The wonderful world of buying a home can sometimes be too much for someone who has never done it before. They get a lot of information that is full of terms of art. ARMS, points, interest rates, good faith estimates, pay-downs, lock-in dates, and so on. Even if some or all of these words are new to you, don't worry; each one has a simple explanation.
Let's start by talking about the different kinds of loans. Mortgages and home equity loans are the two most common types of home loans. Mortgages are just loans that are backed by property and are called "mortgages." This "mortgage" is really just a claim on the property until the loan is paid off. So, a mortgage is a loan that is secured by a lien on the property.
A loan that is also backed by a lien on the property is called a home equity loan. The first mortgage on the home comes before the home equity loan lien. This kind of loan is based on how much the house is worth. Equity is the difference between how much the home is worth and how much is still owed on it. Equity can be a positive number, which means that the house is worth more than what is owed on it, or it can be a negative number, which means that the house is worth less than what is owed on it.
A lien is just a legal term that means someone other than the homeowner has a legal right and interest in the property. So, if the property is ever sold, all liens must be paid off. This means that any money owed to anyone with a lien must be paid, or else the new owner may have to pay the amount owed. A lien is not against a person, but against property. In most real estate deals, a title search will be done to find out if there are any liens on the property. This title search is basically a look at everyone and everything that might have a legal right, obligation, or interest in the property.
If a property has more than one home loan, they are paid off in the order of when they were taken out. This only matters if the house is being sold for less than what is owed on it. This can happen through a "short sale," in which the owner sells the house for less than what is owed on it. To do this, they will need permission from everyone who has a lien. When a house goes into foreclosure, this is also a problem.
You should know the difference between a fixed-rate mortgage and a variable-rate mortgage within these two types of loans. An ARM is a mortgage with a rate that changes over time. The interest rate on a fixed-rate mortgage stays the same from the first day of the loan until the last day of the loan, unless it is refinanced. A fixed-rate or variable-rate loan will usually start with a set rate for a certain amount of time. If the loan hasn't been paid off or refinanced by the end of that time, the rate will change based on certain conditions set up ahead of time, which are usually tied to the federal interest rate. In a typical ARM loan, the rate will be lower than the market rate for 3 or 5 years. This is done to attract people who might want to borrow or to help people get started with lower payments.
People often talk about "points" when they talk about loan packages and interest rates. One way to "pay down" an interest rate is to pay points. This means that you can pay a certain number of points to get a lower interest rate. Points are just 1% of the amount of the loan. So, each point on a $100,000 loan costs $1,000.
PMI, or private mortgage insurance, is another term you'll hear a lot. PMI is insurance for the lender if the amount you borrow is more than 80% of the property's value. This insurance policy is paid for by the borrower in these situations. Your monthly PMI payment is equal to 0.5 percent of the amount of your loan divided by twelve.
An appraisal is tied to the calculation of PMI and many other parts of the loan. An appraisal is a professional real estate agent's estimate of how much the property is worth. They will look at the property and others in the area that are like it. They will look at market trends, recent sales, and other things to figure out how much the house is worth and how much it would sell for.
Escrow payments are another thing that could be added to your monthly payments. Money held in escrow is usually used to pay taxes. To make sure that your taxes are paid, your lender will take 1/12 of your yearly taxes from you every month. Then, your lender pays the taxes you need to pay. Usually, your lender will put 2 to 3 months' worth of payments into the escrow account in case you fall behind on your payments.
Even though there are many more terms you may come across, these are the ones that people most often get wrong. But you should never feel embarrassed or ashamed to ask what a term means during the home loan process. The better off you will be, the more you know.
