12 Mortgage Terms You Should Probably Know About
Flickr’s creative commons (user Matthew Rutledge)
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When I waded into the business of trying to buy an apartment, I was soon waist-deep in Things I Didn’t Know. There were so many unfamiliar words and abbreviations and clumps of jargon. But I went to the kind of hoity-toity liberal arts college that was big on literary theory — Zizek, Foucault, Derrida and Butler were scary at first too — so once I discovered that their bizarro language could be decoded, their ideas were pretty straightforward. (Most of the time.)
If I could kick my way through the murk of that and end up swimming, I figured I could do the same thing with Mortgage-ese. And so I did, with nothing to help me but sheer cussedness and my determination not to pay anyone to do anything I could conceivably do myself. Here is a glossary of what I learned are some of the most important mortgage terms. Familiarize yourself with them and soon you too can feel more confident in your home-buying adventures.
But first: watch this quick lesson that details the most important terms
Adjustable-rate mortgage (ARM)
A type of home loan in which the interest rate changes according to a standard financial index. ARMs can start off lower than a fixed-rate mortgage, but that can change. I got one that is steady for seven years and then adjusts, which is an especially good deal if the odds are good that you will sell your property in the near term (rather than, you know, 30 years from now).
How much the property is worth according to a professional appraiser.
How much your house is worth according to the municipality, so that they can figure out how much you have to pay in real estate taxes. Taxes may be annoying, but remember: they help maintain the roads, and potholes outside your front door would make your place less attractive to future buyers.
Expenses like attorney’s fees, taxes, escrow payments and title insurance that buyers and sellers incur while transferring ownership of a home. These will, almost inevitably, run higher than you expect, so plan to have more cash on hand than you think you will need.
Everything that has to happen in order for your contract to be binding. In other words, the sale is conditional on something else happening. Examples include getting loan approval within a set deadline and passing inspection.
Amount paid in cash for a property outside of a mortgage (hence the expression, “saving up for a down payment”). You can lower your monthly mortgage payments through a lender by putting more cash down up front. (10 or 20 percent is standard.) Co-ops, such are often found in fancy-pants cities like New York, may require higher down payments, while condos are often more flexible.
Value of house minus balance of mortgage equals equity (or, how much of your place you actually own).
Portion of the mortgage payment that is kept in a trust by the mortgage company to be used for homeowners insurance and taxes.
Mortgage insured by the Federal Housing Administration. The mortgage insurance premium is 0.1% or 1.75% of the loan, which may be financed or paid at closing. FHAs allow prospective buyers who can’t otherwise afford a large down payment to secure financing.
A type of home loan where the interest rate will stay the same throughout the entire life of the loan. A 30-year fixed rate mortgage will have an interest rate that will stay the same for all 30 years.
Good faith estimate (GFE)
A form that includes the estimated costs you’ll have to pay for a home loan. A GFE should help you compare other loan offers.
Principal, interest, taxes and insurance. All the parts of a mortgage payment!
Photo: Matthew Rutledge