Understanding Mortgage Terms

ARM

An adjustable rate mortgage has interest rates that fluctuate based on market
conditions. The good news with an ARM is that the initial fixed interest rate is
typically lower than a comparable fixed-rate mortgage. The less than
favorable news here is the fact that the fixed interest rate does expire after a
certain amount of time and is then affected by the market— keep in mind this
can be good news or bad depending on what’s happening in the economy.

PMI

PMI, Private Mortgage Insurance, essentially exists to protect the lender if youwere to default on the loan. PMI is a type of insurance that you may have topay for a conventional loan, if you do not put a 20% down payment. Typically,the PMI payment is lumped into your monthly mortgage payment. This willthen go away once you have reached 20%. For an FHA loan, you may have to pay PMI for the life of the loan.

APR

Annual percentage rate is the annual rate charged for borrowing money. Don’tconfuse APR with the term interest rate— APR includes the nominal interest rate and any other costs or fees involved in procuring the loan (think closing costs and lender fees). Thus, the interest rate will likely be lower than the APR.

Discount Points

You can pre-pay interest that accrues on your loan by way of purchasing discount points. Discount points are good for you long term because you’reessentially lowering your monthly mortgage payment. Typically each point will run you about one percent of the total loan amount and will generally lower the loan’s interest rate by ⅛ to ¼ of a percent. Most people don’t realize that discount points are tax deductible, so make sure to take advantage of that much-needed break if you’re electing to buy discount points.

Amortization

Think of your amortization schedule like a series of repayment remindersthroughout the course of your loan payback period. You’ll notice that during the beginning of your repayment journey most of your monthly payment goes toward interest, but this lessens each month as you work to pay down yourloan. Basically it is a table showing the amount of principal and the amount of interest that comprise each payment until the loan is paid off.

Escrow

An escrow account is used by the lender to hold money set aside by the borrower to pay for monthly real estate taxes and homeowner’s insurance. In typical cases, lenders require borrowers to set aside a few months of these taxes, as well as a year’s worth of homeowner’s insurance payments to be held in an escrow account.

Title insurance

Title insurance ensures you have ownership over your property. You might wonder why this is even necessary; but say one day you get a call from the IRS claiming property taxes hadn’t been paid in years prior— title insurance protects you from having to fork over cash for the previous owner’s responsibilities. Most likely, if you’re financing the purchase of your home thelender will require you to take out title insurance. Keep in mind, that policy will only cover the outstanding amount of the loan at the time the claim is made, so it’s a good idea to purchase an owner’s policy, too.