Brush up on your mortgage vocabulary here
March 23, 2015
The process of purchasing your first home can be an overwhelming one by itself, and as you try to manage the million new things such as what properties or specifications you need and want or what you can afford among the many estimates, fees, and insurances you’ll pay, you’ll probably read and hear a lot of new financial and mortgage related terminology, only confusing the process more.
At Angel Oak Home Loans LLC, we understand that it can be exhausting to make the biggest purchases of your life. Having a firm understanding of the jargon you’ll be hearing will help you keep up with the variety of people involved in your purchase, making sure the details don’t go over your head or get lost in translation. This helps ensure the process goes as smoothly as possible, positioning you for the best possible package in your circumstance.
In case you didn’t know, mortgage is just a fancy word describing the loan and supporting documentation for the purchasing of a property. Here are ten more you should know:
Amortization means the paying off of the principle of a loan, the principle being the amount that you are borrowing; an amortization schedule is then the schedule by which you will be paying the principle of the mortgage loan off. In most loan schedules, the principle is paid off over the duration of the loan alongside the interest.
A professional licensed appraiser inspects the property you are looking to purchase and gives a written fair estimated value based on its condition, similar nearby properties and what they’ve sold for, and the neighborhood the property is located in and how that might affect its value. This is required for many loan inquiries, including taxes.
3. Discount Points
1% of your mortgage loan is equal to 1 point. This is not to be confused with a basis point, which is 1/100 of 1%. Discount points are used to reduce the interest rate on your loan. Each discount point correspondingly reduces your interest rate by 1%, which saves borrowers a lot of money on long term loans.
Escrow is a word with multiple meanings, even in the context of mortgages. A neutral third party, escrow, holds money, documents, or property for safekeeping between the buyer and seller until the transaction according to the escrow instructions is fulfilled. In this case, escrow can be a company or an attorney. The process of completing the purchase of a property is referred to as closing escrow. After the home loan process is completed, an escrow account is used to hold money for property taxes and insurances, collected with each mortgage payment.
The difference between the value of your home and the outstanding mortgage balance is known as home equity. You can think of equity as the dollar value of your ownership share of your home. As you pay into your mortgage loan and the value of your home changes, your equity too changes.
6. Fannie Mae/Freddie Mac
Two government sponsored enterprise agencies purchase mortgages from banks to repackage and sell them to investors as mortgage-backed securities and agency bonds. Fannie Mae buys mortgages from commercial banks, and Freddie Mac buys mortgages from smaller community banks. In practice, know that Freddie Mac and Fannie Mae in effect increase the availability of home loans.
7. Loan to Value
The size of the loan you are taking out in when compared to the value of the property is a ratio known as the loan to value, expressed as a percentage. It is inversely correlated with the down payment, meaning that as your down payment amount goes up, the loan to value goes down. A standard mortgage has a loan to value of 80% with a 20% down payment; any higher of a loan to value will require you to obtain private mortgage insurance.
8. Private Mortgage Insurance
PMI, or private mortgage insurance, is an insurance against default for the benefit of the lender, paid by a borrower. Private mortgage insurance is required for loans where over 80% of the home value is financed, ensuring that if the borrower becomes unable to repay the loan the lender would be compensated by the insurance to offset the losses. If PMI is required, if can be cancelled once your loan to value reaches 20%.
9. Title Insurance
In the event disputes arise over property ownership after you obtain your property, title insurance protects both you and the seller against loss, paying potential fees and legal costs that may arise. These disputes may arise if there are past unpaid liens, easements, pending legal actions, or other legal issues with any prior ownership. These situations are often fully researched before the purchase of a home, but in the event that a title search misses something, title insurance ensures a buyer and lender won’t lose ownership of their property over a past dispute.
The process of verifying all data and evaluating the quality of a mortgage loan inquiry is called underwriting. The underwriter determines the risk involved in giving a loan to the mortgage applicant, and ultimately gives the final approval on whether a mortgage loan is approved or denied.
As you go through the process of obtaining your first home and first mortgage loan, being as informed as possible helps you know what you’re getting into. If you have any questions at any point of the process of obtaining your first home, you should always feel comfortable asking.
Look forward to more first-time homeowner articles, coming soon!