If you are looking to get a mortgage for the first time, you will come across lots of industry-specific terms that you probably have not encountered before. It is crucial you understand those terms before you pursue buying a home. Here are some of the key terms you should be aware of.
An adjustable-rate mortgage is a loan in which the interest rate varies depending on how market rates move. When you sign up for an adjustable-rate mortgage, you first receive a period where the interest is fixed. That introductory period can last up to ten years. During the length of your introductory period, your mortgage interest rate will typically be lower than what you would pay with a fixed-rate loan. Once the introductory period is over, your interest rate will follow market rates. It is always best to compare different types of mortgages. It is also best to compare different mortgage rates from lenders. Current mortgage rates from different lenders can be gleaned from this article.
The term “amortization” refers to the schedule for repaying the loan. For example, a fifteen-year mortgage will include the amount you borrow, the interest rate paid, and the term. That results in a monthly breakdown that shows how much interest you pay and how much is paid on the amount borrowed.
Typical mortgages are paid back monthly, resulting in twelve payments over the course of a year. With a bi-weekly mortgage, you pay half of your normal payment every fortnight. That results in the equivalent of thirteen regular payments, thus reducing the amount of interest you pay and allowing you to pay off the mortgage loan earlier.
The debt-to-income ratio is a calculation in which your potential mortgage’s monthly payments are compared with your monthly income. Your income is divided into the expense figure, which is displayed as a percentage. The higher that percentage figure is, the riskier the mortgage is for the lender.
With a fixed-rate mortgage, the interest rate and the term of the loan are negotiated and set for the whole duration of the loan. Fixed-rate mortgages typically last between ten and forty years.
The loan-to-value ratio is a calculation that is done by dividing the mortgage amount by the value of the property. Lenders typically require the loan-to-value ratio to be at least 80% in order for you to qualify for a mortgage.
You could be required to pay an origination fee when you apply for a mortgage loan. The fee includes things like the application cost, appraisal costs, and follow-up fees associated with the prospective loan.
The principal refers to the amount of money that is borrowed for the mortgage. The principal owed will go up or down as you make your repayments.
Before the closing of a property purchase, the attorneys involved with the process will determine the final costs associated with the loan. They are known as the settlement costs.
Truth in Lending
Truth in Lending is a federal mandate that all mortgage lenders must follow. There are several parts to the regulations, including the proper disclosure of rates and how mortgage loans must be advertised. The regulations of Truth in Lending are there to ensure homebuyers are protected from potential fraudulent activities.