Thinking about buying your first home? The mortgage industry is full of terms that can be confusing. Below is a glossary of terms to help you understand mortgages and make your buying process easier.
ADJUSTABLE RATE: An interest rate that changes periodically according to an index.
AMORTIZATION: A repayment schedule detailing how payments are applied to principal and interest.
APPRAISAL: A written report of a property’s current market value, based on recent sales information for similar properties, the current condition of the property and how the neighborhood might affect future property value.
CLOSING COSTS: Fees incurred in a real estate or mortgage transaction and paid by borrower and/or seller during a mortgage loan closing. These typically include any loan origination fee, discount points, attorney’s fees, title insurance, appraisal, survey and any items that must be prepaid, such as taxes and insurance escrow payments. The cost of closing is usually about 2 to 5 percent of the mortgage amount. Closing costs vary based on property location.
CLOSING (OR SETTLEMENT): Meeting between the buyer, seller the and lender or their agents at which property and funds legally change hands.
CONVERTIBLE ARMS: ARMs with the option of conversion to a fixed rate loan during a given time period.
DEBT-TO-INCOME RATIO: The ratio, expressed as a percentage, that results when a borrower’s monthly payment obligation on long – term debts is divided by gross monthly income.
DOWN PAYMENT: Money paid for a house by the home buyer toward the purchase price. The down payment will be the difference between the purchase price and mortgage amount.
EQUITY: Value of ownership built in a home or property that represents the current market value less any remaining mortgage balance(s).
ESCROW: The neutral third party that holds money and / or documents until the escrow instructions are fulfilled and escrow can be a title company or an attorney, depending on state regulations.
FIXED – RATE MORTGAGE: A mortgage with an interest rate that doesn’t change for the life of the loan, guaranteeing fixed payments.
GRACE PERIOD: Period of time during which a loan payment may be made after its due date without incurring a late penalty.
HOME EQUITY LOAN: A loan secured by equity in a property. These are sought for a variety of purposes, including home improvements, major purchases or expenses, and debt consolidation.
INDEX: A published rate used by lenders to calculate interest adjustments on ARMs (Index + Margin = Interest Rate). Some indices are more volatile than others.
INTEREST RATE: The periodic charge, expressed as a percentage, for use of credit.
LIEN: A claim against a property by the bank or lender to secure repayment of the debt, typically in the form of a mortgage.
LOAN ORIGINATION FEE: A fee a lender charges to process a mortgage, usually expressed as a percentage of the loan (or points), which pays for the work in evaluating and processing the loan.
LOCK OR LOCK – IN: A lender’s guarantee of an interest rate for a set period of time, usually between loan application and loan closing. This protects borrowers against rate increases during that time.
MIP (MORTGAGE INSURANCE PREMIUM): Insurance required on a FHA mortgage to protect the lender in the event of default.
MORTGAGE: A document that creates a lien on a property as security for the payment of a debt.
PREQUALIFICATION: The process of determining how much money a prospective homebuyer may borrow, prior to application for a loan.
PRINCIPAL: The amount of debt, not counting interest, owed on a loan.
PRIVATE MORTGAGE INSURANCE(PMI): Insurance purchased by a buyer or lender on a conventional loan when a down payment is less than 20 percent of the purchase price to protect the lender against default.
REFINANCING: The process of paying off one loan with the proceeds from a new loan secured by the same property.
TERM: The number of years until a loan is due to be paid in full.
TITLE/DEED: A document that gives evidence of ownership of a property, as well as rights of ownership and possession.
UNDERWRITING: The process of verifying data and evaluating a loan application. The underwriter gives the final loan decision.
Due to the rising cost of a college tuition, more and more people are graduating with as much as 6 figures of student loan debt. Putting money toward debt first is a smart financial decision because every day the debt accumulates even more interest. These new graduates are putting off getting married, having children and even buying a home in order to pay down their student loans more quickly.
But it doesn’t have to be this way. Many people successfully pay off their student loans while saving for a home. What are some of the ways that people have achieved these two financial goals simultaneously?
This number is used by banks to determine whether or not you are a good candidate to take on even more debt. Typically, you are in good shape if your debt-to-income ratio is less than 40 percent. Calculate your debt-to-income ratio by adding up all of your monthly payments (auto loan, student loans, rent) and divide that number by your total monthly income. If your debt-to-income ratio is very high, you will definitely need to consider paying down your debt before you apply for a mortgage.
Saving up for a down payment for a home is not an easy task, and splitting your money between student loans and home savings can make it an even more daunting process. Keep in mind that the minimum down payment needed for a home is now only 3 percent! Try to decide how much money you can realistically dedicate to savings and debt repayment. Also, look at homes prices in an area where you might want to purchase a home. This will help to give you an idea of how much money you will need to save for your 3 percent down payment.
The next step is to come up with a monthly savings plan to achieve your goals. Consider using a graduated savings plan where you start out with a steady flow of payments towards your student loans while still saving for a home. As your loan balances start to shrink, you can slowly move more money for your home and put less money towards your student loans. Early on, you might want to put 40 percent of your discretionary income toward student loans and 25 percent toward your future down payment. The remaining 35% is up to you. Within a few years, there should be no reason why student loans would hold you back from purchasing a home.
Remember: the down payment is only 3 percent for a home. Align that with consistent, manageable student loan payments, and you will be in a great spot.
The following two factors are arguably the biggest influencers on your credit score:
The good news is you can control these factors, and even if you slip a bit and are late on a payment, you can recover.
Your credit score is only one of the “risk” variables that influence your interest rate. When you have a higher credit score, 700+, you have demonstrated an ability and willingness to meet your financial obligations on time, and as a result you will qualify for a better interest rate than someone with a lower credit score, because you represent a lower risk of making a late mortgage payment.
It’s super-fast and easy to learn what your exact credit score is and what your mortgage interest rate would be. Here at Advantage Lending, we help buyers every day and can help you get prequalified for a mortgage at no charge! Ask me how to get started.