Purchasing a home is a smart investment. However, if you’re purchasing a home for the first time, there is some terminology you need to be aware of regarding your future home mortgage. Here are some common words you’ll encounter when you’re looking for a home loan. Knowing the terminology involved in your mortgage will help you stay on top of the mortgage process and allow the entire process to run smoothly. Familiarize yourself with these terms and keep yourself out of the dark.
ADJUSTABLE RATE MORTGAGE (A.K.A. ARM LOAN)
A home loan where the interest rate adjusts throughout the term of the loan. ARM Loans usually have an initial interest rate that is lower than that of a Fixed-Rate Mortgage. This low interest rate is locked for a set length of time. Once that time has expired, the interest rate can go up based on market factors. The lower initial interest rate helps those who can’t afford a fixed-rate mortgage get financing for their home. However, the interest rate will most likely increase when the initial term of the low interest rate expires.
FIXED RATE MORTGAGE
On a fixed rate mortgage loan the interest rate stays the same. It does not fluctuate while the loan is being paid off. Financing for fixed-rate mortgage loans are commonly spread out over 10, 15, 20, or 30 years. This type of loan is popular because there are typically no surprises. Since the interest rate remains the same, the monthly mortgage payments are static, and don’t change year to year.
The interest rate of this ARM remains the same for 10 years and then, beginning with the 11th year, changes every year according to the index of the loan. The first number in the name designates the period of stable payments; the second number denotes how often the interest rate will change thereafter.
3/3 & 5/5 ARMs
Again, these ARMs have a stable payment for the period of the first listed number, then the interest rate changes according to the time period designated by the second listed number. For the 3/3 ARM the first 3 years would have stable payments. Then the interest rate would change every 3 years thereafter. The lengths of the time periods can be negotiated.
Also known as the two-step mortgage, or the 7/23 two-step. The interest rate and monthly payment remains stable for the first 7 years. At the beginning of the 8th year, the interest rate changes to reflect the current market rate, and remains fixed for the balance of the loan. This loan can help those who expect their income to increase in the future to qualify for a larger loan right now.
These types of mortgages can be interest-only, partially or fully amortized. However, after making payments for an agreed upon period of time (3, 5, or 7 years is typical) the entire balance of the loan becomes due and payable, thus the term balloon payment. This can be an effective mortgage for someone that knows that they will not live in the home for longer than the payment period. If they do, they must be prepared to meet the obligation of the final balloon payment or choose to refinance.
FEDERAL HOUSING ADMINISTRATION (FHA) & VETERANS ADMINISTRATION (VA) LOAN
Offering a wide range of mortgage choices, these include 30 and 15 year fixed-rate mortgages, as well as ARMs. Insured by these government agencies, the loans feature low or no down payment terms and are often assumable by future purchasers. VA loans are restricted to individuals qualified by military service or other entitlements. FHA-loans are open to all qualified home purchasers. Note: that there are limits to handle moderate-priced homes anywhere in the country. Talk to your lender about FHA/VA possibilities.
STATE OF NEW YORK MORTGAGE AGENCY (SONYMA)
Provides financing for low and moderate-income New Yorkers looking to buy their first home. It offers low down payments, below-market interest rates, longer rate lock periods, and various incentives to encourage borrowers to purchase and renovate properties in need of improvements.
Principal is the original amount borrowed from the lender. It does not include interest or other fees. It’s the lump sum the borrower gets from the lender.
ESCROW/GOOD FAITH MONEY
Good faith money is a deposit of money into an escrow account by a buyer to show that they have the intention of completing a deal. Good faith money is often later applied to the purchase but may be refundable or non-refundable depending on the circumstances and conditions.
ANNUAL PERCENTAGE RATE (APR):
The measurement of the full cost of a loan including interest and loan fees expressed as a yearly percentage rate. Because all lenders apply the same rules in calculating the annual percentage rate, it provides consumers with a good basis for comparing the cost of different loans.
PRIVATE MORTGAGE INSURANCE (PMI)
Mortgage insurance provided by non-government insurers that protects a lender against loss if the borrower defaults.
Insurance to protect a lender or owner against loss in the event of a property ownership dispute.
An estimate of the value of property made by a qualified professional called an “appraiser.” Typically required by the bank.
MULTIPLE LISTING SERVICE (MLS)
An MLS is a database that allows real estate agents to access and add information about properties for sale in an area.
DAYS ON MARKET (DOM)
DOM is typically defined as the number of days from the date on which the property is listed for sale on the local real estate brokers’ multiple listing service (MLS) to the date when the seller has signed a contract but can also be the number of days from listing to the sale of the property or closing date.
The expenses involved in finalizing a closing. Closing costs include lender/agency fees, loan origination costs, escrow payments, title insurance, attorney fees, etc. Closing costs are applicable to the buyer and the seller.
This term refers to conditions that have to be met in order for the purchase of a home to be finalized. For example, there may be contingencies that the loan must be approved or that the home inspection is satisfactory.
Sellers may offer concessions to incentivize buyers to purchase the home, or sweeten the deal. Concessions are most readily seen as a contribution towards the buyer’s closing costs, up to certain limitations and approvals by a buyer’s lender, which ultimately leaves more money in a buyer’s pocket when all is said and done.
Some of the Potential Problems to Check For -
A REALTOR® should be aware of these issues and suggest solutions to you based on their experience in the field:
When it comes to time to make a purchase offer, you most likely will be using a standard purchase offer contract specific to your market. We recommend that you familiarize yourself with the contract details so that when it comes time to accept a purchase offer on your home, you can move quickly. Here are sample contracts from all three of our market areas: