Make sure you know the language when it comes to your mortgage.
Making the largest purchase of your life often means obtaining a mortgage to purchase a new home. Whether you are a experienced home buyer or looking at your first home it is always a great idea to be familiar with the below terms.
Fixed Rate Mortgage: The interest rate on your home loan won't change. While Over the years, your mortgage payment will most likely change some due to the fact property taxes will likely rise, your homeowners insurance might climb or fall, and you should shed your PMI (we will cover this later on); however if you have a fixed-rate mortgage, your monthly mortgage payment won't change much over the years.
Adjustable-rate mortgage. Also known as an ARM, is basically the opposite of a fixed-rate mortgage. You will often start off with a fixed interest rate for several years, and then the interest rate adjusts according to the fully indexed interest rate, often the prime rate, which is what banks charge their most credit worthy customer. While your interest rate and payments will likely be lower in the beginning verses what your rate may be with the fixed-rate mortgage, you are hoping that interest rates remain low throughout the life of your loan. As interest rates climb, your own interest rate and monthly payments will adjust accordingly.
Prequalified. This can be a confusing term, mostly because it tends to get mix it up with the term preapproved. If your lender tells you that you're prequalified for a house, that's a good start -- but you're not ready to start packing boxes to move yet. "Prequalification requires less documentation as it provides a general overview of the loan amount in which a home buyer might be able to qualify for. This is great to give you some idea of what type of house you can afford.
Preapprovals require the submission of many more documents, such as pay stubs, bank statements and tax returns. Preapprovals are really for those who are ready to buying a house. Once you're preapproved, you've basically been told that the bank will lend you money for a house, provided a few details and that you don't have any issues that change things in the meantime, such as missing payments or getting into credit card debt before you're actually approved and moved into your new home.
Conventional loans. These are the typical loans that most people apply for when they want a mortgage. Overall people with low credit scores may not qualify for a conventional Mortgage loan. With the new guidelines from Fannie Mae and Freddie Mac, you may be able to put a down payment as low as 3 percent with a Conventional loan. These loans generally require a credit score above 650.
Federal Housing Administration loan also know as FHA Loans may be the best choice if you have poor credit? FHA Loans tend to have more relaxed credit score requirements and offer lower upfront costs, along with down payments as low as 3 percent."
Appraisal. This is an official estimate that determines what your property is worth. Banks need homes to be appraised, so they don't lend you, say, $300,000 for a house that's only worth $175,000. But additionally most people don't want to pay $300,000 for a house only appraised at $175,000.
Private mortgage insurance (PMI). This is a monthly insurance payment you'll have to pay if the down payment on your house is less than 20 percent of the appraised value or sale price. If you don't want to pay the PMI fee -- which often ranges from .03 to 1.15 percent of the original loan, divided into 12 monthly payments -- you'll have to fork over a bigger down payment or buy a cheaper house. Usually, PMI insurance isn't something you pay forever (it just seems like it, if you have a small down payment.) Typically, after your payments reach 20 percent of the value of your home, you stop paying PMI.
Closing costs. These are fees related to buying a house that your lender charges you, or you rack up from various third parties, such as a home inspector. According to the online real estate database Zillow.com, expect your closing costs to be 2 to 5 percent of the purchase price of your home. That may sound like a lot, but there are many costs involved in closing the deal, from buying title insurance to paying for points and attorney and surveyor fees. Depending on your loan requirements and that each transaction is unique, speak with your REALTOR, who may be able to assist you in negotiating to reduce some of the expenses.
Points. One point is equal to 1 percent of the loan amount. So if you're borrowing $200,000 for your new home, a lender may charge you 2 points, that's $4,000, just as Three points would be $6,000. Points are prepaid interest. The more points you pay, the lower your interest rate will be. If you're planning to live in your house for just a few years, you could make a good argument for not paying points, but if you believe you'll go the distance with a 30-year mortgage, it generally makes financial sense to pay as many points as you can afford to snag that lower interest rate, which, in the long run, should save you money. Ask your lender to do the math so you can make the best decision for you and your needs.
Escrow. When you hear your real estate agent throw this word around, you'll know you're probably near the end of the home buying process. The word can be used in a few different ways, but when you think escrow, think of a third, neutral party. You may have looked at a house, loved it, made an offer and offered a deposit -- which would then be put in escrow.
That is then put in a third-party account so you aren't giving the homeowner your deposit, also sometimes called earnest money. The escrow account keeps your deposit safe so the homeowners don't inadvertently spend your money and put you through the hassle of having to get them to repay you. You might also hear your lender talking about an escrow account where your property taxes and homeowners insurance go until they're paid.
Of course, you can buy a house without truly understanding real estate and lender speak, But that doesn't mean you should. After all, some would argue that's how many homeowners got themselves in trouble before the 2007 recession, making decisions they shouldn't have, and buying homes they didn't realize they really couldn't afford.
The Silver Pecan - Real Estate Group with Keller Williams is here to assist and educate all of our clients with the home buying process. Call us today to schedule your own personal home buying consultation.
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