Understanding the terms associated with your mortgage

As first-time homebuyers begin searching for a home, one of the most frequent questions they ask themselves early on is, “What can I afford?” 

Answering that question involves far more than just the price of a home. Other factors must be considered, from the interest rate to the type of loan to the taxes and insurance.

For those of you who are new to the home-buying process, the following is a glossary that covers the basic mortgage terms you’ll see as you shop around for the right home loan.

Adjustable rate mortgage (ARM): Mortgage in which the rate of interest is adjusted based on a standard rate index. Most ARMs have caps on how much the interest rate may increase.

Annual percentage rate (APR): A standardized method of calculating the cost of a mortgage, stated as a yearly rate, which includes such items as interest, mortgage insurance and certain points or credit costs.

Federal Housing Administration (FHA) mortgage: An agency of the U.S. Department of Housing and Urban Development that insures residential mortgage loans made by private lenders.

Fees (or credits): Additional 3rd party fees or credits toward your down payment. Lenders can provide credits to help lower the down payment by slightly increasing the interest rate

Fixed rate mortgage: A mortgage in which the interest rate does not change during the entire term of the loan, most often 15 or 30 years.

Interest rate: A rate charged to the borrower each period for the loan of money.

Lender costs: Include charges for document preparation, underwriting and origination.

Loan estimate: A three-page disclosure that replaces and integrates the Good Faith Estimate and Truth-in-Lending disclosure into one disclosure.

Mortgage insurance: A policy that insures the lender against loss should the homeowner default on a mortgage. It is part of the monthly mortgage payment.

Principal: The term used to describe the amount of money that is borrowed for a mortgage. The principal amount that is owed will go down when borrowers make regular payments.

Private mortgage insurance (PMI): Insurance that protects mortgage lenders against default on loans by providing a way for mortgage companies to recoup the costs of foreclosure. PMI is usually required if the down payment is less than 20% of the sale price. Homebuyers pay for the coverage in monthly installments. PMI is usually terminated when the homebuyer has built up 20% equity in the property.

Taxes and insurance: Includes estimated property taxes and homeowner’s insurance.

Veterans Affairs (VA) mortgage: A loan backed by the U.S. Department of Veterans Affairs. It requires very low or no down payment and has less stringent requirements for qualification. Members of the U.S. armed forces are eligible for the loans under certain qualifying conditions.

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