Trying to understand a mortgage loan and its vocabulary (jargon) can add extra stress when planning for your next new home or refinance. Especially when you are at the mercy to rely solely on what you're told instead of trusting the knowledge you have within yourself, it can leave you feeling a bit hesitant and powerless, to say the least.
Knowledge is power and is crucial in preventing you from being blindsided in the future when signing up for any new contract concerning a mortgage. Below, we have provided you with some key jargon terms. This knowledge will help alleviate any unwanted and unnecessary stress while boosting your confidence and helping you better understand your future mortgage. You will now have the power to inform and help others who may be getting a start on their newfound journey in homeownership!
Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage (ARM) is a type of loan where the interest rate changes with time. For example, the borrower will pay a fixed rate for an agreed-upon amount of years. Then when that period ends, the rate can increase or decrease for any amount of time for the rest of the loan term.
To even further simplify this, ARM is expressed as two numbers.
Let's use an example of a 5/1 ARM. The first number (5) shows how many years you'll pay a fixed rate on your loan. The second number (1) shows how often the rate will adjust by increasing or decreasing per year after the fixed period has ended.
Amortization is the action or process of reducing or paying off a debt with regular payments (installments). In other words, an amortization schedule would display your regular monthly payments for the life of the loan.This schedule will also detail how your payment is broken down and applied your loan (principal and interest).
The closing cost is a sum fee you will pay to the lender for the necessary and required closing procedures. This includes appraisal fees, title insurance, and a credit report fee, to name a few.
The closing disclosure is a five-page document that the lender will give you at least three days before you close (finalize) the home loan agreement. This document will detail all the fees associated with the loan prior to signing the final loan agreement. This should consist of the annual percentage rate and interest rate, your projected monthly payment, lender fees, and closing costs. If you have questions about anything on this form, ask your lender before agreeing to the terms!
Debt-to-income ratio (DTI)
A DTI is a number that shows how much of your monthly gross income goes towards your current debt. Lenders will use this calculation to consider if you qualify for the mortgage amount.
Earnest money is a deposit the buyer may be required to put down after each party agrees and signs a purchase and sale agreement. This is placed in an escrow account (usually 1% to 3% of the home's listing price) to show that the buyer is committed to purchasing the property. The deposit will be applied towards the purchase of the property. This is also known as a good faith deposit.
This is important when refinancing your home. The home equity is the amount of your home that you own.You can get an estimate by calculating the difference between your current home loan balance and the home's estimated market value. You can find your property’s estimated value on some website like these Zillow, Redfin etc.
You or a lender can order a home appraisal from a licensed professional to assess and give their opinion of the home's value. This guarantees the property’s value based on an in-depth comparison to similar sold properties in the area.
Otherwise known as “Discount Points” or “Mortgage Points”. This is an optional fee you can pay the lender to lower your interest rate on your loan. One Point usually equals 1% of the home’s purchase price. For example, a buyer purchasing a home that cost $200,000 could pay $2,000 to buy one “point”. The amount your lender will lower your rate can vary but points can help lower the rate on your home loan.
This is a letter the lender will send you with the amount you are pre-approved for along with some information based on the loan request. This will help you budget when contemplating a price range of homes to look at.
This is the amount of money you borrow from the lender and will be paid back with your monthly mortgage payments.