifications simply let you know the budget your lender will lend so you can start shopping and planning accordingly.
Principal:
Amount of money owed on a loan, excluding interest. Making this monthly payment reduces the balance of the mortgage.
Underwriting:
Part of the loan process. This is the decision of providing the loan. It is based on credit, employment, assets and other factors to assess risk and match it to an appropriate rate and loan amount.
Stay tuned for more mortgage education and feel free to reach out with any questions you may have! Contact me via social media, text, phone call, or email. All of my contact information is on my Contact Page, or click here.
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