One of the most exciting things you’re likely to do in life is buy a home.
Getting to that point, though, can be a long process. You not only have to slog through all the steps required to get a mortgage, but you also need to learn all the jargon.
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There are a lot of new terms to understand and concepts to know when you get a mortgage. Memorize the most important mortgage terminology with this handy mortgage glossary.
Common mortgage terminology to master
1. Adjustable-rate mortgage (ARM)
On some home loans, the interest rate you pay is subject to change. If your mortgage rates are adjusted based on changing market conditions, you have an adjustable-rate mortgage.
Check your paperwork to see how often your rate changes. You should also find out if there is a cap — many ARMs cap the top rate that can be charged.
Amortization is the way your principal is paid down over time. At the beginning of your mortgage, most of your payment goes toward interest. As you get closer to the end of your mortgage term, more of your payment goes toward the principal.
3. Basis point
One basis point is equal to one one-hundredth of a percentage point. If the average national mortgage rate rises from 3.92 to 3.97 percent, it’s gone up five basis points. A full percentage change is 100 basis points.
4. Cash-out refinance
If you have equity available in your home and you refinance, you might be able to take some of that cash. It’s one way to get a little cash out of your home.
5. Conforming mortgage loan
Many lenders sell their loans to Fannie Mae or Freddie Mac. However, there are limits to the dollar amount of a loan that Fannie or Freddie can service.
Conforming loan amounts are based on the real estate market. The amount eligible for a conforming loan in California is higher than one in Idaho.
6. Conventional mortgage loan
This is any home loan you get that isn’t guaranteed by a government program.
7. Credit report
When you apply for a mortgage, the lender will look at your credit report and credit score. Your credit report is a record of all of your borrowing transactions. It indicates how much debt you have and your payment history.
8. Credit score
The information from your credit report is used to calculate your credit score. This is a three-digit number that lenders use to gauge your risk as a borrower.
The higher your score, the less of a risk you are thought to be. When you have a high credit score, you are more likely to get a low mortgage rate, possibly saving you thousands of dollars over the life of your loan.
A special third-party account. It’s a way to ensure that both the home buyer and seller are protected.
The buyer puts money in the escrow account so that the seller knows the money is available. The seller doesn’t get access to the money until the papers are signed and the buyer gets access to the home.
10. Fannie Mae and Freddie Mac
These are companies known as government-sponsored enterprises. They are chartered federally to buy mortgage loans from lenders. They aren’t owned by the government; they are owned by stockholders.
Fannie and Freddie purchase home loans from lenders and service them. This frees up the resources of financial institutions so they can make more loans to other people.
11. Federal funds rate
This is the interest rate banks charge each other when they make loans on an overnight basis.
We talk about the Federal Reserve setting the rate, but it’s important to understand that the Fed simply sets a target rate and then makes its own purchases or sales to impact the funds rate. The federal funds rate is one of the factors that impacts mortgage rates.
12. Fixed-rate mortgage
Unlike an ARM, which has a rate that changes during the mortgage term, a fixed rate remains the same. Once the rate is set, it stays the same the whole time you have the loan.
For many, a fixed rate is preferable because it allows them to better plan a budget.
13. Home equity
Ownership in your home. It’s the difference between the current value of your home and how much you owe.
If your home is worth $225,000 and you owe $175,000, you have $50,000 equity in your home. That’s how much you can potentially tap into if you want cash.
If you owe more than your home is worth, you have negative equity.
14. Home equity line of credit
A line of credit offered to you based on the equity you have in your home. You can borrow up to a set amount as needed, without the need to apply for a new loan.
15. Home equity loan
A lump-sum loan based on the amount of equity you have in your home. If you want more, you need to apply for a new loan if you don’t have a line of credit.
16. Jumbo mortgage
If you want to borrow more than the amount that Fannie or Freddie can service, you have to get a jumbo loan. These loans usually come with higher interest rates to make up for the higher risk involved.
17. Loan-to-value (LTV)
This ratio reflects the relationship between how much you borrow and the value of your property.
Say you want to purchase a home for $200,000. You make a down payment of 10 percent (that’s $20,000). This means your loan is for $180,000, and you have an LTV of 90 percent.
In order to avoid mortgage insurance, you need an LTV of 80 percent (a down payment of 20 percent). Many lenders also won’t refinance a loan unless you have an LTV of 80 percent.
18. Mortgage broker
Someone who has access to information about different mortgage programs and can help you choose from different options. This person acts as a connection between lenders and borrowers.
When a lender lets you know, officially, how much you can borrow. Your pre-approval letter can be used to prove to sellers that you are serious about buying, and that you can afford the home.
A pre-approval includes pulling your credit information and checking your documentation to verify your ability to pay for the loan.
A lender can pre-qualify you for a loan. This is a less rigorous process than pre-approval.
For the most part, pre-qualification uses information you provide without using documentation to verify. It’s a way to get a ballpark idea of what you can borrow and what rate you might expect. It’s not “locked in,” though, until you get a pre-approval.
Using a refinancing loan to replace your current mortgage. This new refinancing loan pays off your original mortgage.
Often, homeowners choose to refinance when they can get a lower interest rate, especially if they can get a lower fixed rate.
22. Second mortgage
If you have enough equity in your home, it’s sometimes possible to get a second mortgage using your equity as collateral. Home equity loans and lines of credit are examples of second mortgages.
An assessment of how much risk a lender takes on by approving your mortgage application. The underwriting process includes looking at your credit, income, assets, current debt, and other factors that could influence your ability to make your mortgage payments.
Now that you’ve mastered the most common mortgage terminology, you can confidently move forward with the home-buying process.