When you first try to get a mortgage, you will probably be bombarded with a bunch of jargon that may as well be Greek. Unfortunately, sometimes the only explanations offered by your Real Estate Agent or Mortgage officers are those that are aimed at trying to get you into get the biggest possible mortgage. Here are a few of the most common terms and what they mean for you.
Traditional Mortgage (also known as a fixed-rate mortgage): Is a standard mortgage with no special bells or whistles. It is usually the best for people who want a fixed rate and a fixed payment for as long as they stay in the home. You can usually get one of two types: a 30-year or a 15 year. Although the interest is lower on a 15-year, making them a much better deal, the payments are about 1 ½ times the amount of a 30-year and are therefore harder for most people to afford. If you are planning to stay in your home for awhile, a traditional mortgage is likely the best option for you.
Interest Only Mortgage: This type of mortgage is aimed at people who think they are earning less now than they will be in a few years, but want to buy a nicer home now. What it means is that you only pay the interest on your mortgage instead of principal & interest. It does make your payment lower now, but be careful! The payments will increase to include the principal at a specified future date. Often the interest rate increases as well. If your income does not increase in kind, you could end up in foreclosure. Also, keep in mind that your mortgage balance will not decrease unless you make extra payments.
Adjustable Rate Mortgage (ARM): Also makes payments lower for the first few years because they can offer you a lower rate to start out with. You are paying both interest and principal, but your payments will go up after the first term is over because the interest rate is then a higher fluctuating rate. Generally, the introductory rate is good for between 1 and 7 years. The longer you lock in the introductory rate, the higher the rate is and closer to the traditional 30-year-mortgage.
Points: Extra money you can pay up-front to lower your interest rate. Each point is equal to 1% of the amount mortgaged. Make sure to check whether a quoted rate assumes the payment of points or not.
Closing Costs: Are part of nearly all mortgages and tend to be between 1.5-3% of the mortgaged amount. Here are a few very common expenses included in the term “closing costs”. Keep in mind that there are many other fees that can be included:
š Appraisal Fee: amount you pay to appraise the home (generally $300-$500)
š Credit Report Fee: amount it costs to get a credit report (about $20)
š Loan origination or Application Fee: varies from $0-$500
š Insurance premiums for several months (amount depends on Homeowners insurance premium and the number of months’ reserve required by your lender)
š Prorated mortgage interest: (amount depends on the time of month you close the loan)
š Property taxes for several months (amount depends on tax amount and the time of year you close your loan).
š Title Settlement fee or title search fee: based on title company’s fees
š Title Insurance: based on mortgage amount
PMI (Private Mortgage Insurance): A monthly amount of about $60 per $100,000 of mortgage that you must pay if your mortgage exceeds 80% of the home’s value. In other words, if you don’t have 20% of the selling price as a down-payment you must pay to insure against your own default.
80/20 financing: A practice which allows you to finance up to 100% of the home’s selling price without having to pay monthly PMI. The only problem is that you have to take out two loans: the mortgage and a Home Equity Loan/Line of Credit. The finance charges on the 20% of the financing are often enough to discourage using this type of financing, but not always.
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