Mortgage Loan Lingo
Buying a new home. Just the thought of it can fill a person's heart with anticipation, excitement, or panic. Will the home I find be both one I like and can afford? Or will I have to settle for second best? What happens after I find the home of my dreams? Am I going to be overcome by a bunch of lawyer-like terms? Am I going to be taken to the cleaners? These are just a few "what ifs" that face the average new homebuyer. Here are just a few of the terms that you need to know BEFORE you buy!
- Adjustable Rate Mortgage (ARM): Also known as closing escrow, the most important thing to remember about an ARM is that the rate will change, either higher, as the Federal Reserve raises interest rates, or lower, as interest rates go down. To "sell" an ARM, a lender usually will offer a lower initial rate than on a fixed loan. It is easy to convince oneself to accept that low initial rate. However it would be wise to consider just how high the rate will go, and will you be able to afford the payments if interest rates sky-rocket?
- Fixed-Rate Mortgage: This is the type of mortgage where payments remain the same for the life of the loan. Loans are for either 15 or 30 years. You can pay off a loan faster in 15 years, but house payments will be significantly higher than with a 30 year loan. Remember the longer it takes to pay off the loan, the lower the monthly payments will be. However at the end of 30 years, you will have paid 3 times the original cost of your house.
- Conventional Mortgage: This is the most common home loan. This mortgage is not insured by the Federal Housing Administration (FHA) nor is it guaranteed by the Department of Veterans Affairs. It is a loan that you would get at your local bank or credit union.
- Home Inspection: Every home buyer should insist upon an independent third party examination of the home before closing takes place. The Buyer would be wise to attend the inspection. Most states demand that a home inspector be licensed. If the inspector finds problems, such as a faulty furnace or leaky roof, the buyer can insist upon repairs prior to the closing, or ask for a reduction in the cost of the house. The cost of hiring an inspector for the buyer is around $200 to $300, and is well worth the investment.
- Loan-to-Value Ratio (LTV): The LTV is based upon the amount of your down payment compared to the price of the house. The smaller your down payment, the higher the ratio is. This is important to understand. If your down payment is small, you might find yourself forced to pay a higher interest rate. The lender studies the ratio closely, and with this, often makes a decision on whether or not to lend you the money.
- PITI: The PITI is based upon the owner's typical monthly payment, which includes principal, interest, (property) taxes, and (mortgage) insurance. Most lenders collect a portion of annual tax and insurance each month, then they will make a lump sum payment when taxes and insurance come due. If this is NOT included in the monthly payment, you will then be responsible for taxes and insurance payments in addition to your monthly payment.
- Points: 1 point is 1 percent of the loan amount. 2 points would be 2 percent of the loan amount. You can negotiate these points, paying more in advance, and you may get your lender to give you a lower interest rate. Or you can refuse to pay points and take the higher interest rate. Look at this carefully, since the extra interest, spread out over the life of the loan, may be affordable.
- Private Mortgage Insurance (PMI) If your down payment is less than 20 percent of the home's cost (which would be $20,000 on a $100,000 home) your lender may require that you obtain mortgage insurance. This protects your lender if you default on your loan. Make certain that the policy can be cancelled once you have paid off your loan to less than 80 percent of your home's value.
- The Contract: This document lays out the terms of the deal, which includes price of the house, mortgage amount, less your down payment, the date of closing, and what stays or goes in the house. (Examples might be, the attic fan and the gas fire place stays, but the dismantled car in the garage goes.) Even the agent's commission may be negotiated in the contract.
- Closing: This is a term that we are all familiar with; however what takes place is a meeting of the buyer (and in some states, the seller) who sit down with the Realtor and a lawyer (if you're smart), and you all sign mountains of paperwork. The temptation here would be to just sign without reading. Do not do this! The closing is the time for the buyer to read every line and ask many questions.
Buying a new home is a challenging time, but it can also be a joyful experience. I will never forget walking into the house of my dreams, and feeling "ah, this is home." We signed a contract with a wonderful realtor who represented only us, and he walked us through all of these terms. He was there with us at the closing on our behalf. We read every line, asking questions, and remarkably discovered several mistakes, which were then corrected.
After we signed the paperwork, the keys were handed over to us, and the house was ours. I will never forget that moment. It was one of the happiest days of my life. So take your time. Learn the lingo, and find that house of your dreams. By Jaye Lewis
