Tag: Mortgage Closing Costs

Basic Mortgage Terms You Should Know When Buying a House

Understanding these terms will allow you to avoid many of the pitfalls that exist in the real estate market

Educating yourself on the various mortgage terms you will run into will help you make better decisions when deciding which home you want to purchase. When you sign a mortgage contract, your home is used for collateral and it is your responsibility to make sure your payments are made on time each month.

The first term you should know is principal. The principal is basically defined as the amount of money you borrow for your home. Before the principal is provided you will need to make a down payment. A down payment is the percentage you will put towards the principal. The amount of the down payment will often depend on the cost of the home. Once you pay off the principal, the home is yours.

The next term you will need to know is interest. Interest is a percentage that you are charged to borrow a certain amount of money. Along with the interest rate, lenders may also charge you points. A point is a portion of the total funds financed. The principal and interest makes up the majority of your monthly payments, and this is a method that is called amortization. Amortization is the method by which your loan is reduced over a given period of time. Your payments for the first few years will cover the interest, while payments made later will be applied towards the principal.

A portion of your mortgage payments can be placed in an escrow account in order to go towards insurance, taxes, or other expenses. The next term you will hear a lot is taxes. Taxes are the amount of money that you have to pay to your state or government. When it comes to your home, these are known as property taxes. These taxes are used to build roads, schools, and other public projects. All homeowners must pay property taxes.

Insurance is another important term that you will hear in the real estate community. You will not be allowed to close on your mortgage if you don’t have insurance for your home. Home insurance covers your home against floods, fire, theft, or other problems. Unless you can afford to repair your home if it is damaged, it is usually a good idea to get insurance for your home. If your home is located within a zone that is known for having floods, federal laws may require you to have flood insurance.

If the down payment you put towards your home is less than 20% of the total value, you will often be charged additional premiums on your insurance by the lender. This is done to protect you in the event that you default on your loans and fail to make payments. Without this, many people would not be able to afford a house.

These are the basic terms you will need to know before your purchase a home. Understanding these terms will allow you to avoid many of the pitfalls that exist in the real estate market. You want an interest rate that is low, and you should always try to get a fixed interest rate if possible. This will allow you to focus your income on making payments towards the principal, and this will help you pay off the loan faster. A mortgage is an important part of your financial picture, and you want to make sure you pick a home that you can afford. If you fail to make your payments, you may lose your house.

3 Terms Every Mortgage Shopper Should Know

There are three terms that every mortgage shopper should know to better understand what he or she is getting into.

Shopping for a mortgage can be a very confusing experience, particularly if you are unfamiliar with the process. There is a lot of paperwork to sign, documents to read and procedures to be followed. You’d think you were applying to go to Harvard or Yale, except they don’t require that much paperwork for you to be admitted!

There are three terms that every mortgage shopper should know to better understand what he or she is getting into. Going into a mortgage knowing just a few facts will help you immensely in understanding what type of commitment you are getting into.

The first term you should understand is, amazingly, the word “term.” Term refers to the length of the mortgage you are taking out – or the amount of time you are making payments.

Many mortgages run the gauntlet of between ten and thirty years. The longer the mortgage, typically the lower your monthly payment will be (and the more interest you will pay over the life of the loan). There is a trade off here. Although it makes sense to go for the shortest term you can comfortably afford, the reason why 30 year mortgages are by far the most popular is, because of the reduced monthly payment. If a month comes along and things are tight, you won’t be expected to make the higher monthly payment. At the same time, you can always make extra payments to principal any time to reduce the remaining term of your loan.

Next, understand the interest rate on your mortgage and how it is calculated. The interest rate refers to the amount of interest charges you will pay for the money you are borrowing expressed as a decimal – such as 4.25%. Is it fixed or adjustable? In other words, will it be the same throughout the life of the loan, or does it change at specified periods in time? Most home buyers should try and steer clear of adjustable rate mortgages even though they can look better up front. They can often reset to higher interest rates and come back to bite you if you aren’t ready for a jump in your monthly payments!

Finally, understand what closing costs are and how they are going to affect your purchase price. On a purchase money mortgage, you are going to be responsible for coming up with closing costs out of your own pocket. Closing costs consists of things such as appraisals done on the house, attorney fees, title fees, recording fees, etc. Be a smart and savvy consumer, if you see a fee that you don’t understand or doesn’t seem right – speak up! With the new mortgage disclosure laws just enacted in 2015, you will have a chance to review all your closing costs well before you close your loan. I always make sure to go over all these costs with my clients.

Understanding these three terms can help make you a more informed home buyer and help you find the mortgage that is right for you.

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