First Time Home Buyer: Understanding Mortgage Terms
One of the biggest purchases we ever make is our home. Mortgages can be scary and intimidating, especially to a first time homebuyer. There are so many questions and risk factors in this huge decision. A first time homebuyer may find himself inundated with terminology and terms he just simply does not understand. To help take the confusion out of understanding the lingo, we’ve compiled a list of the most commonly misunderstood mortgage terms:
Amortization: The schedule of loan repayment intentions. This usually includes the amount borrowed, the paid interest, and the term’s monthly breakdown.
Biweekly Mortgage: This mortgage repayment plan allocates your payments to half of a monthly amount every two weeks, which results in thirteen annual payments. This one additional payment each year reduces your overall paid interest by enabling an earlier payoff on the loan.
Closing Costs: Buyer usually pays these costs during the mortgage process, unless negotiated otherwise. Some examples of these costs are attorney and recording fees.
Construction Loan: While building a home, this loan allows money advances based on the builder’s schedule. Once the home is complete, the loan total converts into a mortgage for the buyer.
Home Equity: Equity is the difference between the value of the home and any debts owed on it. As a mortgage progresses, the loan balance decreases and the home value increases, thus increasing the equity on the home.
Escrow: This is usually a predetermined dollar amount held aside by the lender each year. The lender accumulates a small percentage each month on the mortgage to accrue for payment towards annual home taxes.
Good Faith Estimate: This is a breakdown of approximate payments due on closing of your loan. It enables you to shop and compare loan costs with multiple lenders.
Loan Origination Fee: Usually quoted as a percentage, this is an upfront fee imposed by a lender for new loan application processing. Most origination fees average between 0.5 and 1% of your loan.
Mortgage Points: In order to get the lowest interest rate, lenders will offer borrowers the ability to “buy down” their interest rate. If the homebuyer intends on staying in the home for the majority of the duration of the loan, paying points can result in huge savings. However, if the buyer plans on flipping the house or moving soon after buying, they will most likely lose money by participating in point purchasing.
Private Mortgage Insurance (PMI): This insurance is usually required by lenders when the loan to value rate is less than 80%. It protects the lenders from the borrowers defaulting on the loan. In order to purchase this insurance, the borrower pays a monthly PMI premium, in addition to their monthly mortgage rate.
Title Insurance: Title insurance is imperative for a homebuyer. It offers protection for you and the lender from the possibility that your seller (or any previous sellers prior to them) doesn’t have true ownership of the home and property, thus annulling your transaction of acquiring ownership.
Obviously, there are many more terms and lingo utilized in the mortgage-acquiring and home-buying process. We hope this clarifies some of the most commonly used terms that are often confusing to a first time homebuyer. When working with Whitworth Home Builders, you can rest assured that any real estate questions you may have, we can help you find the answer. Contact us today to start your home buying experience.