Are you looking to get a mortgage to buy a house? It’s a great life decision and one of the best ways to have reliable, affordable housing.
However, if you’ve never gotten a mortgage before, you might be confused about the terms of them.
There are lots of terms that sound similar but mean slightly different things. If you don’t know the common mortgage terms, you might end up getting the wrong mortgage or signing something you shouldn’t.
To help you understand mortgages better, we’re creating this guide to the most common mortgage terms. Read this, and you’ll be an expert in understanding mortgages, knowing what, when, and why to ask things.
Fixed-Rate Mortgage
A fixed-rate mortgage has an interest rate that remains the same throughout the life of the loan. This type of mortgage provides stability and predictability, as your monthly payments won’t change.
Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage has an interest rate that can change over time. The interest rate is typically based on an index, such as the prime rate, and the lender will adjust your interest rate at regular intervals, usually every year.
Federal Housing Administration (FHA) Loan
An FHA loan is a mortgage that’s insured by the FHA. These loans are designed to help low- to moderate-income borrowers purchase a home, and they often offer more relaxed credit and income requirements than traditional mortgages.
Veterans Affairs (VA) Loan
A VA loan is a mortgage that’s guaranteed by the Department of Veterans Affairs (VA) in the US. These loans are designed to help eligible veterans and active-duty military members purchase a home, and they often offer more relaxed credit and income requirements than traditional mortgages.
Principal
The principal amount is the total amount of money you borrow to finance the purchase of a home. This is the amount that your monthly payments are based upon, so it’s important to understand how it affects your budget as well.
Interest
Interest is the fee that you pay to the lender as compensation for borrowing the money to purchase your home. The interest rate is affected by numerous factors, including the size of the down payment, credit score, the type of loan, and its term.
Loan Term
The most common loan terms for mortgages are a 30-year and a 15 year mortgage. A 30-year mortgage has smaller, more affordable payments and provides. Remember that the loan-to-value ratio must be taken into consideration to ensure the loan’s refinancing conditions are favorable for the loan term chosen.
Down Payment
The down payment is the amount of money you pay upfront to purchase your home. The down payment is typically a percentage of the home’s purchase price.
Closing Costs
Closing costs are the fees associated with obtaining a mortgage, including mortgage broker services, title insurance, appraisal fees, and attorney’s fees.
Private Mortgage Insurance (PMI)
Private mortgage insurance is a type of insurance that protects the lender if you default on your mortgage. If you make a down payment of less than 20% of the home’s purchase price, you’ll likely be required to pay PMI.
Understanding Common Mortgage Terms
Mortgages can be complex, but understanding the most common mortgage terms will help you make informed decisions about the mortgage that’s best for you.
Whether you’re a first-time homebuyer or a seasoned homeowner, take the time to familiarize yourself with these terms and concepts to ensure that you’re fully prepared. With a little bit of knowledge and preparation, you can secure the mortgage that will help you achieve your homeownership dreams.
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