Common Terms Used in Mortgage Lending
A home is a major purchase, and a home loan is a legal contract, so you want to be certain that you understand exactly what you’re getting into. Working with a reputable lender who will explain your options and guide you through the loan process is always wise. However, taking the time to develop a basic understanding of some common terms used in mortgage lending will help. It will make it easier for you to explore your options and boost your confidence.
As MoneyGeek explains, the principal is the loan amount. It will be paid back in regular monthly payments in the terms that are agreed to in the loan contract.
As Investopedia reports, interest is the fee that lenders charge for the privilege of borrowing money. It’s generally expressed as a percentage.
A mortgage preapproval is a tentative approval from a lender for a home loan. As Credit Karma indicates, it’s the first step that smart buyers take when buying a home. Getting preapproved offers several advantages. It’s a chance to have a professional look over your application and make sure that everything is in order with your finances before the home of your dreams is on the line. It’s also a way to find out how much you can borrow. Plus, approaching real estate agents and sellers armed with a preapproval letter shows that you are a serious buyer. In addition, going through the preapproval process smooths your path when you’re ready to formally apply for your loan. However, it is important to remember that a preapproval is not a guarantee of a loan.
According to the Consumer Financial Protection Bureau, an adjustable-rate mortgage is a home loan with an interest rate that can change. As a result, your monthly payment can go up or down. ARMs usually start with an introductory period that features a special low interest rate and a correspondingly low payment. When that period is over, the interest rate and payment can increase significantly. It depends on the rate caps, index interest rate, and the state of the market. ARMs can be very complicated, so deciphering them can be tricky. Borrowers who use these loans must be comfortable with a certain amount of risk and unpredictability.
A fixed-rate mortgage offers a steady alternative, according to the Consumer Financial Protection Bureau. With this form of financing, the interest rate remains constant throughout the life of the loan.
Your credit score is a number that helps creditors assess your creditworthiness. As USA.gov explains, a variety of things impact your credit score, including your payment history, any late payments or outstanding balances, and the length of your credit history. Applications for new credit accounts and the types of credit that you use also have an impact.
The down payment is an initial payment made by a homebuyer. According to The Truth About Mortgage, this first payment typically ranges from 5 to 20 percent of the purchase price. It’s put toward the purchase price and held in escrow until closing. The remainder of the purchase price is generally funded by a home loan.
Private Mortgage Insurance
Lenders take a risk whenever they lend out money. One way they protect themselves is mortgage insurance. As MortgageCalculator reports, you will generally be required to carry private mortgage insurance if you have a conventional loan and make a down payment of less than 20 percent. You’ll pay the premium payment each month as part of your monthly mortgage payment. You’ll be able to cancel the policy when you have sufficient equity.
Closing is the final step in a real estate transaction, according to MoneyGeek. Traditionally, this is when the last of the paperwork is signed, funds are exchanged, and the homebuyer officially becomes a homeowner.
At PrimeLending Dallas, we understand that the language used to discuss home loans can get confusing. Our team of home loan experts is ready to help you sort through the possibilities and offer user-friendly explanations. Contact us today to get started.
*All loans subject to credit approval and identification of acceptable property. Conditions and restrictions may apply.